BUSINESS

OPEC tightens its taps

PATRICIA CHISHOLM May 9 1988
BUSINESS

OPEC tightens its taps

PATRICIA CHISHOLM May 9 1988

OPEC tightens its taps

BUSINESS

By the time that the members of the Organization of Petroleum Exporting Countries (OPEC) gathered at their Vienna headquarters last week, the price of oil had surged upward by about $1.85 to $22.60 per barrel in the preceding two weeks. And although the once-powerful oil cartel has lost much of its influence over world oil prices, it appeared that last week’s meetings might restore some of its influence. For the first time since the 13-member cartel was formed in 1960, formal meetings were also being held with non-OPEC members, at their request. But last Thursday oil prices dropped back sharply, following reports that an agreement to cut production significantly appeared remote. No producer, it seemed, was willing to suffer large revenue losses without reciprocation. Said Richard Carl, senior vice-president and director of Merrill Lynch Canada Inc.: “All the producers are saying that they can’t afford to cut that much.”

OPEC has been unable to maintain strict production quotas among its members since the early 1980s. Rising production from non-OPEC members also contributed significantly to a subsequent world oversupply. And as production levels continued to rise, oil prices began to gyrate uncontrollably. In the past three years they have dropped from a high of $37 a barrel in 1985 to less than $12 in 1986, to their current average level of about $18.50 a barrel. The OPEC target is $22 a barrel. But now,

with a new agreement on significant production cutbacks unlikely, those hopes for higher prices could be eroded.

That situation could seriously affect the economy of Alberta—Canada’s largest oil-producing province. Alberta Energy Minister Neil Webber said that the province expects to receive 28 per cent of its 1988 fiscal-year income from resource revenues, based on an average oil price of $22.75 a barrel. But if world prices fail to increase as expected, the province’s projected $835-million deficit for 1988 could rise dramatically.

As the closely watched Vienna meetings progressed last week, it became clear that OPEC and non-OPEC nations remained deeply divided. Early in the week seven non-OPEC nations—Angola, China, Colombia, Egypt, Malaysia, Mexico and Oman—offered to cut their oil exports by five per cent, provided that OPEC reciprocated. Then China and Colombia backed off. Without their support, the non-OPEC cuts would have reduced exports by a mere 180,000 barrels a day. A five-per-cent cut by OPEC members would remove 750,000 barrels per day from the market. Total free world demand for oil is about 50 million barrels per day, making the proposed cuts less than two per cent of world supplies.

But hopes for an agreement on production cuts grew slim when the OPEC nations could not reach a consensus themselves. Cartel president Rilwanu Lukman of Nigeria and some other OPEC officials supported the proposed cuts.

But Saudi Arabia and its Gulf allies resisted on the grounds that they has already done their part to keep the level of OPEC exports stable. Later, there were reports of an OPEC offer to match the nonOPEC cuts on a barrel-for-barrel basis. Such a deal would reduce the required OPEC cut by approximately 570,000 barrels per day. Then, late Friday, OPEC proposed a cut of 300,000 barrels a day. The suggestion was immediately accepted by eight OPEC countries, but four others, including Saudi Arabia, said that they would have to consult their governments before making a decision.

Complicating the negotiations is a deep rift between Saudi Arabia and Iran. Iranian deputy Oil Minister Kazempour Ardebelli was the driving force behind the meeting with non-OPEC producers. Sauj^Jp di Arabia broke off diplomatic relations with Iran last week, citing ■'$, Iranian mines in the Persian Gulf and an attack last year on the Saudi Embassy in Tehran. OPEC officials speculated, however, that Saudi Arabia may co-operate if the reductions by non-OPEC nations are larger.

Meanwhile, the Alberta government accepted an OPEC invitation to attend the meeting as an observer and sent two representatives, Dale Lucas and Joel Thompson, who met with both OPEC and non-OPEC officials. But the governments of Canada, the United States and Britain, which oppose setting production or export quotas, were not invited. The Soviet Union, which is the world’s largest producer, has consistently refused to attend OPEC meetings. Although Webber was not in Vienna, he said that Alberta would not take any action that could hurt Albertan producers, but that if oil cannot be shipped for technical reasons—such as pipeline constraints—the reduction could be declared a production cut to lend the cartel moral support.

Canada ranks sixth in the world among non-OPEC nations, producing 1.53 million barrels per day in 1987—the vast majority of it from Alberta—and almost all Canadian oil exports go to the United States. Like many other oil producers around the world, Albertan officials favor a stable, slightly higher oil price of about $22 per barrel. But Merrill Lynch’s Carl said that the price could stay at between $18.50 and $19.70 per barrel if OPEC fails to reach an agreement with non-OPEC nations. And at week’s end, with such an agreement unlikely, many observers predicted that a final decision will be postponed until OPEC’s next meeting in June.

-PATRICIA CHISHOLM with SUE MASTERMAN in Vienna and BRIAN BURTON in Calgary

SUE MASTERMAN

BRIAN BURTON