What OPEC oil price cut means. Western nations may benefit in long term; third world may lose out
Wall Street: up. London stock exchange: down. Bras'ilia: relief. Lagos, Jakarta, and Algiers: deep concern. These are some of the reactions to the historic OPEC oil price cut announced Wednesday. It was only the second time in the life of the Organization of Petroleum Exporting Countries that it has reduced its prices to try to keep world prices up in the face of slumping demand. (The first cut was in early 1983.)
OPEC dropped the price of Arab light crude by $1 to $28, and decided that Arab light would no longer be the marker, or reference, OPEC price.
However, drivers, homeowners, and businesspeople need not throw their hats into the air.
Oil analysts contacted here say it is doubtful that the OPEC move will translate into immediately lower gasoline or home-heating bills, especially in Europe. The OPEC reductions were relatively small, they say. Governments will be tempted to raise indirect taxes on oil products to raise revenue, and oil companies will be eager to retain extra profits to offset current losses on refining.
In Europe, too, currencies have fallen against the soaring dollar so that oil, which is sold in dollars, has actually been rising in cost even as its dollar prices fall.
However, the days of the ``oil shocks'' of 1973 and 1979 have gone, at least for now. Those shocks pushed world oil prices up by 15-fold, changed ways of life, altered economies, and shifted an estimated 4 percent of global GNP from oil consumers to oil producers.
Now the movement is back the other way.
The news is good in the long term for Western nations and Japan. If it helps lessen inflationary pressures in industrial nations, it could help world economic recovery. The feeling in London oil circles after the OPEC decision was that prices would keep falling in the months ahead as the weather warms and demand lags behind supply.
Yet cheaper oil is a blow to a number of large third-world countries who rely on oil revenues. Nigeria (population 90 million) earns 95 percent of its revenue from oil. Indonesia (population 162 million) generates 60 percent.
According to Morgan Guaranty Trust, the 21 biggest debtors in the world might lose $30 billion from their current accounts by 1990 if oil falls to about $22.50 a barrel. Mexico's would be $8 billion worse, while even oil-importing Brazil would gain only $4 billion. The Soviet Union, the largest producer in the world, stands to lose some revenue, but follows the spot market in its pricing.
Britain finds itself in a curious position. Now the fifth largest oil producer in the world, its government earns some $12 billion a year in oil revenues. While cheaper oil might help the British economy recover, it also means less immediate revenue. Britain is expected to hold its North Sea oil price to the current $26.85 level.
It has been helped by Nigeria's decision to lift the price of its Bonny Light crude, which competes directly with North Sea crude, from $26 to $26.85.
The British dilemma is that the value of the pound sterling has plummeted against the dollar on fears of an oil price fall. The government has been forced to push interest rates up as a result, and this is threatening promised tax cuts in March and manufactured exports as well.
A fundamental issue, oil analysts here say, is whether prices will descend gradually, or whether a sudden free fall might choke off third-world incomes and weight down Western banks with huge unrepayable debts.
``If prices do begin to slide,'' says Paul Stevens, oil economist at the University of Surrey, ``no mechanism exists to put a floor under them.''
However, Dr. Stevens and other analysts feel, or at least hope, that prices will fall bit by bit, dollar by dollar.
In the short term, all eyes are on the spot market to see if traders feel OPEC has done enough to prop up its lower prices, or whether the feeling is that OPEC's ability to dictate prices has largely dissipated.
Oil analysts contacted by this newspaper were not particularly impressed with OPEC's moves. They pointed to 1) open squabbling during the just-ended Geneva conference and 2) the spot price for oil to be delivered in March, which has been below $26, though it had firmed somewhat at this writing.
Analysts were unsure how the oil market would react to the actions of Libya, Algeria, and Iran in openly voting against OPEC's decisions. Gabon abstained.
Besides lowering the price of Arab Light by $1, OPEC also narrowed the price gap between its heavy and light crudes from around $4 to $2.40, as had been widely predicted. Cheapest OPEC crudes are now priced at $26.50. The most expensive light crudes go as high as $28.90.
London oil analyst Paul Spedding said in an interview, ``I don't think OPEC has done enough yet.''
OPEC's announcement Tuesday that it has set aside $3 million to provide inspectors and take other steps to police its production also failed to move Mr. Spedding. ``OPEC had to do it,'' he said, ``but can it succeed?''
In fact, OPEC production has recently fallen below its official ceiling of 16 million barrels a day. The authoritative Petroleum Intelligence Weekly in New York estimates that OPEC is pumping 14.5 million barrels a day.
But production quotas are notoriously hard to police when so many members depend on every last dollar of oil revenue. The majority of OPEC members have decided to sacrifice with a price cut now in hope of higher prices to come later as demand rises and output stays low.