War of The Open Spigots

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Falling temperatures usually boost the spirits of oil producers. As energy users in the Northern Hemisphere stoke their furnaces and fill up their oil tanks, demand for fuel begins climbing toward its annual peak. For members of the Organization of Petroleum Exporting Countries, who supply 40% of the world's crude, the season should be one of relative harmony. But not this year. The group is in the throes of an oil-pumping free-for-all that has sent prices tumbling to levels not seen in more than two years.

In the past six weeks, three leading gulf producers -- Saudi Arabia, Kuwait and the United Arab Emirates -- have opened their spigots, increasing OPEC's total output nearly 10%, to 21 million bbl. a day. Because worldwide demand for OPEC's crude amounts to only about 19 million bbl., the overflow has created a price-dampening glut. West Texas Intermediate, the benchmark U.S. crude, fell earlier this month to $12.60 per bbl., a drop of nearly $3 from its level in August and more than $7 from a year ago. The price edged upward last week, closing at $14.92 per bbl., reflecting expectations among oil traders that the glut may soon inspire OPEC to cut its production.

If it does not, experts like Robert Chandross, chief economist at Lloyds Bank in Manhattan, warn that prices could drop below $10 per bbl. and remain at that level for the next six months. That would mean a repeat by next spring of the oil-market collapse of early 1986, when OPEC overproduction sent prices crashing to less than $10 per bbl. While cheap energy helps most Western economies by lowering inflation, petroleum at prices below $10 or $12 per bbl. is a painful prospect for such indebted oil producers as Algeria and Mexico and the weakened U.S. energy belt.

The latest production binge had its origins in the eight-year Iran-Iraq war, which ended with an Aug. 20 cease-fire. During the conflict, Iraq desperately needed oil revenues to fuel its war machine. As a result, the country exceeded its OPEC production quota of 1.54 million bbl. a day. Now that the fighting has ended, Iraq will have enough pumping capacity to increase its production even more, from a current level of 2.7 million bbl. a day to about 3.5 million bbl. a day within the next 18 months. With 100 billion bbl. of reserves, Iraq ranks second only to Saudi Arabia among the world's producers. By contrast, Iran's heavily war-damaged oil facilities are currently unable to pump more than its quota of 2.4 million bbl. per day.

The United Arab Emirates was the next to flout its production quotas. Long dissatisfied with its limit of 948,000 bbl. per day, the U.A.E. announced last August that it would pump 1.5 million bbl., and now produces nearly 2 million. In response, Kuwait raised its daily output from 1 million to 1.6 million bbl.

Saudi Arabia was not far behind. Earlier this month it declared in a statement, "Saudi Arabia has done enough for OPEC. The kingdom cannot accept that some members have production privileges and others not." Fearing a loss of market share to other OPEC producers, the Saudis boosted their output at least 15%, to more than 5 million bbl. per day. Just as it did in 1986, OPEC's longtime leader is trying to force restraint upon oil producers by pushing prices uncomfortably low. The Saudis last week sounded conciliatory, however, possibly because they believe their point is getting across.