Nigeria coup sets oil market trembling; prices may fall

Last weekend's military coup in Nigeria has thrown a measure of uncertainty into world oil markets - once again putting pressure on OPEC (Organization of Petroleum Exporting Countries) to decrease its world benchmark price for crude.

Until the takeover in Lagos by Army officers under the leadership of Maj. Gen. Mohammed Buhari, who deposed civilian President Shehu Shegari, the price of oil had been firming. This was due mostly to the cold snap in the United States in late December.

But the Nigerian coup, the moderation of winter weather (especially in Europe , which buys a great deal of OPEC oil), and the continued flood of both crude oil and refined petroleum products onto world markets - these are putting downward pressure on oil prices. By spring, analysts say, the OPEC benchmark could drop between $1 and $4 from its current price of $29 a barrel.

Such a drop could bring prices of regular gasoline in the US down to $1 a gallon or lower. Consumers also may be able to buy home heating oil for less. Heating oil prices were on the verge of a decline in mid-December, but the cold wave forced at least two companies to cancel plans to lower prices.

At least initially, a drop in crude prices would have a salutary impact on the economies of the US, Europe, East Asia, and many third world countries, moderating inflation and decreasing the energy costs in manufacturing. All of this could contribute to economic recovery in Western Europe and Asia. But at the same time, oil producers such as Mexico, Nigeria, and Venezuela - countries with heavy international debts - might have more difficulty making loan payments.

Over the longer term, a precipitous drop in world oil prices may discourage US oil exploration and US research into alternate energy sources (such as solar power and synfuels), making the country vulnerable once again to leverage exerted by foreign oil suppliers. In the next year, the US Department of Energy estimates, net oil imports will rise 1 million barrels per day.

But most of the oil producers' attention today is focused on Nigeria. The coup caused crude and heating-oil futures to fall sharply Tuesday. Along with high US interest rates, this apprehension contributed to a record one-day rise in the strength of the dollar. Many oil buyers and speculators apparently felt General Buhari might pull Nigeria out of OPEC, exceed the current Nigerian oil-production quota, or undercut the OPEC benchmark.

With the reopening of telecommunications and air travel in Lagos, more information about the coup leaders is trickling out; now analysts are beginning to feel that an abrupt swerve in Nigeria's oil policy is not in the works. When he was sworn in Tuesday, Buhari was reported as saying Nigeria would remain in OPEC.

''Because he (Buhari) used to be the petroleum minister, he may not act rashly,'' says John H. Lichtblau, president of the Petroleum Industry Research Foundation. ''But that is not clear yet. Initially, the overthrow of Shegari, who was a clear OPEC supporter, was assumed to be negative.''

Before the coup, there was strong sentiment in Nigeria's parliament to pull out of OPEC. Nigeria's most important source of foreign revenue earnings is its sale of oil, so finding a market for that oil is important to the financial well-being of the country. Nigerian production stands at 1.3 million barrels a day, down from a high of 1.8 million barrels a day in the late '70s.

Like other OPEC members, Nigeria benefited greatly when oil prices increased tenfold between 1973 and 1980. But now that prices are on the decline, Nigeria is in many ways a hostage to OPEC membership. If it remains in the cartel, it is forced to abide by OPEC's production limits and prices. Given the current conditions of supply and demand, non-OPEC oil producers such as Mexico and Britain benefit most; they enjoy the advantage of the OPEC benchmark but can sell any quantity of oil they wish. That has seemed an attractive alternative to some Nigerians.

Even under pro-OPEC Shegari, Nigeria violated its OPEC production quota. Last spring, Nigeria drastically undercut OPEC's $34-a-barrel benchmark, and this precipitated the fall of the benchmark to $29 a barrel. But if Nigeria were to bolt from OPEC or blatantly violate OPEC policy, Saudi Arabia might retaliate by flooding the market with cheaper oil.

''Nigeria does have a recent history of attempting to grab market share by discounting,'' notes Steven A. Wood, senior economist of Chase Econometrics. ''That clearly can't be ruled out, and Britain will act as Nigeria acts.''

But he notes that the ''mismatch between supply and demand'' is not as great as it was a year ago when prices fell by $5 a barrel. He says he believes there will be some downward pressure on prices in the spring but does not think the drop will exceed $1.50 a barrel.

An oil-market watcher at Platt's Oilgram News in New York predicts that Nigeria will remain in OPEC but will push for a bigger share of the market - and expects Saudi Arabia to oblige for the sake of harmony.

Mr. Lichtblau is not so sure: ''Nigeria is very important to OPEC right now on the question of whether the price structure will be maintained. (Buhari) cannot be stronger on OPEC than Shegari. In an atmosphere of doubt, buyers are in a position to hold off buying, and this can put downward pressure on prices.''