Down, Down, Down

By John S. DeMott

OPEC finds that it is a crude, crude world

After having almost everything go their way for the past decade, the 13 members of the Organization of Petroleum Exporting Countries were faced last week with a long list of things going against them: plunging oil prices, oversupplies, excessive production, drooping consumption, world recession with fears of depression. Even Humorist Art Buchwald was having fun with OPEC's woes. The columnist "quotes" a man from Qatar as saying: "Since the oil glut we've had to cancel four palaces, and make do with three used 747s for our sheiks."

Poor, poor OPEC, Buchwald went on, needling the oil producers, who have ballooned their prices from $3 to as high as $41 per bbl. in eight years, swelled their treasuries unimaginably, twice plunged the industrialized world into recession and contributed to an inflationary spiral that is unmatched in peacetime history. Now that those producers have impaled themselves on a horn of plenty, Buchwald urged Americans to have a heart and to "do unto them what they have done unto us."

Americans did not have to do it. The law of supply and demand was doing everything for them. A growing glut of world oil supplies was driving down the cost of crude and the price of gasoline. Robert O. Anderson, chairman of Atlantic Richfield, told a group of TIME editors last week: "The drop in the past two months is the largest drop in the history of oil prices. We really have a moment in the industry that is without parallel."

OPEC itself is in disarray. Iran and Iraq, for example, have been waging a war of attrition for 18 months, and Iran two weeks ago reduced its oil price by $2 per bbl. to increase sales, raise money and pay for the fighting. Libya's leader Muammar Gaddafi last week let off a tirade against the U.S. and Saudi Arabia, which he accused of producing too much oil and driving down prices. He said that the oil producers now face an "economic blockade" ordered by America and executed by Saudi Arabia. Production by the 13 members of OPEC has fallen from a high of 31 million bbl. a day in 1977 to just below 20 million bbl. now.

For some oil producers with low populations and high revenues, this is not creating much hardship. Kuwait has slashed production by 70%, to a mere 650,000 bbl. daily, without difficulty. Indonesia, on the other hand, has a large population and badly needs oil revenue for development. Therefore, it has continued to pump crude at full tilt, helping to sustain a buyer's market.

Petroleum producers that are not OPEC members, and that only a few years ago had little influence over world oil markets, are beginning to make their weight felt. Non-OPEC countries, including Britain, Mexico and the U.S., currently produce about half of the free world's crude and have become an influence on international prices as OPEC'S share has fallen to 43%. Last week the British triggered the latest panic in the world oil market by reducing the price of oil from its 20 North Sea fields from $35 to $31 per bbl.

As a result of the glut in crude, U.S. gasoline prices, which have been slipping for a year, have gone into a tumble. Last week in a few isolated places they were sinking to 97-c- per gal. In early 1981 the average price of regular in the U.S. was about $1.30 per gal. Experts are predicting that $1-or-less gasoline could pop up elsewhere during the next 90 days.

In Houston, a full-fledged Texas-style gasoline war was under way, with a few truck stops around the city offering diesel fuel for 99.9-c- per gal. Madco Oil Co., an independent with 32 stations around Houston, heated up the competition two weeks ago after negotiating a lower price with its wholesaler. Truckers flocked to the stations to fill up, the word transmitted to the good buddies by CB radios: "Hey, ya goin' through Houston?. Getcha some of that fuel, get filled up, man."

Edward Brantley of Eufaula, Ala., pumped fuel into his 18-wheeler's 350-gal. tank at the Madco station on Interstate 10. Said he: "I save $14 or $15 per 100 gallons." Says Madco Station Manager Sue Turner, 37, who put in 20-hour days after she and her husband Joe dropped the price to below $1: "We're just trying to keep the customers happy."

The pressure is now being felt by dealers of major oil companies. Shell Dealer Mann Mundey in Houston has dropped his price to $1.07, even though he must still pay Shell $1.09. Says he: "I have to reduce my prices to maintain my share of the market."

In Atlanta, some stations sell regular for $1.12, a nickel to a dime less than a year ago. Tom Patton, an independent distributor, paints a picture that stands in stark contrast to the one just three years ago, when shortages made driving a frustrating exercise in gasoline lines and escalating prices. Says he: "The supply is abundant, gas is easy to get, and prices at wholesale have dropped."

As if OPEC did not have enough troubles, the cartel faced a new, unexpected supplier: China. That country is helping to drive down prices at the pump in Oregon and Washington. Last month Cenex Cooperative in Vancouver, Wash., and

McCall Oil of Portland, Ore., teamed up to import 140,000 bbl. of Chinese gasoline at a wholesale price of 990 per gal., several cents lower than local competitors. The Peking petrol represents only 4% of the market, but it has had a price-depressing impact throughout the area. Says Wayne Bowlby, president of the 800-member Oregon Gasoline Dealers Association: "It only takes one station to offer it, and then it affects all the rest."

The oil and gasoline situation in the U.S. is pretty much being repeated all over the world. Prices and consumption are down in Europe, partly because of conservation lessons well learned since 1973, but also because slowing economies have lessened the demand for energy. Moreover, the use of oil has been reduced by the shift to coal, gas and other sources of energy. As a result, the incomes of the oil producers are dropping drastically, to the point where some of them are actually borrowing more than they are earning. That dramatic swing away from the image of Arabs swimming in oceans of petrodollars turned up last month in a report by the Bank for International Settlements in Basel.

BIS figures show that in the third quarter of last year, new loans to OPEC countries rose to $2.4 billion, almost double the amount of the previous quarter. That borrowing was still not enough, says the bank, to keep up with OPEC's internal spending demands as it pursued vast new construction projects and other modernization programs. So in the third quarter of 1981 OPEC countries withdrew a total of $700 million from their Western bank accounts. In the same quarter of 1980, they had deposited $10.9 billion in those accounts.

Last week's British decision to cut North Sea oil prices and the decision by Iran two weeks ago to reduce its prices finally pushed OPEC into action. Said a State Department analyst: "This has been one of the biggest threats yet to OPEC unity." United Arab Emirates Oil Minister Mani Said al-Oteiba, the current president of OPEC, announced that there would be a "consultative" meeting of the organization later this month. The session will sound out OPEC'S members on how much oil each is willing to keep off the market to stabilize prices.

The critical participant at the upcoming meeting will be Saudi Arabia. With 40% of OPEC's production, the Saudis are the key to any plan to reduce production and hold up prices. It was the Saudis, in fact, who forced OPEC's price reduction from $36 per bbl. to $34 per bbl. last October. The Saudis have trimmed production to about 7.5 million bbl. daily from a high of 10.5 million last summer, but experts feel that they would have to cut output to 7 million or even 6 million bbl. to dry up the glut and stop the slide in prices. Sheik Zayed Bin Sultan al-Nahayan, President of the United Arab Emirates, reportedly was in Saudi Arabia last week in an at tempt to persuade King Khalid to send a delegation to the OPEC meeting.

Even if the Saudis agree to reduce production, other OPEC countries might still jump in and attempt to grab a larger share of the market and boost their own production. Such is the severity of the current strains within OPEC. Says Marshall Thomas, markets editor of Petroleum Intelligence Weekly: "If they don't meet and act fairly soon, they are going to have a problem holding them selves together."

OPEC has long been labeled a cartel, but it is really little more than an association of bazaar traders. A successful cartel, says any definition, must be able to control production and thereby set prices in good and bad times. The failure of OPEC to do that now makes it a sort of fair-weather cartel, strong in the late 1970s when the world's economies were buoy ant and had high demand for its oil, but weak now when Europe and the U.S. are less dependent upon its energy.

Few experts predict the imminent demise of OPEC. It will always serve the self-interest of the oil producers to get together and try to influence prices. The organization did that for more than a decade after its founding in 1960, but hardly anyone but energy specialists noticed them. It was only in 1973, after the industrialized countries had allowed their economies to become hostages to OPEC oil, that the Middle East producers were able to begin dictating world petroleum prices. As long as the U.S. and Western Europe continue to conserve energy and produce more of their own oil and power from alternative sources, they will be able to restrict the influence of OPEC and be less dependent on the whims of a few countries in a politically volatile part of the world.

-- By John S. DeMott. Reported by Gary Lee/Washington and Lawrence Malkin/Paris, with other bureaus

With reporting by Gary Lee/Washington, Lawrence Malkin/Paris

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