Share this story
Close X
Switch to Desktop Site

OPEC in disarray: what it means

The world now waits, with decidedly mixed feelings, to see what will happen to oil prices in the wake of OPEC's failure to whip its members into line on production and prices.

Some analysts say they believe that the 13-member cartel might hold another emergency meeting in February or March to prevent individual producing countries from engaging in a price cutting war.

About these ads

But people who drive cars and heat their homes with oil no doubt would be delighted to have petroleum prices take another nose dive, as oil-producing nations scramble for shares of a shrinking market.

A drop in the cost of gasoline and home heating fuel would give American families more money to spend and might help boost the US economy toward recovery.

Oil-importing nations, especially debt-ridden developing lands, would have to pay less for the fuel they import to run their factories, homes, trucks, and cars.

But the expectation of an OPEC price war sends chills through officials of big international banks and political leaders of some oil-producing states.

Mexico, for example - with an $80 billion foreign debt - counts on income from the sale of its oil to avoid outright default on its massive obligations to Western banks.

Other cartel members with debts of varying size include Nigeria, Venezuela, and Indonesia. Oil producers outside OPEC - notably Britain and Norway - base their economies on stable prices for the North Sea oil they sell.

The British pound dropped to an all-time low against the dollar Monday, partly in reaction to fears that oil prices might plunge. Investors also appeared to be motivated by a belief that US interest rates had stabilized, after declining for several months.

About these ads

Similar caution in foreign exchange markets around the world buoyed the dollar against most major currencies including the West German mark and Japanese yen.

On Wall Street, meanwhile, the prospect of lower oil prices and possible turmoil in petroleum markets turned investors bearish and propelled the Dow Jones average down.

Loss of oil revenues might force Mexico and some other oil producing nations to appeal for additional loans to tide them over and avoid default. This would strain an already burdened banking system. Even before the OPEC debacle, experts say, many smaller US and European banks were backing away from new loan commitments to debtor countries.

Another casualty of a sharp drop in the price of oil, analysts say, might be investment in alternative sources of energy. Once-ambitious plans for a US synthetic fuel industry already have been scaled back.

All this constitutes the dark side of the possible scenario emerging from the wreckage of the Geneva meeting of the 13-member Organization of Petroleum Exporting Countries.

''In the short run,'' says Lawrence B. Krause of the Brookings Institution, ''a steep drop in the price of oil is negative,'' because of factors outlined above. ''But,'' he adds, ''it becomes positive pretty fast.''

Lower oil prices, he says, would benefit the world economy as a whole, resulting in less inflation and more stimulus to national economies now mired in recession.

Billions of dollars that might have gone to OPEC producers will - if prices drop significantly - remain in oil-consuming countries for domestic investment and consumption.

At the heart of OPEC's dilemma is a declining world market for oil. From a peak of 31 million barrels daily (m.b.d.) in 1979, OPEC production now hovers at the 18-19 m.b.d. level. To sell even that much oil, a number of OPEC members are offering their crude below the official price of $34 a barrel.

Several cartel members - especially Iran, Libya, and Venezuela - also are pumping more oil than their OPEC-assigned quotas permit. This adds to the world surplus of oil and puts downward pressure on prices. To prevent the surplus from increasing, Saudi Arabia has steadily cut its output from a high of 10 m.b.d. to 4.5 million barrels daily or less.

The Saudi effort at the Geneva meeting just ended was to assign a new overall production limit for OPEC - 17.5 m.b.d. - give each member a firm quota within that total, and maintain orderly pricing, pegged to the $34 a barrel that the Saudis charge for their Arabian light crude.

This arrangement would have required the African producers - Libya, Algeria, and Nigeria - to charge perhaps $1.50 a barrel more for their superior grade of oil, which contains less sulfur and is easier to refine than Saudi crude.

But the Africans, who have been discounting their oil, reportedly refused to add this ''differential'' to their price, on the grounds that they would lose sales.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.