OPEC Talks Tough Again

Saudi Arabia is a land rich in oil and privileged royal princes. Yet it is so tight for cash that Crown Prince Abdullah, who is running the show for the ailing King Fahd, has boldly cut the budget. And he is reportedly sending out "Abdullahgrams" to spendthrift nephews, demanding that they reverse their habit of ignoring telephone and electricity bills or face service cutoffs like ordinary Saudis.

That's also why the monarchy's peripatetic Petroleum Minister, Ali Naimi, was trying last week to broker production cuts among major oil producers to sop up a global glut that has recently pushed prices to a 12-year low, barely higher in real terms than in 1973. After several days of haggling at meetings in Europe and the Persian Gulf, Naimi finally announced a breakthrough: Iran, Algeria, Venezuela, Mexico and the Saudis agreed to press OPEC (the Organization of Petroleum Exporting Countries) and non-OPEC countries for a 2 million- bbl.-a-day reduction in the flow of crude, a figure equivalent to nearly 3% of world output.

Are we heading for another oil shock? Not even close. Although the news sent futures prices for West Texas crude rocketing past the $15 barrier, and gasoline may soon rise a few cents per gal., the world is still awash in oil. And there's not much that OPEC can do about it. (The latest spot price of Saudi Arabian light is also starting to rebound, at $9.96.) Indeed, traders are watching to see whether OPEC, which has been unable to police its members in the past, can deliver the promised reductions when it meets on March 23 in Vienna. "Oil exporters are trying to build an emergency bridge to the 21st century," explains Daniel Yergin, chairman of Cambridge Energy Research Associates. "If OPEC had not reached this agreement, or if it does not stick, the alternative will be more low prices and economic turmoil."

Most consumers, of course, think the current oil glut is just great, akin to a tax cut. American motorists are filling their tanks for under $1 per gal., less than the price of bottled water. America's annual oil bill dropped roughly $40 billion last year, and that money has shifted to other parts of the booming economy. The result is lower inflation and higher growth, with savings that show up on everything from home- heating bills to airline fuel and utility charges. Says Cynthia Latta, principal U.S. economist at Standard & Poors/DRI: "Higher oil prices will be widely felt across the economy, but they are not likely to pose an immediate threat to continued low inflation and robust consumer spending."

Yet some Americans do pay a huge price for cheap oil. Texas' petroleum industry, for example, loses roughly 10,000 jobs for every $1 drop in the value of crude. Nationwide the price collapse has so far cost 24,000 jobs, with an additional 17,000 at risk in the first half of 1999, according to the American Petroleum Institute. Almost 140,000 domestic oil wells have been abandoned in little over a year, principally in Texas, Oklahoma, Colorado and Louisiana, forcing U.S. daily production down by 360,000 bbl. a day. In Alaska, which depends on tax revenues from oil, the state is forecasting a $1 billion budget gap, equal to about half the money it needs to pay for the day-to-day running of government.

Even big oil companies are worried about a bleak pricing future, one reason they are merging. British Petroleum and Amoco recently united, hoping to save more than $2 billion annually, with a reduction of 6,000 workers. The new Exxon/Mobil combination is expected to save about $2.8 billion, with 9,000 jobs eliminated. Conoco, Texaco and Chevron are also expected to reduce staff.

For the Saudis, the aim is to absorb some 300 million bbl. of supply overhang and bring inventories more in line with demand. It won't be easy. Nearly a year ago, some of the same countries that signed on to last week's deal agreed to reduce oil production by a whopping 3.1 million bbl. daily. When that happened, prices rose from $13 to more than $17 per bbl. Then flagrant quota busting, higher production from Iraq, warmer winter weather and lower demand for energy in Asia combined to wreck the price-fixing scheme, and oil crashed to just over $10.

Why won't the the same thing happen again? The first test will come when OPEC decides the allocation of production cuts among 10 of its members. Saudi Arabia alone seems prepared to accept reductions of 500,000 bbl. a day in output. But that still leaves 1.5 million bbl. in reduced production and revenues to divvy up among the other members. Many of them, including Iran, Indonesia, Nigeria and Venezuela, are in much greater need of cash than even the Saudis. "I don't like to project what is going to happen," Saudi oil czar Naimi told TIME last week. "But I believe we will be successful in coming to an agreement to reduce surplus inventory and to lift the price." If not, the princes can expect a few more Abdullahgrams.