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.