Opec pays its price – a split in unity

THE Organization of Petroleum Exporting Countries (Opec) failed to resolve its crisis in Qatar last night, and a two-tier pricing system for crude oil will come into force next month. Saudi Arabia and the United Arab Emirates will raise prices by five per cent, and the other 11 producers by 15 per cent.

The main results of the ministerial meeting, most dramatic since the embargo of three years ago, are as follows:

• Saudi Arabia and the UAE will raise the price from US$11.51 (S$28.31 in 1976) per barrel to US$12.09 from Jan 1, 1977, almost exactly five per cent;

• Iran, Venezuela, Kuwait and the rest will raise the price to US$12.70 from Jan 1, and US$13.30 from July 1 next year, a combined increase of 15.6 per cent;

• The burden on less developed countries who produce no oil will be eased, by an extra grant or at least US$800 million to the Opec Special Fund;

• Saudi Arabia will abandon the production ceilings which it has imposed on itself for the last three years in deference to the wishes of other producers.

At present Saudi Arabia and the UAE account for 35 per cent of total Opec output. But if Saudi Arabia chose to re-open the wells it has blocked off in the last three years, this proportion could be raised to 50 per cent, even without using any of the extra capacity under construction.

Thus the prospect of a price-cutting war is seriously raised, with consumers scrabling to buy cheaper oil from Saudi Arabia, and even breaking contracts with other suppliers. Saudi Arabia’s Oil Minister, Sheikh Yamani, appeared to recognise, and even welcome, this yesterday, and the inherent dangers to the whole organisation in the two-tier system were clear to all delegates at the Qatar meeting. Ministers differed on how grave the split within Opec is, but the disharmony is all the more noticeable after the cohesion of recent years.

But Saudi Arabia’s provision of cheaper oil is not to be without a price of its own. In exchange for Saudi moderation, Sheikh Yamani said he expects “an appreciation” from the West, and referred specifically to two matters: the so-called North-South dialogue between rich and poor nations, where the rich are being asked for colossal financial aid in the form of commodity pricing and debt relief; and the Middle East crisis.

It was explained last night that the West would be expected to put pressure on Israel to give up the land it occupied in the 1967 war and to acknowledge the rights of the Palestinians, Sheikh Yamani’s chief ally at Opec, Mr. Oteiba of the UAE, said: “In getting that goal we are willing to use all the weapons we have.”

From QATAR, UPI reports – Asked what he would do if oil companies flood the market with Saudi Arabian crude, Sheikh Yamani replied, “I will wish them good luck.” But he avoided saying that this meant a breakup of the 13-member oil cartel which has stuck together since 1960.

The majority of countries here rallied round Iran’s call for a 15 per cent increase to offset the effects of western inflation, which Opec’s economic commission said had increased the price of industrial goods 26.9 per cent since the last 10 per cent oil price increase in October 1975.

Sheikh Yamani said he disagreed western inflation was this high. “If you use the dollar, with which we are paid, the inflation rate dropped to less than 4 per cent” over the last 15 months, he said. He went on to say that import prices of Opec countries are due largely to their own problems, such as port delays, damage in shipment and increasing wages.

Although Saudi Arabia has been in close contact with the US Administration-designate in recent days, Sheikh Yamani said Washington had not put pressure on him.

“An increase of more than 5 per cent now would be harmful for the world economy. The world recovery now is much less than it was earlier in 1976. There are reports of a recession. Why should we take part in this?”

Asked whether he thought the price would settle, he said: “The market will decide, it is not up to Saudi Arabia.”

He said Saudi Arabia would remove its present production ceiling of 8.5 million barrels a day. Saudi Arabia had faithfully kept its obligations to Opec, restricting its production to achieve a unified price. As a result, he said, Saudi Arabian production went down from 8.5 to 5.6 million barrels a day, as demand for oil fell off in late 1975 and earlier this year.

He said a two-layer price system had already been in effect for some time because other countries had been undercutting the market. He accused Iraq, the most hawkish voice at this conference with a demand for a 26 per cent increase, of slashing its prices to boost production 30 per cent. He added: “I don’t expect the 10 per cent to be enforced in the market.” He predicted the Saudi decision to expand production and raise prices only 5 per cent probably would force other Opec members to abandon the larger increase.

Asked what would prevent oil companies buying supplies from Saudi Arabia and selling them at a higher price should the increase be higher than 5 per cent, Sheikh Yamani replied: “I am not an economist, but my economists told me this won’t happen.”

With reference to demands from the other Opec member a higher increase, Sheikh Yamani asked: “Is it fair that all of Opec get together to decide the price not of their own crude, but of ours? Is it fair that we as a sovereign state have our crude prices fixed against our will?”

He said it was difficult to find a price structure other than one which is based on Saudi Arabian light crude. Opec needs to find a formula to reflect all the factors in the cost of production. He said although one has not been found until now, “we are trying to see a formula, we are pushing for it.”

Sheikh Yamani said the other countries’ increase of 15 per cent would severely damage the economies of Britain, France, Spain and Italy, and would have a ripple effect on the Common Market and from there to the developing world. The oil producers themselves would be affected.

“We live in a small world. If the world suffers economically, no matter how much money we have, we are going to suffer along with it.”

The Saudi 5 per cent increase would in effect not be an increase at all, because spot buying rates on the oil market have already gone beyond that figure as companies raced to stockpile in anticipation of a bigger hike. “All we are doing is taking the profit away from the oil companies and putting it into Saudi coffers,” he said. As to production, “we will take a look at our capacity and we would increase it still further.” Already Saudi Arabia could easily increase its production by more than the total output of Algeria.

But Yamani said that “to talk of the collapse of Opec is wishful thinking.”

The Iranian Minister, Jamshi Amouzegar, who had led the campaign for 15 per cent, said the 11 majority countries produce 20 million of the 31 million barrels produced daily by Opec members, and added “the world cannot do without those 20 million barrels.”

He said that because of more transparent accounting procedures in the West, it would be easy to see how much oil the petroleum companies buy at a 5 per cent and how much at a 10 per cent increase.