Even with cuts, OPEC has policing snag
Even if the Organization of Petroleum Exporting Countries cajoles an agreement out of its members to cut production, keeping everyone in compliance will be enormously difficult. Thus the optimism that accompanied OPEC's latest conclave had ebbed by early this week, and world oil prices again weakened. This was largely because of Iraq's refusal, as of this writing, to take part in production cuts. But it is also a function of the tricky goal of allocating painful production cuts and then trying to maintain tighter global oil supplies in the face of a persistent glut and massive inventories throughout the world.
Although these OPEC meetings have lost much of their glamour - this is the sixth marathon session this year - the world oil price nonetheless hangs in the balance. A change in the price of just $1 a barrel by OPEC costs consumers at least $20 billion a year, allowing for induced changes in oil and gas prices worldwide.
Last week there was superficial consensus that oil prices should be increased to $18 a barrel from the present range of $13 to $16. But then came intensive negotiations and fading hopes.
The obstacles are real: (1)large-scale cheating on quotas already; (2)bitter confrontations over Iran's and Iraq's production; (3)the specter of large surplus inventories of oil ``overhanging'' the market; and (4)a pervasive lack of confidence in the consistency of Saudi policy.
The Saudis had earlier demanded higher oil prices without production cuts - ``squaring the circle.'' They have momentarily abandoned a fixed price target, but they are nonetheless accused of producing 1 million barrels a day more than their own quota of 4.3 million.
The fragile price balance even now persists only because of unexpected shortfalls elsewhere. Iraq's production is down by 350,000 barrels a day because Petroline, the line connecting its southern fields to Saudi Arabia's oil pipelines, is closed for expansion. Iran's exports are down by some 400,000 to 800,000 barrels a day, thanks to Iraq's increasingly successful raids.
The will to increase prices is constrained by fear and mutual suspicion. The OPEC secretariat has shown ministers that oil industry stocks are at least 300 million to 400 million barrels ``too high,'' so that a speculative sell-off, if oil prices did rise for a short time, could eviscerate OPEC's production cut.
A rundown of oil inventories is indeed ominous. The OPEC staff considers a possible figure of 2 million to 3 million barrels a day during early 1987 as a ``worst plausible case.'' This market response, which is quite beyond OPEC's control, would more than swamp the maximum production cut it proposes - which is some 1.5 million barrels a day.
One bright lining to the dark cloud over OPEC is the cooperation proffered by all major non-OPEC exporters except Britain. The ``Group of Five'' - Angola, Egypt, Malaysia, Mexico, and Oman - has been conferring with OPEC and convinced it that the five will reduce production by 10 percent or more. Norway, without openly cooperating or negotiating with OPEC, has proposed to continue the 10 percent production cut it made on an ad hoc basis last month.
OPEC's own possible production cut, however, still founders on the questions of how much, from what base, and - most acute of all - how to include Iraq? Iran insists that Iraq, which is not exempt from restrictions, be brought within the system, while the smaller members contend that they be exempted if Iraq is.
Oil markets thus far are still anxiously unresponsive, and the fallback position now being considered by OPEC is the ``default option,'' i.e., to roll over the present quotas, probably perpetuating the present price in the mid-teens, until very early next year, when the cliffhanger sessions might begin anew.
Thomas R. Stauffer is adjunct professor at Georgetown University and a longtime observer of OPEC.