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OIL'S NEW GAME OF CHICKEN

You need a scorecard to keep up with the game of chicken being played in the oil market.

With oil demand sagging, the Organization of Petroleum Exporting Countries decided on Nov. 14 to cut its group production quota by 1.5 million b/d in January-but only if it receives 500,000 b/d worth of help from nonmembers.

In particular, the group wants help from Russia, where production and exporters have jumped lately.

Since then, decision-making about oil production by the world's most important exporters has amounted to a global bidding contest.

Russia's first response to the OPEC overture was an offer to exports by 30,000 b/d. That wouldn't be as easy as it might sound. Russia doesn't have a single national oil company able to control output by decree. But it does have an export authority.

Whatever the constriction mechanism, 30,000 b/d wasn't enough for OPEC. Russia raised the offer to 50,000 b/d. Again, not enough.

On Dec. 5, the offer rose to 150,000 b/d, which might satisfy OPEC, depending on what other nonmember exporters do.

Norway says it will cut production by 100,000-200,000 b/d. Mexico might pull 100,000 b/d out of the market, Oman and Angola a combined 50,000 b/d. That stretches to OPEC's target of 500,000 b/d.

For OPEC, this is quite an achievement. It is not easy to get five countries to agree on anything. And here are five of them promising to sacrifice sales volumes for the common good.

For the market, however, three doubts loom.

These are only promises. If by chance any of these countries has made a promise it doesn't intend to keep, the deception would not be history's first.

Then there is the dicey matter of arithmetic. The cuts on offer sparkle with specificity. Far less clear are the production levels against which the reductions are to be made. Again, shenanigans with output base levels are not without precedent.

And who or what will enforce the cuts? This is a good question for OPEC, members of which produced 800,000 b/d more than their combined quotas in November. Actually it was a good month. Overproduction 2 months earlier totaled 1.1 million b/d.

Yes, history resounds with broken production promises, in and out of OPEC.

So it goes with coordination of production among exporters with discrete economic motivations. When the market's shrinking and prices are plunging, an attempt at extraordinarily broad coordination can't do much harm.

It is most likely that the exporters will bluster and quibble, trimming here and there, while producers not involved in the debate trim output out of sheer economic necessity. The muddle will continue until demand growth resumes to rescue everybody.

Little of the adjustment will have resulted from effective coordination. But no one should underestimate the ambition behind the effort to make it happen.


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