Oil Exporters on a Slippery Slope

Bargain-basement rivals push OPEC toward another price cut

The markdown mania took off as suddenly as a price war on computers or toasters. But the merchandise that went on sale was crude oil. Early last week Norway’s state oil company triggered a chain reaction among petroleum exporters by offering its $30-per-bbl. North Sea crude for $28.50. Two days later Britain, a much larger producer, followed suit with a $1.35 cut on its Brent crude, to $28.65. For oil exporters the events were ominously familiar. When Norway and Britain officially discounted their oil in February 1983, the move forced the Organization of Petroleum Exporting Countries to make its first price cut in history, a $5-per-bbl. markdown, to $29 for the benchmark Arab Light crude.

The new round of discounting threatened to push the 13 members of OPEC toward a second painful price cut. The countries immediately made plans for an emergency meeting next week in Geneva, where they hoped to devise a plan for holding the line on prices. But almost immediately after the meeting was announced, a member broke ranks. Nigeria, one of the poorest OPEC countries, cut the price of its Bonny Light crude by $2, to $28, in order to prevent a decline in sales. Nigerian Oil Minister Tarn David-West said the country had to place its own economic health on a higher priority than its loyalty to OPEC.

Nigeria’s decision made it more likely that other restless members, like Abu Dhabi, will tear away, possibly leading to anarchy among OPEC members and a sharp slide in oil prices. “This has got to panic every oil-producing nation,” says Lawrence Goldstein, executive vice president of the Petroleum Industry Research Foundation. “In the next few days we will find out what OPEC is made of.” Most oil-industry insiders believe, though, that the group will try to avoid cutting its price, at least by much. Their shared interest in keeping world petroleum prices stable will help resolve many disagreements. “They have held together in very troubled times,” says a Western petroleum expert in the Persian Gulf. “So I think that you will not see the collapse of OPEC and a wild price war.”

Taken alone, last week’s price cuts will have little impact on fuel prices in the U.S. But if they force OPEC to cut its benchmark Arab Light by about $1.50, to $27.50, gasoline prices in the U.S. could fall by about 30 per gal. Lower energy prices would spark more economic growth. But a fall in oil revenue would aggravate the problems of such countries as Mexico and Venezuela, which depend largely on oil income to pay their enormous foreign debts. Their trouble could extend to the dozens of U.S. banks that hold Latin American loans.

The economic impact last week in Britain was sharp and swift. The $1.35-per-bbl. price cut will diminish the government’s $13 billion annual oil revenues by about 5%. On the day of the announcement, the British pound fell to a record low of $1.19. Shaken by the skidding currency and a possible worsening of the country’s coal miners’ strike, traders on the London Stock Exchange sent the Financial Times industrial share index to its steepest one-day loss in history.

The origins of last week’s oil slide reach back to midsummer. Buyers started balking at official prices at a time of continuing glut. The Saudis helped restore temporary calm by keeping their production low. As an added measure, Sheik Ahmed Zaki Yamani, the Saudi Arabian Oil Minister, jetted around the globe to such non-OPEC countries as Egypt, Malaysia and Mexico, urging those governments to restrain from giving discounts or increasing production.

Britain decided to cut prices on long-term contracts last week because its own “oil and similar varieties like Nigeria’s Bonny Light were selling for discounts of at least $2 on the spot market, where prices float according to market conditions. As a result, producers were having trouble signing up steady customers. Said a Japanese buyer in the Persian Gulf: “We prefer reliable, long-term contracts to buying on spot, but the price difference is too big for us to pass up.” In July the Japanese bought 25% of their oil on the spot market, compared with 9% in 1982.

An ironic reason for the slack demand for so-called sweet crude like Britain’s Brent light is that its quality is too high. Traditionally, refiners were willing to pay a premium for light, low-sulfur crude, which is used primarily to make gasoline. But refiners in the past year have improved their technology so that they use more of the less expensive, heavy crude. Thus the so-called sour oil is getting a larger share of the market, and its price has been holding firmer. In the past few weeks Saudi Arabia has boosted its exports of heavy crude, which it sells for as little as $26 per bbl.

The pricing problems between light and heavy crude come at a time when the oil industry is just recovering from two years of massive oversupply, caused largely by conservation measures and the global economic slump. Total oil consumption is expected to increase about 3% this year over 1983, thanks partly to strong growth in the U.S. and Japan. But that pace is too slow to satisfy OPEC members, which are currently producing slightly less than their self-imposed quota of 17.5 million bbl. per day, only half their capacity. As a result, OPEC countries such as Libya and Iran have been quietly undercutting official prices to keep sales steady. “They’re showing an inability to handle a moderately growing pie,” says Arnold Safer, president of the Energy Futures Group consulting firm. “When there are a few more goodies to share, they fall apart.”

When OPEC ministers meet in Geneva, they will have four basic choices: cut production, cut prices, adjust prices between light and heavy crude, or do nothing while hoping demand will pick up soon. It will be extremely difficult for them to decide which members should cut back output and by how much. All the countries want to keep production up in order to keep money flowing in. Iran and Iraq have a four-year-long war to finance. Venezuela and Nigeria owe large debts to Western bankers. Reducing the official price from $29 to compete with Britain could start an all-out skirmish with non-OPEC producers. “The system is so inherently unstable,” says William Randol, an industry analyst for the First Boston investment firm, “that the slightest slip can lead to another crisis.”

Most experts say that because consumption is gradually rising, the OPEC countries should simply stand by their prices. “If OPEC just sits tight this time, it will probably come through,” said an international oil analyst in Paris. “The market is looking for a psychological boost, and it’s in OPEC’S interest to provide one.” Moreover, the timing of OPEC’s current crisis, at the beginning of the cold-weather season, puts the group at a better advantage than at its last trial, which occurred at winter’s end.

Nonetheless, other authorities maintain that the OPEC benchmark will have to come down at least $1.50, particularly since Nigeria is selling on the cheap. The true market price of oil, if all producers exported at will, would be about $20 per bbl., and OPEC must at least partially close the gap between that price and the official $29 level. Said Safer: “My guess is, the OPEC countries will come to their senses.” In a speech to a gathering of energy experts in London, Energy Secretary Donald Hodel predicted last week that world prices could fall to $25 per bbl.

That kind of drop would be very good news to homeowners as the weather gets colder. Last winter the price of home heating oil jumped by about 100 per gal. in two months, to $1.17, when a series of cold snaps hit the U.S. But if this winter is normal, a decline in crude prices of $1.50 could bring a 30 drop in heating oil, to $1.02 per gal. Heating-oil users are also benefiting from the fuel’s competition with natural gas, which currently is in abundant supply in the U.S. Possibly adding to the gas glut is the Canadian government’s decision in July to stimulate exports. Last week a leading exporter, Pan-Alberta Gas, announced that it would reduce prices to some U.S. utilities by as much as 30%.

Because of the approaching heating season in much of the Northern Hemisphere, demand for oil would normally be high this month. Yet many are putting off their purchases in the hope that prices will fall even further. Supplies in the U.S. are low and getting lower. Last month oil imports to the U.S. fell 9.6% from a year earlier. Stockpiles in Western countries equal only 94 days of consumption, the lowest for the month of October since 1979. As soon as oil companies begin topping off their tanks for the winter, prices may snap back. Said a confident Mani Said al-Oteiba, Oil Minister of the United Arab Emirates: “It’s a matter of weeks.” —By Stephen Koepp.

Reported by Barry Hillenbrand/Bahrain and Lawrence Malkin/Paris