Saudi deal: AWACS for $32 oil

Despite the relief in Western capitals at the potential for lower oil prices and further disarray in the ranks of OPEC after its recent meeting here, some experts warn against jubilation.

What this meeting has shown, once again, they say, is the political impact of Saudi Arabia's willingness to use its huge reserves in the interests of the West.

But these experts point out that this has only served to widen the gap between OPEC hawks and Saudi Arabia, further increasing the isolation of the rich, desert kingdom.

The Saudi stand on freezing its own oil price of $32 a barrel, the lowest among OPEC countries, has also increased the West's dependence upon the Saudi royal family underlining the dangers from a would-be- assassin, or incidents like last year's takeover of the Grand Mosque in Mecca.

Meanwhile, sources close to the Saudi delegation here made it clear last week that the Saudis will expect some reciprocal gesture of support -- starting with the early delivery of American AWACS surveillance planes, and an American policy on the Middle East that is more closely tailored to Saudi concerns and less with the administration's obsession with the Soviet Union.

For OPEC itself, the 13-nation oil producers' cartel faces the worst crisis in its 21-year history after the failure here of last week's extraordinary meeting to agree on a unified price for its oil. For seven of these last 21 years, the world has watched and winced as the members of the cartel emerged from dramatic pricing sessions to give a further twist to world inflation.

Between 1971 and 1981, the price for a barrel of crude oil rose from $1.60 to Indonesia, and Ecuador.

Last week's meeting -- one of the longest and most contentious ever -- has, most feel, stretched that cohesion to breaking point. As a result of the deadlock, OPEC prices remain as they were last officially set in Bali, Indonesia -- that is, floating between the $41 charged by Nigeria, Libya, and Algeria, and the low of $32 demanded by Saudi Arabia -- a range that in effect makes a mockery of the notion of a cartel.

Following Friday's announcement by Saudi Oil Minister Ahmad Zaki Yamani that the Saudis will freeze prices at $32 a barrel until the end of 1982, the prices of other OPEC members -- and hence world oil prices -- seem certain to fall. It was Nigeria, in desperation, that called last week's extraordinary meeting. In order not to undercut Libya and Algeria (which produce similar high- quality crude) the Nigerians had held prices to $41.

But such is the current oil glut that it had meant cutting back production to a third of Nigeria's normal output of 2 million barrels a day -- a massive drain on the revenues of Africa's most populous nation.

According to the Petroleum Intelligence Weekly, Nigeria now is expected to cut its crude oil by at least $3.50 to $36.50 a barrel. Some feel that a price cut by Nigeria could signal the first salvos in a price war: Libya, which lacks the economy to absorb huge oil revenues, could afford to stay aloof. But it is felt that Algeria, with ambitious industrial plans and limited oil reserves, would be forced to follow Nigeria.

Sheikh Yamani's dramatic announcement of a Saudi price freeze until the end of 1982 is seen as further bleak news for his OPEC partners, because it effectively preempts any pricing decisions at next December's OPEC meeting in Abu Dhabi. Although Sheik Yamani also announced that Saudi Arabia will cut its production by 1 million barrels a day in September "as a gesture of goodwill" to the rest of OPEC, this will not be enough to soak up the current oil surplus -- running at between 2 and 3 million barrels a day. Nor were other OPEC delegations molified by Sheikh Yamani's insistence that the Saudis want a "strong OPEC."

Algerian delegates openly described the Saudi position as "rigid." Other delegates complained privately that the Saudis had used their massive oil reserves to "blackmail" the cartel.

The failure of last week's meeting came as a surprise to many, since both OPEC hawks and moderates had wanted a single unified price. In particular, the Saudi Arabians have long argued for a single price and regular price rises pegged to the level of inflation instead of disruptive price hikes that damage Western economies and (indirectly) Saudi investments in the West.

Contributor James Dorsey writes from Kuwait:

The world's largest oil exporter, Saudi Arabia, is confident that its oil strategy will prevail, and that by the December OPEC meeting the other members of the oil cartel countries will come around to its point of view.

The Saudi contention is that high prices will price oil out of the energy market. As a result the Saudis have vowed to keep their $32-a-barrel oil -- the lowest price charged by an OPEC member -- until the end of 1982.

Although other OPEC countries could not accept a Saudi proposal for a new $34 standard, Arab sources here share the view that the Saudis are in a dominant position.

Says one ranking Arab diplomat: "The Saudis are . . . in the driver's seat."

Oil experts share the Saudi view that oil prices will continue to fall.

The one million barrel a day cut in Saudi oil production -- from 10 million to 9 million barrels a day -- is unlikely to restore fully the balance between supply and demand, given that world overproduction is estimated to be running between 2 and 3 million barrels a day.

"The Saudis will ultimately be proven right," says one Arab government official, adding that "the Saudis are economically and politically strong enough to dictate their terms."

Saudi Arabia refutes accusations that its high level of oil production has forced the market price of oil down. The Saudis defend their high output as a means of compensating or market shortfalls, partially caused by the gulf war between Iran and Iraq.

Saudi oil officials maintain that the market price of oil will remain low even though Saudi Arabia has now decided to cut back production.