OPEC JUST TENDING TO ITS INTERESTS

What is the Organization of Petroleum Exporting Countries doing?

Everybody wants to know. The question isn't ali that difficult. In its muddlesome way, the producers' group is tending fairly well to its interests. The oil and gas industry outside of OPEC and the consuming world should do likewise by not holding the group to an antique standard of performance.

Market observers are wondering why OPEC, meeting in Vienna late in November, didn't cut members' production for the second time in 2 months to reverse a slide in the price of crude. For this there are two possible explanations. One is that OPEC ministers viewed the price slide as an aberration. The other is that they didn't consider a production cut to be in the collective interest of OPEC members.

A WEAK MARKET

Certainly, the market has weakened in 1993's second half. Thanks to economic problems in Europe and Japan, demand hasn't lived up to expectations. More oil has entered the market from the former Soviet Union (F.S.U.) than anyone expected. And production is rising in non-OPEC areas such as the North Sea. Further, oxygenates are backing out a measure of crude, having contributed last winter in the U.S. perhaps 400,000 b/d - measured in methyl tertiary butyl ether equivalents - to product supply.

After all that, however, OPEC's production quota still isn't out of line with anticipated demand for its crude this quarter and next. And F.S.U. exports are falling as a harsh winter hikes local demand. With one major exception, market basics don't justify a slump in crude prices of nearly 25% since May. The exception is the threat of Iraqi oil exports. The prospect has worried traders since the Persian Gulf crisis of 1990-91, which resulted in the United Nations embargo that soon may be relaxed. There can be little doubt that the Iraqi factor held prices in check in 1991 and most of 1992, when Kuwaiti output remained crimped by war damage and the market lacked its usual cushion of surplus production capacity.

So what can OPEC do about all this? Very little that would not contradict its collective interests, which are always difficult to define. Late in September, the group set a 24.5 million b/d ceiling for fourth quarter 1994 and first quarter 1994 in an agreement that brought Kuwait back into the quota scheme and featured accommodations of sorts from Iran, Saudi Arabia, and Nigeria. Demands in November for further cuts might well have unraveled this touchy but important accord, and a lower quota would only have invited cheating. In the interests of its hard-won September agreement, therefore, the group has focused on assessments of the call on its crude and invited others to respond to sagging prices as they see fit.

MAKING ROOM FOR IRAQ

Sooner or later, OPEC and the rest of the market will have to accommodate Iraqi oil. Setting a floor under group production rather than price can be interpreted as OPEC's way of reserving room in the market for Iraq - with marginally economic producers elsewhere helping to pay the bill in advance. And there's an important political consideration that receives too little notice. Iraq's OPEC neighbors have reason to expect Saddam Hussein to use oil revenues more for weapons than for human provisions. They may see low oil prices in the near term as sacrifice essential to self-defense.

For the moment, the market is more complicated than usual. Notably absent is an OPEC interested in maximum crude price at any cost. This is the market of 1993. It is something quite different from the oil market of, say, 1983. And 1973-the year of the Arab embargo - is ancient history.