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Oil supply stable despite Gulf conflict OPEC meeting unlikely to result in much action as prices hold steady

The Iran-Iraq war has upstaged OPEC. When the OPEC oil ministers meet in Vienna today, two key questions affecting the world oil market will stand in the foreground:

Can Iraq's Air Force keep Iran's major oil terminal on Kharg Island shut down?

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Will Iran retaliate by disrupting oil shipments of other Persian Gulf oil exporters, particularly Saudi Arabia?

``That's the one we worry about the most,'' says Thomas McNaugher, a fellow at the Brookings Institution in Washington.

Iraq's bombings of Kharg Island in recent weeks have taken more than 1 million barrels a day out of production. This and an unexplained reduction in Soviet oil shipments to the West have tightened up the world oil market, allowing Egypt and Algeria to raise their oil prices for October.

The Iraqi attacks were made to pressure Iran to end the war. It is assumed a loss of vital oil revenues will force Iran to seek peace because of financial necessity. Iran, the experts say, may be able to continue shipping about 500,000 barrels a day from Sirri and Lavan Islands further south in the Gulf. But this is inadequate to meet Iran's financial needs.

Mr. McNaugher suspects that Iran, not wishing to negotiate peace, will attempt to muddle through. According to Platt's Oilgram, Iran is attempting to construct underwater pipelines from Kharg Island to offshore mooring buoys in an attempt to reduce damage from Iraqi air attacks. Small tankers could be loaded at night from this underwater system and transfer the oil to larger ships at Sirri Island. Iran is also attempting to repair the piers at Kharg Island, but observers say that if Iraq is persistent i n its bombing raids, this effort will fail.

As for the possibility of widening the conflict, Iran and Saudi Arabia have moved to improve their relations over the last year. A Saudi prince visited Tehran during the summer and the Iranians complimented the Saudis on their handling of this year's Haj, the annual Muslim pilgrimage to the holy cities of Mecca and Medina in Saudi Arabia.

Whether Iran wants to upset this greater friendliness with attacks on Gulf oil shipments remains uncertain, McNaugher says. Iran undoubtedly also recognizes that widening the conflict could result in a response from the United States, which has strong naval forces in the region.

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From the standpoint of oil production, the knockout of Kharg Island is advantageous for both Iraq and Saudi Arabia.

Last weekend, Iraq began using a new oil pipeline, from Basra in Iraq, which joins a Saudi pipeline north of Riyadh, where the oil goes across the Arabian Peninsula to Yanbu on the Red Sea. Iraq says it will export 500,000 barrels per day (b.p.d.) by this route, on top of the 1.2 million b.p.d. it ships via a pipeline through Turkey.

But Saudi Arabia and Kuwait may now cease to provide Iraq with 250,000 b.p.d. of ``war-relief production,'' an aid effort that was started when Syria, as a favor to Iran, shut off a pipeline carrying Iraqi oil to the Mediterranean. If that proves to be the case, the net daily increase in production for Iraq would be only 250,000 barrels.

The Saudis want to boost their output to avoid a sharp drawdown in their monetary reserves. The Saudis have an Organization of Petroleum Exporting Countries (OPEC) quota of 3.5 million b.p.d. In order to maintain prices during the recent worldwide oil glut, however, they have been producing far less.

In a series of well-publicized moves late last month, the kingdom negotiated a series of ``netback'' deals with Exxon, Texaco, and Mobil involving the sale of Saudi oil at market prices, less the cost of freight and refining, and thus below the official OPEC price. The deals involving at least 800,000 b.p.d. were to begin last Tuesday.

Saudi Arabian production has already stepped up from below 2 million b.p.d. to about 3 million b.p.d., giving it the capacity to export some 2.3 million b.p.d., according to reports from Riyadh.

George F. Friesen, an oil analyst with Dean Witter Reynolds Inc., suspects the Saudis have been ``posturing,'' trying to put psychological pressure on other OPEC members to restrain their production so the Saudis can increase theirs without knocking down the price of oil.

Some observers say they believe the Saudis must follow through on their threat to boost output or lose some of their credibility. However, the knocking out of Kharg Island and the normal building of winter stocks by oil companies have taken some of the steam out of the quota debate.

John H. Lichtblau of the Petroleum Industry Research Foundation predicts that oil prices will stay slightly stronger until spring, when demand starts to fall off again. ``There is no fear that everything will collapse,'' he says.

The OPEC ministers are scheduled to meet again in December when, if necessary, they could have another crack at resolving their disputes but, ``Very little of great substance will be accomplished at [the current] meeting,'' says Mr. Friesen.

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