Oil: The War Begins

Prices break, and OPEC scrambles to keep them from going into a free fall

From Europe to the Middle East, harried members of the Organization of Petroleum Exporting Countries huddled through the week. The structure of bloated oil prices that OPEC had erected over the past decade, condemning rich and poor nations alike to recurrent bouts of inflation and stagnation, was shaking wildly. Prices had broken and were threatening to go into a free fall.

To prevent that from happening, the oil ministers of Saudi Arabia and several of its oil-rich Persian Gulf neighbors agreed to lower the official OPEC price by an undisclosed amount. The gulf nations were hoping to whip the other OPEC members into accepting the new price floor at a meeting this week. Failure to do so, the Arabs seemed to sense, could mean the end of OPEC. Said a senior OPEC official: "The war begins. It is very dangerous."

Since late 1973, when OPEC jacked up its charge for a barrel of oil from $3.07 to $11.65, crude prices have moved mostly in one direction: up. The big question, especially after the 1979 Iranian revolution ignited a wave of increases that pushed the official price from about $13 to $34, was: How high would the price go? Now the question is: How far will it drop? The answer, as ever, is: Nobody knows.

The cutting actually started two weeks ago when Britain and Norway, which are not OPEC members, dropped their charge for North Sea oil by $3 per bbl., to $30.50. This precipitated the first public break in OPEC ranks. Nigeria, blessed with very high-quality crude oil and burdened by heavy debt, said it was slashing its price by $5.50, to $30 per bbl.

The announcement was stunning, not only for the historic implications of the crack in OPEC but also because the cut is even larger than it seems. A barrel of Nigeria's Bonny Light crude, once refined, yields a higher-priced product mix than does the Arabian Light oil on which the OPEC bench-mark price is based. The Saudis used to insist that the "differential" should be $3, but more recently have reportedly been willing to accept $1.50. Even at that, the official OPEC price would have to fall to $28.50 to make it competitive with $30 Nigerian oil. In Lagos last week, Mallam Yahaya Dikko, Nigeria's top petroleum official, stood behind his nation's pledge to match any further reduction in the price of North Sea oil.

To keep the price cutting from getting out of hand, OPEC members held a desperate round of meetings in Paris and Riyadh. For the first time, non-OPEC members were being welcomed into the discussions. The oil ministers sought out representatives from Britain, Norway and Mexico, a step that symbolized the success of the non-OPEC world's attempt to free itself from the organization's stranglehold. Last year, for the first time in at least 20 years, the rest of the non-Communist world produced more oil than the 13 OPEC nations (54% to 46%).