Trying to Stop a Rolling Barrel

By Stephen Koepp.

Conditions appeared to be ripe last week for the long-predicted breakup of the Organization of Petroleum Exporting Countries. The pressure of OPEC's three-year struggle to prop up global oil prices seemed, at long last, to have fractured the group beyond repair. During the three-day emergency meeting in Geneva, OPEC's ministers let loose an unprecedented public display of insults, accusations and stubbornness. Yet once again the blowup failed to happen, and the group reached some broad agreements. Nonetheless, those accords showed convincingly that OPEC has lost its ability to dictate world oil prices.

To align their official rates with sagging world petroleum markets, nine of the 13 OPEC members reshuffled the prices of a variety of crudes they sell; the effect was to reduce the weighted average cost of an OPEC barrel of oil by 29 cents, although some grades will drop by more than $1. It was only the second price cut in the organization's 25-year history. The first came in March 1983, when sliding world crude prices forced OPEC to mark down its Arab Light benchmark crude by $5 per bbl., to $29.

Last week's agreement largely settled a long-festering dispute over the price differentials between two major grades of oil, light and heavy. The light-crude producers like the United Arab Emirates needed lower official prices in order to remain competitive with less expensive heavy oil produced by countries like Kuwait and Venezuela. The group also took the symbolic step of abandoning Arab Light as the bench-mark price for all OPEC crude. Arab Light, once the world's most important oil, is now just another grade struggling in a world awash in oil. Admitted OPEC's current chairman, Subroto, who is Indonesia's Oil Minister: "The fundamentals of the market will ultimately determine the price."

Norway, a non-OPEC oil producer, touched off the cartel's current troubles last October by cutting the price of its North Sea crude by $1.50 per bbl., to $28.50. Britain quickly followed Norway, which inspired OPEC member Nigeria to undercut both competitors and sell its oil for $28. OPEC tried to brake the price slide in October by reducing the output quota for its members from 17.5 million bbl. a day to 16 million in hopes that lower supply would mean higher prices. At the time, the group predicted confidently that as soon as oil refiners began building their stockpiles for winter, the global glut would evaporate. But aside from January's arctic blast across Europe and North America, winter temperatures have been moderate in the Northern Hemisphere. Instead of stocking up, oil buyers have waited for prices to fall still further.

Last week's meeting had hardly got under way when it ran into trouble. Nigerian Oil Minister Tam David-West sparked an uproar by discrediting a report prepared by Mani Said al-Oteiba of the United Arab Emirates. The study came from a committee that attempts to find out which OPEC members are secretly exceeding their quotas or selling at discounts from official prices. Financially strapped Nigeria is one of the suspects. Oteiba stormed out of the conference, telling reporters that David-West "is stabbing OPEC in the back by defying our pricing structure."

Oteiba later returned to the meeting, but next day the Oil Minister from Egypt, who attends the sessions only as an observer since his country is not an OPEC member, walked out in a burst of indignation over presumed insults by Saudi Oil Minister Sheik Zaki Yamani. The Arabian official apparently blamed the Egyptian for being the source for an article in the Wall Street Journal * just three days earlier that told in detail about the sumptuous comforts enjoyed by the ministers during their meetings.

The surprisingly open display of rancor within OPEC temporarily alarmed some financial markets. Despite the cartel's declining share of free-world production, from 64% in 1979 to about 40% currently, moneymen fear that if the group should break up, the ensuing price war would cause financial turmoil in other oil-producing countries. U.S. oilmen predict that a price decline to $15 per bbl., for example, would choke off all drilling ventures and put the U.S. back at the mercy of producers in the Persian Gulf.

After the OPEC decisions were announced, prices rose slightly on the spot market, where the cost of oil floats according to supply and demand. Industry experts believe that within about a month the spot price of crude could resume a downward drift. OPEC members will continue to be tempted to give discounts in order to boost sales. Moreover, the group's resolve appears weaker, since four countries (Libya, Algeria, Iran and Gabon) refused to endorse the price cuts. Said Constantine Fliakos, a senior oil analyst for Merrill Lynch: "A majority decision is not good enough for OPEC, which has had difficulty enforcing even unanimous decisions."

For American consumers, last week's actions will mean little change in gasoline prices because most of the benefits of falling crude prices have already been passed along. The average cost of gas at the pump stands at about $1.14 per gal., down 5 cents from October. Prices were reported as low as 88 cents per gal. in Texas. U.S. gas prices have come a long way since the peak of $1.42 reached in March 1981.

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With reporting by Lawrence Malkin/Geneva and Barry Hillenbrand/Riyadh