The Humbling of OPEC

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Those 13 member nations cannot control each other, much less world oil

In the glittery lobby of Geneva's Hotel Intercontinental last week, reporters waited anxiously outside the grand ballroom as delegates from the 13-member Organization of Petroleum Exporting Countries deliberated behind closed doors. For the second time in the past five weeks, OPEC's contentious band of oil ministers were debating what to do about a continuing worldwide petroleum glut that has put intense downward pressure on prices. Their main goal: to reach agreement on production quotas that would keep the cost of crude at $34 per bbl., the "official" level for the past 16 months. Suddenly, the ballroom door burst open and out strode the dapper, but obviously weary Saudi Oil Minister, Sheik Ahmed Zaki Yamani. As cameras flashed and video recorders whirred, OPEC's most powerful leader curtly announced: "The meeting has ended. There has been complete failure."

That simple pronouncement could hardly have been loaded with more significance. The mighty organization that once seemed able to bend the world to its will was sinking deeper into its worst crisis. OPEC was badly split, if not permanently shattered. Concluded Harvard Economics Professor Otto Eckstein: "The cartel is on the verge of falling apart. If Saudi Arabia cannot impose some production and price discipline on the other members, then OPEC is finished."

To be technical, OPEC never existed as a true cartel, by definition a group that controls price by controlling production. The organization thrived as long as there was a sellers' market, but until recently it has never had to prove that its members could operate in a buyers' market and abide by agreements to limit production. The collapse of the talks in Geneva demonstrated that such discipline may be beyond them. As a result, the world may be in for the first sharp break in oil prices since OPEC quadrupled the cost of crude almost a decade ago.

After the meeting broke up, the oil producers began a tense waiting game to see which one would be the first to slash prices. At a press conference, Yamani predicted that Britain, a non-OPEC producer, would take the lead within a few days by trimming $2 or $3 off its $33.50 charge for North Sea oil. He said that Nigeria, an OPEC member that has had particular trouble selling oil recently, might then feel forced to follow Britain's lead. If that happened, Yamani hinted, the Saudis might themselves shave a few dollars off their $34-per-bbl. price.

Word of a possible Saudi price cut had an immediate impact. In spot markets, where shipments of oil that are not part of long-term contracts are traded, the cost of crude dropped to about $30. Some experts believe that the price will eventually drop below this level, but even if $30 became the new OPEC price, it would represent a 12% decline. Any reduction, in fact, would be like a huge tax cut for the world economy, which could help end its worst downturn since the 1930s.