OPEC: Still in the Driver's Seat?

More and more financial analysts are now betting that OPEC will be able to ride out the oil glut without lowering its official marker price of $34 per barrel.

If they turn out to be right, Saudi Arabia will be making good on its recent commitment—received with great skepticism in the West—to follow up its successful three-year effort to hold down on rising oil prices by another effort to keep oil prices from collapsing.

Among the prestigious institutions forecasting that Saudi Arabia is likely to succeed are Wharton Economic Forecasting Associates (WEFA) and the Chase Manhattan Bank Economics Group. Joining them is John Lichtbau, president of the Petroleum Industry Research Foundation, who says OPEC, in which Saudi Arabia is the key producer, "has probably retained its ability to protect its existing floor price level."

The breakthrough for OPEC—and particularly for Saudi Arabia, which had been deliberately exporting much more oil than it needed for its own revenues—came at a March conference in Vienna, when OPEC agreed for the first time to put a ceiling on oil production. It also agreed not to lower the $34 marker price, which already was being severely battered in the "spot" market. Both decisions surprised many Western experts, who had not believed OPEC was capable of coming to a common accord on either price or production.

OPEC's determination to hold oil companies to their long-term contracts, despite much cheaper oil available in the free market, soon began having an effect on the free market as well. After an early drop in "spot" prices, these prices began firming up in late April, as OPEC not only held to its combined production ceiling of 17.5 million barrels a day, but even dropped it below the 16-million-barrel mark. The Wharton report had earlier predicted that prices would firm because of "the psychological effect of the Saudi determination to hold on to the $34 per barrel marker." It concluded that "international market conditions were expected to sufficiently turn around by the fourth quarter (of 1982) to comfortably accommodate a $34 per barrel marker."

Some analysts who specialize in the Middle East point out that oil-producing countries of the area have more reason than many people in the West are aware of for keeping their prices from sliding. "For many of these countries, oil is not just a source of income, in the ordinary sense, but is actually an asset" says one. "It is an irreplenishable resource —unlike, say, wheat—and therefore will one day run out. For them, it's extremely important not to sell off their assets too cheaply. That's why, in the days when the outlook was for rising prices, many of them—particularly those which were accumulating far more revenues than they could spend—would have preferred to keep much more of their oil in the ground, so that it could command a better price later. If they had, they would have set off a world depression that would make today's world economy look like a boom by comparison. Maybe it was in their own interest, too, not to cause this to happen-but they have to be given credit for seeing this so clearly."