The Market v. OPEC

The Organization of Petroleum Exporting Countries is a cartel so powerful that it has seemed able to set prices wherever and whenever its 13 members pleased, regardless of market forces. But at a stormy meeting in Vienna in September, OPEC decided to raise oil prices 10% effective Oct. 1, rather than the 25% that some members had urged earlier. Now it appears that the actual increase will be smaller still. Experts at the Petroleum Industry Research Foundation reckon the weighted average of price boosts by all OPEC members so far at less than 9%--equal to a rise of about a penny per gal. in the U.S. price of gasoline. Assistant Treasury Secretary Gerald Parsky estimates an even lower increase: 6.5% to 7.5%.

Curiously, some of the OPEC nations most noted in the past as firebrands pushing for ever-higher prices are among those now raising their crude less than the agreed-upon 10%. Algeria has hiked its prices only 8.5%. Indonesia, another former price hawk, raised some quotes but cut others so that its increases average a mere 1.6%. "Basically we are staying put on price, but as a good member of OPEC we had to go through the motions," said Mohammad Sadli, the nation's minister of mines, in Washington last week.

Most of the prices being raised less than 10% are for grades of crude that were especially costly to begin with; they carry premiums above base OPEC prices because of such factors as low sulfur content of the oil or closeness of wells to markets. During the past year or so, these premiums have got to be higher than could be justified during a severe slump in global demand.

Varying Needs. "We charge what the market will bear," says Indonesia's Sadli. Indonesia has special reasons for keeping its increases small. It sells most of its oil to Japan, where consumption in early 1975 fell 13% below 1973. Also, Indonesia's latest increase brings the price of Central Sumatra sweet crude, a product highly valued for its low sulfur content, to $12.60 per bbl., and China, which does not belong to OPEC, is marketing a similar crude for $12.10.

The same pressures do not, however, apply equally to all OPEC members. Saudi Arabia and Kuwait have raised their prices the full 10%, even though they have urged price moderation within OPEC in the past; Saudi Arabia at first argued for no price increase at all at the Vienna meeting. Both nations have enormous oil reserves and small populations: they did not need the extra income that a bigger-than-10% price boost would have brought, but neither do they now need the extra revenues that they might get by competitive price shading.

The smaller increases that some other nations are making cannot be read as anything like a signal of OPEC'S breakup. OPEC has demonstrated formidable unity and economic muscle by quintupling oil prices since late 1973--and by posting an increase now in the face of weak demand. Moreover, its current price hikes, though smaller than announced, are still a heavy burden on the world's consumers; OPEC exporters alone will raise world oil bills around $9 billion a year. Still, they demonstrate that not even OPEC can ignore the market.

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