Business: Another Oil Price Stunner

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Trying to regain control of the cartel, Saudi Arabia posts a 33% rise

It was a $6-per-bbl. Saudi shocker, and it could not have come at a more anxious moment. Four days before the 13 member nations of the Organization of Petroleum Exporting Countries were to sit down in Caracas for their fourth price-raising session in a year, the cartel's biggest producer took preventive action. In a surprise announcement that whipped the money markets into a frenzy and sent gold leaping to yet another alltime high of $462 per oz., the desert kingdom of the House of Saud, long regarded as the quintessential OPEC moderate, announced one of the biggest increases in the cartel's 19-year history.

The Saudi move amounted to a startling 33% jump from its previous price of $18 per bbl., to $24, and it means still more inflation for the world. Other so-called OPEC moderates also posted increases. Venezuela, the cartel's fourth largest producer, moved from $20 per bbl. to $24, while Qatar and the United Arab Emirates went from approximately $21.50 to about $27.50.

In the Alice-in-Wonderland world of the oil game, some observers argued that the rises were welcome, on the theory that they might somehow manage to forestall even bigger OPEC money grabs in the days ahead. By bringing its charges up to the $24 level, where much of the rest of OPEC has been for months, Saudi Arabia is attempting to return order and stability to the cartel's chaotic price structure as well as head off demands in Caracas for much steeper hikes by such cartel radicals as Iran, Libya and Nigeria. Said Saudi Oil Minister Ahmed Zaki Yamani: "We wanted to avoid a hot discussion in Caracas that might lead to a much higher level of prices."

The Saudi maneuver was a last-minute gamble to regain control over a cartel that shows signs of breaking into a wild scramble for ever greater profits. In a losing struggle to impose some restraint on surging prices, the Saudis have been selling their crude far below the prices charged by nearly all other members.

The split developed this summer, when most OPEC members boosted their prices from $14.55 per bbl. to a full $23.50, but the Saudis chose to go to only $18. Soon even the $23.50 barrier was broken as members began selling single shipments of oil on the spot market for as much as $40-$45 per bbl. Several members have by now begun selling crude under long-term contracts for about $26 to $27.50 per bbl., inviting additional leapfrogging increases. By going to Caracas with their petroleum once again priced close to cartel levels, the Saudis will be able to argue that they have returned to the fold and may gain stronger bargaining power to stop or at least slow further rises.

The Saudi gambit is risky. By increasing a full $6 per bbl., the Saudi government is, like it or not, obviously tempting other cartel members to do much the same. Warns Walter Levy, an international oil economist: "This is the beginning of a further round of price increases. As long as spot prices remain substantially higher than OPEC prices, we are in an ever escalating situation."