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British Resist Saudi Push to Ease Oil Glut

February 02, 1986|TYLER MARSHALL | Times Staff Writer

LONDON — As oil prices fall and economic uncertainty mounts, a test of wills is developing between two of the world's leading oil producers, Saudi Arabia and Britain.

Sheik Ahmed Zaki Yamani, the Saudi oil minister, hopes to force Britain to limit its production and set an important example for all the producers outside of OPEC, the Organization of Petroleum Exporting Countries.

Prime Minister Margaret Thatcher of Britain, however, boasts that her government maintains "the freest oil province in the world," and says there will be no change in this policy.

In recent years, Britain and the growing family of non-OPEC oil producers have dramatically increased their output, undercutting efforts within the cartel to keep price levels up by limiting production.

As a result, prices have weakened and OPEC's share of the world oil market has been reduced--from more than 60% in 1979 to a little more than 33% today.

Saudis Lost Patience

Last August, the Saudis lost patience and doubled their production. Crude oil prices tumbled.

Overtly, Yamani's wrath has been directed against non-OPEC producers, but at the same time the Saudi actions have damaged other OPEC countries. And oil experts here speculate that Yamani hopes to counter the flagrant cheating by OPEC members who exceeded production quotas and discounted prices while Saudi Arabia steadily cut back its output.

Flexing his country's unparalleled reserves and production capacity, Yamani has demanded discipline and warned of dire consequences for the world economy if prices continue to decline.

At the same time, the Saudis have increased production as Yamani has attempted to show non-OPEC countries what will happen if they don't hold production down.

With crude oil prices down nearly 40% in the past three months, Yamani has predicted a further substantial decline unless the non-OPEC countries agree to some form of production limits.

So far, Thatcher has shown no sign of buckling, despite projected losses of nearly $7.5 billion in revenues and prospects for more of the same.

Her unequivocal "no" to production limits and to talks with OPEC about such limits--established last Tuesday in a statement to Parliament--sent crude oil prices tumbling further as nervous oil traders saw no end to either the Saudi-British confrontation or to the volume of Saudi oil flooding onto Western markets.

Yamani has many reasons for concentrating on Britain. In the decade since Britain's North Sea oil fields became active in 1975, Britain has steadily increased its output, doubling production over the past six years to 2.5 million barrels a day, while OPEC sought to limit its output.

Output Topped Saudis

At one point last summer, Britain's output briefly surpassed that of Saudi Arabia, a factor that some people think was the last straw for Yamani.

Also, Britain is a convenient target. It is not a Muslim country, not an Arab country and not an indebted Third World country, any of which might be politically difficult to attack.

Above all, Britain is important. Although it produces barely 5% of the 45 million barrels of oil that is consumed daily around the world, Britain is an influential player in a world where symbols and psychology are powerful market forces.

Britain dominates the North Sea, which constitutes one of the largest non-OPEC sources of exported crude oil anywhere. Crude from Britain's Brent field has come to be among the most widely traded, taking on the role of price-setter in a development that has raised Britain's profile.

In addition, Norway, the other big North Sea producer, has traditionally taken its pricing lead from Britain. Norwegian government officials have confirmed that Norway is ready to discuss production cutbacks, but only as a follower, not a leader.

"If other non-OPEC countries, especially Britain, will regulate production, then we will also consider it," Egil Helle, chief spokesman at the Norwegian Ministry of Petroleum and Energy, told The Times.

In the words of Stephen Turner, an oil economist for the respected Edinburgh-based brokers Wood Mackenzie & Co., "The U.K. (United Kingdom) is the pivot."

A Difficult Task

But if part of Yamani's strategy involves facing down Thatcher, the expert opinion here is that his task will not be easy. For a variety of reasons, industry observers and analysts believe that Britain's strong public stance is more than posturing.

In most of the OPEC countries oil revenues account for 90% or more of total income and nearly 100% of exports, but North Sea oil accounts for 6% of Britain's national income and slightly less than 10% of its exports.

Certainly the loss of oil income due to falling prices will have an impact. The revenue drop could force Thatcher's government to put off a $5.3-billion income tax cut planned for announcement in March. And for a prime minister whose stock was shaken by a recent scandal that led to the resignation of two Cabinet ministers, such a sacrifice could be significant.

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