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Meeting Seen as Last-Ditch Bid to Prevent Collapse : OPEC Losing Control of Oil Prices

July 21, 1985|Associated Press

NEW YORK — OPEC oil ministers appear to be running out of options for defending oil prices as they prepare to meet Monday in Geneva, Switzerland.

"They're sitting seemingly over an abyss," said Richard Kjeldson, senior international economist at Security Pacific National Bank in Los Angeles.

If the ministers fail to regain control of sliding prices, oil-producing countries and their bankers--many of whom are American--will suffer. But oil-consuming nations--including the United States--will get an economic shot in the arm that would hold down both inflation and interest rates and make it cheaper to fuel airplanes, cars and power plants.

The official price of the Organization of Petroleum Exporting Countries' bellwether oil, Arabian Light crude, has been reduced nearly 18% since March, 1983, and most analysts have written off the ability of OPEC to prevent prices from falling further.

About the only issue dividing analysts is whether prices will continue to drift lower or plummet.

Slow Drop Expected

Kjeldson said the consensus forecast sets the odds at 60-40 that the price of oil "floats on down another couple bucks in the next 12 months" rather than stages a more precipitous decline.

"I don't see any chance of staying where they are or going higher," he said.

Each $1-a-barrel cut in the world price of oil, if passed on entirely to consumers, is the equivalent of a reduction of about 2 1/2 cents a gallon in the retail price of gasoline or other refined petroleum products.

OPEC is in a bind because its oil market has been shrinking and its 13 members not only are fighting competitors from outside the organization but increasingly are trying to outmaneuver one another just to hold on to their share of an increasingly smaller pie.

"Cartels are short-lived," said Kjeldson. "In a down market they undercut one another."

In its peak year, 1979, OPEC produced nearly 31.5 million barrels of oil daily, representing about five of every eight barrels consumed in the non-communist world, and oil prices appeared to be heading on a one-way course--higher. In recent months, OPEC output has been flirting with 14 million barrels a day, a level last seen 20 years ago and representing about one out of every three barrels consumed.

Market Forces Decide

Analysts estimate that the price of as much of 80% of the oil being sold around the world is currently determined by market forces rather than official decrees, compared with about 15% during OPEC's heyday.

Non-OPEC producers such as Britain, Norway and the Soviet Union all have moved toward prices determined by the marketplace. Two former OPEC allies, Mexico and Egypt have cut their prices in the past two weeks without waiting for OPEC's meeting.

OPEC's debt-ridden members, Nigeria, Venezuela, Ecuador and Indonesia, are being squeezed financially by the deterioration of oil markets. Saudi Arabia, with huge cash and oil reserves, also is feeling a pinch.

For years, Saudi Arabia has been the "swing producer," lowering its output in an attempt to keep OPEC's overall production within the organization's limits whenever demand dropped or other members exceeded quotas.

But in the past two months, Saudi Arabia's production has dropped so low that, if it continued on a sustained basis, the kingdom would have to make new spending cuts to stick to a budget that already reduces government programs.

Glut Could Worsen

And if, as it has threatened, Saudi Arabia steps up production while other producers in and out of OPEC continue to produce at current levels and fail to stop rampant discounts, the glut will worsen and prices will plummet.

If OPEC fails to restore discipline to markets, "there's no reason why prices have to stop at $20 or $10" a barrel, said Philip Verleger Jr., a Washington oil analyst for Charles River Associates, a private consulting firm.

Arabian Light, which peaked at $34 a barrel in 1981, was cut by OPEC to $29 after a stormy series of meetings in 1983 and was reduced to $28 earlier this year after more divisive sessions. On the open market, Arabian Light was hovering below $27 a barrel last week.

It was Saudi Arabia's demand that OPEC members toe the line that brought the organization's oil ministers together earlier this month in Vienna, Austria.

Those talks recessed early this month with a promise from ministers to end cheating on price and production quotas, but no means for accomplishing that goal were established.

"OPEC, after three days of informal deliberations, failed to take the only action that would have been decisive enough to stop the slide in petroleum markets, namely, more stringent production controls," analysts at the New York investment firm of Merrill Lynch, Pierce, Fenner & Smith Inc. said in a review of the Vienna session.

Can't Support Price

"The recent meeting confirms our view . . . that OPEC is so weakened that it can no longer support the price at current high levels and that the price will come down sharply before year-end."

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