OPEC AND OIL PRICE TEMPTATIONS

In its meeting last week in Geneva, the Organization of Petroleum Exporting Countries improved on some of its past performances by keeping near term demand for its oil on center stage. It still, however, cannot keep unrealistic price hopes of some members out of the limelight.

Sept. 30, 1991

3 min read

In Geneva, members quibbled over likely fourth quarter demand levels and settled for a best guess of 23.65 million b/d, which they adopted as a production ceiling of sorts. The figure matters no more than the 22.3 million b/d ceiling that the group has ignored all year. Saudi Arabia declared early that it would produce what it pleased, making volume disputes pointless.

PRODUCTION AND DEMAND

The group's efforts to match production with anticipated levels of demand deserve applause. As the world's marginal collective oil producer, OPEC must balance supply with demand. In recent years it has been an active process because production capacity usually has exceeded demand. OPEC has had to determine how to limit production.

This year, supply and demand have come into rough balance on their own. OPEC's function now should be passive: to produce and satisfy demand to the extent possible. Some members, Saudi Arabia in particular, understand this and want economic forces to run their course. They recognize that at some point production capacity again will exceed demand and that OPEC again will have to apportion the financial pain of production restraint among its members. This likely will occur next when Iraq and Kuwait restore significant volumes of exports.

Alas, periods of market balance always tempt some OPEC members toward cartel behavior. They want to assert a crude price and cut production if necessary in pursuit of the target, regardless of demand.

It never works. Fleetingly in the past, OPEC has held up the price of crude with production restraint. But the efforts always backfire. Members disagree over quotas, they cheat, they eventually compete for market share. In response to the initially higher crude prices, consumers reduce oil use. The market shrinks. Prices plummet.

Everyone suffers. Consumers must try to factor gyrating oil prices into planning. Producers swing between prosperity and desperation. Politically and economically, petroleum loses some of its convenience value.

Oil producers don't need that. Hydrocarbon fuels are under heavy and mostly unwarranted environmental fire. And many consuming nations are still trying to rationalize their commitment of troops to battle in defense of foreign oil fields. Antioil sentiment is high.

The consuming world would not take lightly an attempted reversion by OPEC to the business of active oil price management. Governments would feel pressure to retaliate by further subsidizing nonpetroleum fuels and by imposing import fees or other trade barriers. For political and strained economic reasons, therefore, oil demand would fall. Do OPEC members want all that?

MODEST AGGRESSION

Price aggression at last week's meeting was modest and, thanks to Saudi resolve, moot. The price aspirants wanted only to make real the $21/bbl target already in effect, requiring a nudge of less than $2/bbl and little deliberate production restraint.

This time, reason conquered temptation. OPEC probably will realize its target price naturally as the market tightens in the fourth quarter. And the consuming world probably will have more than 23.65 million b/d of OPEC oil if it needs it. But the price bluster, however subdued, was troubling. Did anyone in OPEC other than Saudi Arabia learn anything from the 1980s?