BUSINESS

A power play splits OPEC

SUE MASTERMAN July 26 1982
BUSINESS

A power play splits OPEC

SUE MASTERMAN July 26 1982

A power play splits OPEC

When ministers from the Organization of Petroleum Exporting Countries abruptly jetted out of Vienna’s sultry summer heat last week after an acrimonious two-day meeting, they left a badly shaken oil cartel in their wake. Instead of salvaging the organization’s fractured production and price-control agreement, the session ended in disarray, raising the prospect of an oil-pricing free-for-all in a world market already pinched by slumping demand. The major cause of the cartel’s newest woes: a rift between oil giant Saudi Arabia and cash-short Iran over pricing and production.

The Saudis arrived at the hastily called meeting demanding price boosts by countries that have been flooding the market with oil at cut-rate prices. Indeed, several OPEC members have ridden roughshod over the daily production quota of 17.5 million barrels agreed upon last March. That agreement was intended to cut back oil production enough to take up the market’s slack and force consumers to use up inventories. Then, an eventual economic recovery in the industrialized coun-

tries—combined with the increased demands of winter—would firm up prices. In March it appeared certain that the cartel’s benchmark price of $34 (U.S.) for light Saudi crude could be maintained if all 13 member countries stuck to the allotted quotas.

Nevertheless, at the March meeting Saudi Arabia’s powerful Sheik Zaki Yamani said that he did not consider himself fully bound by the agreement. He suspected that other member countries would break it—and they did. Nigeria, whose high-grade oil fetches $35.50 a barrel, saw its share of the market shrink like a puddle in the desert sun as the price for the same grade from North Sea oilfields dropped to about $30. Resulting revenue shortfalls forced Nigeria to slash its prices. To varying degrees, Libya, Algeria, Venezuela and Ecuador also broke the agreement. But the worst offender was Iran. Despite a quota of 1.2 million barrels a day, the Iranians raised their production to 2.6 million barrels. Not only that, but they walked into last week’s meeting demanding that their quota be hiked to three million barrels a day. Behind Tehran’s request was its need

for cash to finance the war with fellow OPEC member Iraq; a war that took an ominous turn last week as Iraq was invaded by Iranian forces (see page 16).

Despite its stance, Iran remained in basic agreement with the quota system. It simply argued that its production boosts should be accommodated for by cuts in the Saudi and Iraqi quotas. The Iranian move—which was supported by several members—was seen as a direct attempt to take over power within the cartel from the traditional Saudi-led Arab faction.

For their part, the Saudis had little room to manoeuvre in the face of Tehran’s demands.

Riyadh has already cut daily production by three million barrels in order to reduce the glut and still finds itself with unsold oil because of discounting by other members. Angered by the recalcitrance of Iran and its supporters, the Saudi’s chief delegate, Abdul Aziz Al-Turki, strongly hinted last week that the kingdom may counter the competition with price-cutting of its own. With 40 per cent of OPEC’s produc-

tion controlled by the Saudis, the effects could be far-reaching. Already, spot market prices for Saudi light crude have fallen to $31.50 a barrel. And while that could be good news for most Western consumers, it poses some special problems for Canada, which is committed to raising the price of old oil to 75 per cent of the world price by 1984. Billions of dollars of future government revenues depend on world prices rising.

The next few months may see serious infighting between OPEC members and a continuing drop in oil prices. But it is still too soon to write the cartel’s death warrant. Since its first serious muscle-flexing in 1973, OPEC has shown that its member countries know how to rally around the barrel when their collective interests are threatened. In the long term, as the oil inventories of consuming nations are used up, the prospect is that prices will stabilize and may even rise. Although OPEC may be suffering from a major rift at present, it still has the means to cure itself.

-SUE MASTERMAN in Vienna.