Even at $29 a barrel, O.P.E.C. oil is too dear

Press, 28 March 1983, Page 20

Even at $29 a barrel, O.P.E.C. oil is too dear

From ‘The Economist,’ London

Prepare for oil prices to tumble like a row of dominoes. Instead of relieving the price-cutting pressures oil producers now face, the Organisation of Petroleum Exporting Countries has intensified them. This month’s London agreement, with its $29-a-barrel marker price, is designed to allow Nigeria and other members of the cartel to steal away markets from North Sea crude by undercutting North Sea prices. The North Sea oil producers are furious, and O.P.E.C/S threat of a price war if they retaliate is unlikely to deter them from forcing the British National Oil Corporation to respond with price cuts of its own. The reason is simple. The production ceiling of 17% million barrels a day (b/d) set by O.P.E.C. is a big comedown from the cartel’s 30 million b/d in 1979 but it is still too high to push oil companies into mending thenfences with O.P.E.C. because of a fear of shortage of supply. Most forecasters reckon that 17% ’ million b/d from O.P.E.C. is enough to bring world oil supply and demand into comfortable balance. So Ibng as oil buyers believe

these forecasts and know that at least that much oil is coming on to the market from O.P.E.C. (and possibly more if O.P.E.C. members cheat on production quotas as they have in the past), they will .be in no hurry to lock themselves into contracts set at the |29-a-barrel marker price. Oil bargains abound. The spot markets last week priced various crudes well below O.P.E.C.’s newly-trimmed prices and Russia, the world’s biggest oil producer, has reduced its price to 127.50 a barrel. About one barrel in five of the world’s crude oil is now traded on the spot markets and O.P.E.C. has no power to dry up this supply. It comes mostly from oil companies who calculate that the losses they make from selling excess crude, even at today’s depressed prices, are still smaller than those they make by refining the stuff into products. The outlook for prices of those refined products remains bleak. Refineries are working at well below capacity. Consumption is still falling. Between 1980 and 1982, the capitalist world’s appetite for refined oil products fell by about 10 per cent to around 45 million

b/d. The increase in demand resulting from a world economic recovery will be offset, at least in part, by the finishing touches many industrial consumers are now putting on the oil-saving projects they commissioned during the 1979-80 price boom. Oil companies have cut their stocks of oil h- and will keep them low. The oil price will continue to ratchet downward. Watch out first, though, for a phoney peace. If the British National Oil Corporation holds off retaliating against attempts to reduce the market share of North Sea oil, a temporary firming of the price is possible. Oil companies cannot continue forever to cut their inventories by about 5 million b/d — as they have done in advance of the O.P.E.C. price cut. When they move into the market to replenish stocks they will drain the glut in the spot market and increase demand for O.P.E.C. crude.

It will be a temporary blip. So long as the world remains sure it has at least enough oil to go round, somebody, somewhere is sure to insist that it be made cheaper and somebody, somewhere is sure to oblige.