BUDGET RESOLVE DUE OIL PRICE TEST

The time has come once again to question resolve in the oil market. Seasonal demand slumps approach, raising the usual doubts about the Organization of Petroleum Exporting Countries. Will OPEC members cut production to protect crude prices? It's an entertaining question. But it has little to do with the resolve most important to the petroleum industry.

More than 200 companies responding to a Salomon Bros. survey late last year said they plan to boost worldwide upstream spending in 1990 by a total of 10.5%, based on crude price expectations averaging $18.37/bbl. It's a confident but not overly optimistic view. What's uncertain is how sensitive actual spending will be to potentially wide price swings.

As always, crude prices depend largely on the accuracy with which OPEC aligns its quota with demand and the degree to which it limits production accordingly. Through most of last year, the group produced 1-3 million b/d more than quota; the average crude price jumped 21% from 1988's depressed level nevertheless.

AN UNUSUAL YEAR

But last year was unusual. Demand growth exceeded expectations, and non-OPEC supply decreased. The result was a ready market for OPEC's surplus production. Any demand surprises this year probably will work in the other direction. International Energy Agency (IEA) projects a 1 million b/d consumption increase to 52.9 million b/d outside the centrally planned economies. The gain might be smaller than that if economic pause evident in the U.S. and other major markets endures or becomes recession. Non-OPEC supply, meanwhile, will increase to 29.3 million b/d from 28.8 million b/d last year and 29.2 million b/d in 1988.

Together, slower demand growth and renewed competition from other sources of supply mean OPEC's breather is over. With normal stock patterns-an average drawdown of 2.4 million b/d in the first quarter and a buildup of 1 million b/d in the second.demand for OPEC crude, based on IEA's quarterly projections, will remain below 21 million b/d through the first half. Not until the second half does demand for OPEC crude seem likely to exceed the group's quota-22.6 million b/d in the third quarter if stocks increase by a normal 1.5 million b/d and 23.3 million b/d in the fourth quarter with stocks unchanged.

If OPEC wants to keep prices from sinking in the first half, therefore, it must cut production to significantly less than the current quota. And it must do so soon. So far, it has managed to reduce production only to 23.5 million b/d from 24 million b/d last month.

THE LONG VIEW

In fact, OPEC's pivotal members have little reason to care much about chances of a first half price slump. Some of them are adding production capacity in anticipation of demand gains later this decade and in the decade after that. OPEC's pivotal members-the Persian Gulf producers and Venezuela-have reserves representing 117 years of production at current quota levels. By necessity, they take the long view, in which market share years from now matters more than price in the next few months.

So there may be some ruts in the year-long road to a crude price average of $18.37/bbl-or $16.37/bbl or $20.37/bbl. Will companies hang tough, confident that prices down in the first half can and very likely will rebound in the second? Or will they hang their futures on next quarter's results, shelving investment plans if prices take a jittery turn? The annual question of resolve is no less pressing now than ever; it just applies less to OPEC and more to oil companies investing in a market subject to sudden near term change.