It looks like jockeying for position before a crucial meeting. Fifty thousand barrels a day here, a hundred thousand there: Members of the Organization of Petroleum Exporting Countries are pinching production. It looks like politics, too, and it is. When so many governments own and control so much oil and gas production, how can it be otherwise?
Production cuts also look like rational-if so far insufficient-responses to glut. The world can produce more oil than it needs. Changes likely in the next few months would only widen the gap between demand and deliverable supply. Someone must restrict flow, and the decision belongs to OPEC. The group must choose between market share and price. It can allow oil prices and its members' revenues to collapse and force non-OPEC producers with higher unit costs to make the cuts. Or it can defend prices and revenues by finding some way to apportion volume sacrifice among its members.
EARLY CONSENSUS
Premeeting production cuts signal an unusually early consensus favoring the latter course, even if they do raise doubts that members will cut enough. In this regard, the Feb. 12 meeting differs from its predecessor last September in Geneva. There, several members wanted to cut production in a balanced market in order to raise prices. Saudi Arabia said no, and that was that. Now several members want to cut production in an oversupplied market to keep prices from plunging. In some past gluts, token cuts by others have satisfied the Saudis, who responded with the deep cuts the market needed. What about this time?
Perhaps more than usual, much depends on politics. A year after the Persian Gulf war, Middle Eastern power balances have yet to realign. Arabs and Israelis are discussing peace. While Iran tempers its Islamic extremism and courts international business, Algeria heads the other way. As factors in this month's OPEC meeting, however, these pressures probably will yield to members' revenue needs, inclining the outcome toward production cuts in defense of price.
One item on the political menu works in the opposite direction and may not even exist: Saudi Arabia's alleged determination to drive oil prices down as a favor to U.S. President George Bush. According to suspicion, the cheap oil thanks Bush for defending Saudi oil fields against Iraqi aggression and ensures he'll do it again if necessary; after all, Saddam Hussein remains in Baghdad. Maybe the Saudis are using cheap oil as a vote for Bush; maybe not. If so, and if Washington, D.C., thinks it can count on sacrifices from Riyadh whenever the U.S. economy stalls, then both countries are sadly mistaken.
ECONOMIC SELF-INTEREST
The U.S. did not take the lead in Operations Desert Shield and Desert Storm as a friendly favor to Saudi Arabia and Kuwait, although solid relations helped in the decision making. Ultimately, the U.S. and its non-Arab allies defended the Persian Gulf oil fields as acts of economic self-interest. It is on that basis alone that they should expect Saudi Arabia to conduct its petroleum industry affairs now. Indeed, oil price cuts engineered by Saudi Arabia on behalf of the U.S. would appropriately anger other OPEC members and guarantee future Middle East instability. For the U.S., then, today's cheap oil could mean tomorrow's desert fight.
Politics will influence oil prices as long as governments own and control significant volumes of production. But all governments must know by now that politically determined oil prices make trouble for everyone. Saudi Arabia and the rest of OPEC should let economics guide them next week. The rest of the world should expect nothing more.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
