It's a measure of just how much of a paper tiger oil
cartels have become that few people outside Wall Street
really cared about the announcement by OPEC members
late last week. Key OPEC countries—including Saudi
Arabia, Iran and Venezuela, as well as non-OPEC
member Mexico—seeking to raise oil prices further,
pledged to cut production by 2 million barrels a day by
April 1. And this time, the OPEC producers said, they
really meant it.
Despite some production cuts already, many experts are
skeptical of OPEC's ability to follow through. "I don't
believe it," says oil analyst Phil Verleger. "OPEC for the
last several years has been an eating and drinking
society." He points out that the members have not set
individual quotas. Even so, Verleger says, if the Saudis
and others carry out their plan, prices at the pump could
shoot up by 18 to 20 cents more than current levels,
which have been creeping up in recent weeks. Still, for
much of the world, deflation now seems a far bigger
threat than inflation. In the face of continuing recession in
Japan, Asia and Russia, a mild uptick in oil and other
commodity prices may not be such a bad thing after all.
Newsweek, March 22, 1999
newsweek.com
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MARCH 22, 1999 VOL. 153 NO. 11
OPEC Talks Tough
Again
Cash-strapped oil nations are
threatening to cut production.
But can they afford to turn off
the tap?
BY ADAM ZAGORIN
Saudi Arabia is a land rich in oil and
privileged royal princes. Yet it is so tight
for cash that Crown Prince Abdullah, who
is running the show for the ailing King
Fahd, has boldly cut the budget. And he
is reportedly sending out
"Abdullahgrams" to spendthrift nephews,
demanding that they reverse their habit of
ignoring telephone and electricity bills or
face service cutoffs like ordinary Saudis.
That's also why the monarchy's
peripatetic Petroleum Minister, Ali Naimi,
was trying last week to broker production
cuts among major oil producers to sop up
a global glut that has recently pushed
prices to a 12-year low, barely higher in
real terms than in 1973. After several
days of haggling at meetings in Europe
and the Persian Gulf, Naimi finally
announced a breakthrough: Iran, Algeria,
Venezuela, Mexico and the Saudis
agreed to press OPEC (the Organization
of Petroleum Exporting Countries) and
non-OPEC countries for a 2 million-
bbl.-a-day reduction in the flow of crude,
a figure equivalent to nearly 3% of world
output.
Are we heading for another oil shock?
Not even close. Although the news sent
futures prices for West Texas crude
rocketing past the $15 barrier, and
gasoline may soon rise a few cents per
gal., the world is still awash in oil. And
there's not much that OPEC can do about
it. (The latest spot price of Saudi Arabian
light is also starting to rebound, at $9.96.)
Indeed, traders are watching to see
whether OPEC, which has been unable
to police its members in the past, can
deliver the promised reductions when it
meets on March 23 in Vienna. "Oil
exporters are trying to build an
emergency bridge to the 21st century,"
explains Daniel Yergin, chairman of
Cambridge Energy Research
Associates. "If OPEC had not reached
this agreement, or if it does not stick, the
alternative will be more low prices and
economic turmoil."
Most consumers, of course, think the
current oil glut is just great, akin to a tax
cut. American motorists are filling their
tanks for under $1 per gal., less than the
price of bottled water. America's annual
oil bill dropped roughly $40 billion last
year, and that money has shifted to other
parts of the booming economy. The result
is lower inflation and higher growth, with
savings that show up on everything from
home- heating bills to airline fuel and
utility charges. Says Cynthia Latta,
principal U.S. economist at Standard &
Poors/DRI: "Higher oil prices will be
widely felt across the economy, but they
are not likely to pose an immediate threat
to continued low inflation and robust
consumer spending."
Yet some Americans do pay a huge price
for cheap oil. Texas' petroleum industry,
for example, loses roughly 10,000 jobs
for every $1 drop in the value of crude.
Nationwide the price collapse has so far
cost 24,000 jobs, with an additional
17,000 at risk in the first half of 1999,
according to the American Petroleum
Institute. Almost 140,000 domestic oil
wells have been abandoned in little over
a year, principally in Texas, Oklahoma,
Colorado and Louisiana, forcing U.S.
daily production down by 360,000 bbl. a
day. In Alaska, which depends on tax
revenues from oil, the state is forecasting
a $1 billion budget gap, equal to about
half the money it needs to pay for the
day-to-day running of government.
Even big oil companies are worried
about a bleak pricing future, one reason
they are merging. British Petroleum and
Amoco recently united, hoping to save
more than $2 billion annually, with a
reduction of 6,000 workers. The new
Exxon/Mobil combination is expected to
save about $2.8 billion, with 9,000 jobs
eliminated. Conoco, Texaco and
Chevron are also expected to reduce
staff.
For the Saudis, the aim is to absorb
some 300 million bbl. of supply overhang
and bring inventories more in line with
demand. It won't be easy. Nearly a year
ago, some of the same countries that
signed on to last week's deal agreed to
reduce oil production by a whopping 3.1
million bbl. daily. When that happened,
prices rose from $13 to more than $17
per bbl. Then flagrant quota busting,
higher production from Iraq, warmer
winter weather and lower demand for
energy in Asia combined to wreck the
price-fixing scheme, and oil crashed to
just over $10.
Why won't the the same thing happen
again? The first test will come when
OPEC decides the allocation of
production cuts among 10 of its
members. Saudi Arabia alone seems
prepared to accept reductions of
500,000 bbl. a day in output. But that still
leaves 1.5 million bbl. in reduced
production and revenues to divvy up
among the other members. Many of
them, including Iran, Indonesia, Nigeria
and Venezuela, are in much greater need
of cash than even the Saudis. "I don't like
to project what is going to happen,"
Saudi oil czar Naimi told TIME last week.
"But I believe we will be successful in
coming to an agreement to reduce
surplus inventory and to lift the price." If
not, the princes can expect a few more
Abdullahgrams.
--WITH REPORTING BY SCOTT
MACLEOD/RIYADH
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