Trickle Down

Jitters over teetering oil prices

The spot markets for oil, where tanker-size shipments are traded on a day-to-day basis, normally bustle with buying and selling. Last week, however, they seemed almost paralyzed by uncertainty. Only a fortnight ago, the Organization of Petroleum Exporting Countries had failed to reach agreement on a plan to prop up oil prices by curbing production. That dramatic breakdown induced a kind of suspended animation. The cost of crude seemed sure to fall, but no one could be certain how far or how fast. While a few oil producers made their opening moves last week, others held back to see what their competitors would do.

The first gambit came from an unexpected source: the Soviet Union. In a new deal with the Italian government, the Soviets reduced the price of their crude by $2.15 per bbl., to $29.35, which was considerably lower than the OPEC benchmark price of $34. The Soviet Union produces more oil than any other country (12 million bbl. per day), and exports of crude account for 80% of its foreign currency earnings. Apparently, Moscow wants to protect its share of the oil market, or even increase sales, through price cutting. But almost no one followed the Soviet lead. Only Egypt, which exports just 340,000 bbl. per day, announced a significant cut, lowering the price of its so-called Suez blend crude from $31 to $29.

Some of the biggest buyers of crude oil decided not to wait for producers to drop prices. Led by Gulf Oil Corp., all the major U.S. oil refiners announced a $1-per-bbl. reduction, from $32 to $31, in the price they were willing to pay for oil from independent producers in the U.S. Gulf also curtailed its purchases of North Sea oil, and was reported to be selling oil on the spot market at significant discounts. The moves were clearly designed to force down the price of crude from overseas suppliers, including the OPEC countries.

News from the Middle East about the intentions of OPEC'S feuding members was confused and contradictory. Early in the week, Kuwait's government news agency reported that Saudi Arabia, Kuwait, Qatar and the United Arab Emirates had agreed to trim $4 off their $34-per-bbl. price unless the other members of OPEC accepted new limits on their production. Two days later, the United Arab Emirates' Oil Minister denied that the four Persian Gulf nations were threatening their OPEC allies with price cuts.

Western oil experts believe that the Saudis are willing to reduce their price but want some other major oil producer to go first. Two weeks ago, Saudi Oil Minister Sheik Ahmed Zaki Yamani suggested that Britain, which is not part of OPEC, might take the lead by lopping $2 or $3 off the $33.50 it charges for a barrel of North Sea oil. But British Prime Minister Margaret Thatcher is hardly eager to initiate a price cut that would slow the flow of oil revenues into Britain's struggling economy. Says a senior British oil executive: "Why should we be first? Why should Saudi politics be more important than our politics?"

Whoever lowers the price first, oil experts predict, the average cost of crude oil to U.S. refiners will fall about $2 per bbl., to $30. If the cost falls below that level, oil companies will probably begin to buy aggressively, and the price will stabilize. Theoretically, a $2 reduction in the crude price could mean about a 5-c- drop in the price of a gallon of gasoline. Because of sluggish demand, gas prices have already been drifting down from an average of $1.29 per gal. a year ago to $1.18 per gal. now. At a few stations in some areas, gasoline now sells for less than $1 per gal. for the first time in more than three years.

To help prevent prices from going lower, OPEC still hopes to set a new production ceiling. Several of the OPEC Oil Ministers will be in Venezuela this week for the dedication of a new refinery. Although no formal meeting is scheduled, the ministers will undoubtedly be searching once again for a common strategy to take control of the falling cost of crude. This file is automatically generated by a robot program, so viewer discretion is required.