OPEC Fails to Make a Fix

Confusion in Caracas gives opportunities to the cartel's customers

While Venezuelan air force helicopters whirred in the sky above and 5,000 soldiers patrolled on the ground below, armed motorcades wound through the clogged streets of Caracas. It was a typical Panavision entrance for the 13 oil ministers of the Organization of Petroleum Exporting Countries. The price-fixing cartel that had tiptoed onto the stage of international power politics a decade earlier was gathering amidst pomp, pageantry and supertight security to do what it had learned to do best: demand more money.

The members did just that. But after the most fractious meeting in OPEC's history--it was a "bazaar" in the scoffing description of Saudi Arabia's Oil Minister, Ahmed Zaki Yamani--the cartel failed to agree on any uniform price. Instead, each country will fix the cost of its crude. The cartel also failed to set limits on production, as some of its hawks sorely want to do. In fact, the divisions were sharp enough to raise questions about the future of OPEC. While its members' separate price rises will cause immediate pain to the rest of the world, they also present an opportunity for oil-importing nations to counter OPEC by cutting demand. Market forces, the law of supply and demand, will have a much bigger influence than before.

After four days of dispute, the meeting in Caracas broke up with hard-line hawks such as Iran, Libya, Nigeria and Algeria planning to charge a minimum of $28.50 per bbl. and perhaps $30 or even more, while other cartel members said that they intended to go no higher than $24. All in all, the rises add up to a big increase over the OPEC official maximum of $23.50 that had prevailed since summer, the $18 that Saudi Arabia, the cartel's leading producer, had posted until two weeks ago, and the $12.90 that OPEC averaged a year ago.

The U.S. is already suffering increasing economic upset from energy inflation, and now the malaise will worsen. According to Administration calculations, the cost of crude oil imported into the U.S., which last month averaged $25 per bbl., will rise to from $28 to $30. Several of the nation's most important OPEC suppliers, including Nigeria and Libya, are also among those that lifted their prices the most.

The projected increases are expected to raise the nation's oil import bill from about $62 billion this year to more than $83 billion, representing a rise in fuel costs of $80 for every American citizen. The increase, said Energy Secretary Charles Duncan, could add from 4-c- to 8-c- to the retail price of a gallon of gasoline in the coming weeks, and 3-c- to 7-c- to the cost of home heating oil, a major expense for consumers in the import-dependent Northeast. Several of the largest oil companies, including Exxon, Mobil, Chevron and Texaco, last week announced wholesale gasoline price increases of 6-c- to 10-c- per gal. This signals further sharp rises at the pump in the weeks ahead for motorists, who are already paying an average nationwide price of about $1.04 per gal.

President Carter's Council of Economic Advisers had its own glum set of figures on the Caracas spinoff: consumer prices will climb by 1% more than they would otherwise have during 1980, and some 250,000 more workers will lose jobs. U.S. economic output will be shaved by some $17 billion, while $10 billion will be added to the nation's balance of payments deficit.

The Paris-based Organization for Economic Cooperation and Development, which comprises the world's 24 leading non-Communist nations, also issued a grim forecast, and on an even larger scale: a rise to $26 per bbl. would cut nearly 1% off its members' economic growth, reducing it to stagnation at best, and push OECD inflation up from an earlier projected 9% to at least 10%. Largely as a consequence of the oil increases, the organization now expects unemployment in its member nations to rise from just under 17 million to a full 20 million.

Yet OPEC's failure to agree on a single price presents the oil-importing nations with a rare chance. If they substantially reduce their consumption of crude, prices at long last could be braked. Decreasing demand for petroleum can easily stampede OPEC's members into a back-stabbing rush to hang onto their customers by offering all sorts of discounts and deals. Already there are signs that this year's 100% increase in crude oil costs is beginning to crimp cartel sales. U.S. oil imports dropped by 8.5% during November to 7.9 million bbl. daily, suggesting that the market is beginning to loosen.

The Caracas gathering itself revealed a cartel in deepening disarray over how to cope with the topsy-turvy world of petroleum. The yearlong production cutbacks in Iran have tightened supplies and stirred chaos in oil markets everywhere. Cartel members such as Algeria, Libya and Nigeria have been ignoring official OPEC price lists. Iran has been dreaming up gimmicks to lift the cost of crude under contracts already signed at lower prices. The favorite tactic: requiring customers to buy at least some oil at up to $45 per bbl. Customers who balked have been threatened with loss of their long-term supply contracts.

In Caracas, Saudi Arabia and Venezuela pressed for pricing restraint but were effectively countered by profit-hungry producers led by Iran and Libya. They urged an increase to at least $30 per bbl., arguing that anything less would be silly since consuming nations have been willing to pay prices that would have seemed unthinkable a year ago.

Just before the meeting began, Iran's Ali Akbar Moinfar announced that, whatever happened, the revolutionary government was immediately bumping its price to $28.50. In a move that topped Iran's, Libya's Ezzedin Ali Mabruk then declared that his government was lifting its price to $30 per bbl. Not to be outdone, the Nigerians jumped to $30 too.

Iran and Libya urged that OPEC adopt the classic market-tightening tactic of cartels: production cutbacks of 5% to 10% that would keep prices high even if demand sags. But several members, including Venezuela, resisted on grounds that production levels are a matter of national sovereignty. Among those opposing the cutbacks was Iraq, which has invested heavily in oil development and is now pumping some 3.7 million bbl. daily, making it OPEC'S second largest producer after Saudi Arabia (9.5 million bbl.).

Once a strident hardliner, Iraq tried to be a middleman in the power struggle between extremists and self-professed moderates. Its oil minister, Tayeh Abdul-Karim, suggested that a relatively modest floor price be established, but that it increase automatically every three months in line with world inflation and the economic growth of Western nations, a proposal that won only limited support.

On the third day, the whole conference moved into Yamani's hotel suite for a marathon twelve-hour session. While the Saudi minister padded back and forth serving English tea, and his guests munched on Algerian dates, an idea was floated to lift Arabian light oil to $26 as a new floor price, but fix a ceiling at $30. This was rejected by Libya, Algeria and Iran.

The discussion hopelessly stalled over pricing differentials, which are the variances in costs that are supposed to reflect the relative values of crudes according to their sulfur content and distances from major markets. Algeria, Iran, Libya, Ecuador, Gabon and others rejected a proposal to reduce the differentials, which help them to charge the highest prices. Iraq voted to follow that majority. The discussion became so confusing that the Indonesian delegate had to ask what the question was when his turn came to vote.

Midway through the fourth day, the ministers called it quits. An exhausted Yamani pledged to hold Saudi prices firm at $24 per bbl., but he was well aware that the survival of the cartel was now in question. Said he, trying to put the best face on his defeat: "There will definitely be a [global] recession. We will notice a sharp drop in the spot market. Then there will be some sort of unification of price levels among OPEC members."

With OPEC in disarray and vulnerable, bold action by oil-importing nations to cut their dependence on foreign petroleum cannot be easily countered by cartel members. Operating through OPEC, their monopolistic, price-propping has placed an enormous and continuing burden on oil consumers everywhere. Economist Otto Eckstein, president of Data Resources Inc., estimates that OPEC'S policies have been bloating the world's oil bill by $40 billion to $60 billion a year. Says he: "We need that cartel like we need a tourniquet around our necks. Any form of free competition is going to lead to a more balanced result."

Besides stricter conservation, one vital policy for the U.S. is to boost the use of coal and the production of syntheic fuels, including shale oil. The U.S. could be producing as much as 6 million bbl. of "synfuels" a day by 1990, equal to about 75% of all current imports. Jimmy Carter wants the financing for his own more modest synfuels program to come from his proposed windfall profits tax; it would be levied on the increased revenues that U.S. oil companies have been earning since price controls on oil began to be phased out last June. But Congress must now wrestle with a Senate bill passed last week that would yield $178 billion in revenues by 1990 and a House bill that would raise some $277 billion. A compromise of $227 billion was agreed to last week, but details are not expected to be worked out before February.

The White House has been mulling over new initiatives that would cut imports without the need for congressional action. Proponents and opponents of various measures can agree on one key point: the U.S. has rarely had a better opportunity, or more need, to take energy action. Year after year, that action has been impeded by debate over which groups in the population, which regions of the country, should make the largest economic and environmental sacrifices. After Caracas, it was clear that unless the U.S. accepts some compromises that will cut its consumption of precious petroleum, the OPEC cartel will simply regroup and start pushing up prices in unison once again. qed

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