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JAMES FLANIGAN

OPEC Unlikely to Regain Its Lost Leverage

October 31, 1986|JAMES FLANIGAN

What does it mean that Saudi Arabia's Oil Minister Ahmed Zaki Yamani lost his job? Slightly higher oil prices in the next few months, which means 20 cents or a quarter more for a gallon of gasoline in 1987.

But it does not mean dramatic increases in oil prices any time soon; prices are not going back to $28 to $30 a barrel where they were a year ago. Basically, Saudi King Fahd's dismissal of civil servant Yamani and his replacement by Planning Minister Hisam Nazer is one stitch in a pattern indicating that oil markets will settle down now after an uproarious nine months in which prices fell to their lowest levels in a decade.

Falling prices didn't please everybody. Saudi Arabia's Nazer, who has a BA degree in international relations and a master's in political science from UCLA, thought that expanding Saudi oil production to gain market share was wasteful, a way of selling his country's resource cheap. He differed with Yamani, who thought that pumping more oil faster from Saudi Arabia's vast reserves would bring other oil producers into line and stabilize oil markets. Nazer wasted no time Thursday in calling for a new meeting of the Organization of Petroleum Exporting Countries to set production quotas and fix prices.

Wants Income Now

Iran also wants OPEC to try for higher prices by limiting its production. Iran's problem is that its oil reserves are going to play out in the next decade. So it wants prices to go as high as possible in the meantime. Reports out of OPEC's recent conference in Geneva were that Iran's view was gaining, while Yamani's was losing.

So OPEC, which is capable of producing 30 million barrels a day but has been pumping just over half that much, will go back to production agreements and fixed prices. Which means that it will go back to cheating, with those nations needing or wanting more income now--Iran, which was a notorious cheater in the past, and Nigeria--producing more than their share and selling it on the spot market.

All things considered, then, the price will go up, but not too far up. With the world economy stuck in slow gear, "there's not much OPEC can do about demand, and it's hard to push the price up by controlling supply," says oil analyst Barry Good of Morgan Stanley. The consensus of oil experts sees prices settling around $17 to $19 a barrel.

On balance, that will be good for the United States, which in many ways was hurt by this year's price decline. It was in our country, after all, that oil companies cut back exploration budgets and laid off thousands of employees. It was in our country that banks in the oil regions of Texas and Oklahoma were threatened with insolvency as energy industry borrowers went bankrupt. An oil price above $15 a barrel is no miracle cure, says bank consultant Michael Morrow of Sheshunoff & Co., but oil-patch banks can survive at it.

Beats the Alternative

It may be ironic to be rooting for stability in OPEC, which in the 1970s helped afflict us with historic inflation. But the alternative of oil prices plummetting below U.S. costs of production clearly has drawbacks for our society, too.

What we really should be rooting for is other oil producers to balance OPEC's potential monopoly power, new oil discoveries or developments like those that occurred in the 1960s and '70s in Alaska, the North Sea and Mexico. But at $15 or even $18 a barrel we are unlikely to get them, says Chairman C. J. Silas of Phillips Petroleum, because new oil exploration is stalled. With no new supplies coming into the market, and old wells fading out--many of them U.S. wells--OPEC can look forward to supply balancing demand in the early 1990s. That is when the cartel hopes to reimpose a stranglehold on energy consumers.

Will it? Probably not. As we've seen through most of this decade, OPEC is not the world's most disciplined cartel when it comes to holding the price line.

Besides, if OPEC can see oil prices rising in the early '90s, so can other people. The smart ones have already begun to look out five or six years and invest in oil development based on expectations for oil prices at that time.

Shell Oil Co., for example, has purchased some offshore California oil leases from Phillips. The Japanese national oil company is investing in exploration in the U.S. Rocky Mountains. And Robert O. Anderson, the builder and former chairman of Arco, has formed a venture with British partners to buy oil properties from his old company.

Those, admittedly, are exceptions.

Most oil companies are holding back on exploration because they must pay attention to institutional shareholders who refuse to back investments based on payoffs five or six years out. In that sense, the myopic U.S. shareholder is OPEC's strongest ally.

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