THE PRESS FRIDAY, OCTOBER 26, 1984. Oil’s slipping price

Press, 26 October 1984, Page 16

THE PRESS FRIDAY, OCTOBER 26, 1984. Oil’s slipping price

Sometimes single-handedly, the Saudi Oil Minister, Sheikh Yamani, has held the Organisation of Petroleum Exporting Countries together. The hand that he has had to play has always been strong because Saudi Arabia is the biggest producer of oil in O.P.E.C. and the country has been willing to reduce its own production, but his own qualities as a negotiator have been formidable. Nevertheless, the task on which he has just embarked to try to persuade Nigeria to put up the price of its oil again will be one that tests all his abilities. Nigeria’s foreign reserves are low, its population is large, and it has substantial foreign debts to service. It wants to sell its oil and is prepared to cut its price so that it retains its customers. Sheikh Yamani’s task is to persuade Nigeria that it should not yield on price. The world’s oil markets are awash with oil. Sheikh Yamani will try to persuade the Nigerians first, and the Norwegians later, that the law of supply and demand affecting price can be influenced by supply. Once again he will advocate production cuts and once again, presumably, U will be Saudi Arabia itself that will forgo sales to keep world production under control. Nigeria was prompted to cut prices a week ago by Norway’s decision to abandon attempts to hold the official price 5 per cent above the spot prices. Forty-eight hours after Norway announced its decision, Britain followed suit. Neither Norway nor Britain are members of 0.P.E.C., but they belong to a price-supporting cartel that includes the O.P.E.C. producers, Mexico, and the Soviet Union. Within 0.P.E.C., Sheikh Yamani exercises enormous influence. His views, and Saudi Arabia’s actions, are also important to non-O.P.E.C. producers, but various countries, within and outside 0.P.E.C., have been putting national interests above adherence to a uniform price. One of the main factors affecting the price of oil has been the rapid decline in consumption since 1979. That was the time when worries began to be voiced that the world would start to run out of oil within the foreseeable future. The substantial rise in the price of oil that year, the conservation measures implemented, the world recession, and some mild weather all helped to reduce oil consumption. In 1979, the

world was using about 65 million barrels a day of oil. It is now down to about 56 million barrels a day. Another factor has been the increase in spot sales. Most of the world’s oil was once sold by contract and, in the late 19705, spot sales accounted for only 5 per cent to 10 per cent of internationally-traded oil. Now the proportion is a great deal higher. British Petroleum, for instance, buys about two-fifths of the oil products it needs in Europe on the spot market. Spot prices can .no longer be ignored ,by the oil producers as they, were once. This was the basis of Norway’s move. Its oil company, Statoil, intends to fix prices monthly to keep them in line with spot prices. _ ; The pressures which have forced the prices down, barring the weather, which is unpredictable, are likely to continue. The need for countries to retain their oil customers and to keep up their incomes from oil will also continue. The question that arises under such circumstances is whether O.P.E.C. and other oil producers will be able to hold the prices even at the level to which they have declined. The question is of paramount importance for O.P.E.C. because its continued unity depends on the maintenance of a price that is more or less uniform. Sheikh Yamani understands this very well. Nigeria did not attend recent O.P.E.C. talks in Geneva but will soon attend a full O.P.E.C. meeting; this shows that Nigeria understands the position as well. Norway has been invited to be an observer at the talks and has accepted. New Zealand buys some of its oil on longterm contracts and some on the spot market. It relies on the oil companies to deliver a regular supply both of the crudes and of the refined products. Practically all the diesel imported is on contract. Over the last 18 months the Government has instructed the oil companies to buy on the spot market for some of New Zealand’s supply. About 40 per cent has been bought an this way. The New Zealand devaluation and the rising value of the American dollar have, unhappily, more than compensated for the savings made on the spot market and for the contract prices, some of which have been even lower than the spot market.