A major break in official Organization of Petroleum Exploring Countries oil prices, the first since 1973, is on the way, oil industry experts believe.
Nigeria, which is steadly losing sales with its oil price pegged at $40 a barrel, this week slashed the price by $4 a barrel on about 100,000 barrels a day sold to an oil trading company.
The West African nation so far has refused to cut the official price it charges major oil companies such as Mobil, Texaco and Gulf, which are pressing the Nigerians for similar cuts. But analysts expect the cut to apply to all buyers soon, perhaps beginning in July.
Meanwhile, an offer by Great Britain to reduce the price of its North Sea oil by $2 a barrel to $37 was rejected by the purchasers such as British Petroleum, which publicly demanded a $5 cut.
Mexico last week cut its prices by $4 a barrel. Iraq trimmed a Mediterranean delivery premium by 57 cents. And Ecuador, which officially cut its price $3.80, reportedly has been trying to sell oil for as much as $10 below the official $40 price.
According to Petroleum Intelligence Weekly, an authoritative industry newsletter, the Mexican cut "all but ruins the negotiating position of producers trying to protect the crumbling edifice of OPEC's maximum selling prices." Concluded PIW, "The price revolt among contract customers is spreading across the OPEC and non-OPEC fronts, making major price reductions all but inevitable for the majority of producing nations."
Theodore Eck, chief economist for Standard Oil Co. (Indiana), put it just as bluntly. "Everybody else has to come down to Saudi Arabia's $34 price," he declared. "It's a rationalization of the market that is happening sooner rather than later. You just can't pay $41 when your competitor is paying $36."
Saudi Arabia charges $32 a barrel for its Arab light oil purchased under contract by the four U.S. partners of Aramco, Standard Oil Co. of California, Exxon, Mobil and Texaco. Other customers generally pay $34 for Arab light, which is the equivalent of about $36 for the higher-quality oil produced by Nigeria, Libya and Great Britain, Eck said.
Customers who do not have contracts with the oil experts and who rely on spot market purchases instead, have long since revolted. Spot market prices have ben tumbling since the first of the year as a result of production in excess of current demand and the highest oil stocks in history. Oil inventories are perhaps as much as 600 million barrels above normal for this time of year.
The key to the growing drop in world oil prices, which has spread to the United States as well, is the willingness of oil companies -- majors and independents alike -- to walk away from crude-oil contracts if the price is too high.
The problem for oil buyers is that demand for petroleum products has fallen so far and prices are so weak that they have been losing money on each barrel of oil they process. These losses have mounted to record levels in some cases, particularly in Europe.
There is so much oil around that several of the Aramco partners are selling Saudi oil in the spot market and are offering to sell their oil on a contract basis at least through the end of the year. The Saudis are said to be "rather pleased" with these sales because they put more pressure on other exporters to bring their prices down to the Saudi level, a major goal of Saudi policy and the reason they agreed at last month's OPEC meeting neither to raise their price nor to cut production.
With a $40 price, Nigeria, which was exporting about 1.7 million barrels of oil daily earlier this year, is having difficulty finding buyers for the portion of its crude not taken by major oil companies. Its oil production has been falling steadily, and last Friday Ian Walker, head of BP Oil International Ltd., declared, "I understand their production has been cut in half as a result of the fact they are out of line with the prices of oil which can be obtained elsewhere."
Other analysts suggested the drop in production has not been that sharp, but large enough that the Nigerians had to cut prices to try to hold on to their customers. Some of Mexico's customers, too, had notified Pemex, the state-owned oil company, that they would be exercising their contractual right to forego oil purchases for 90 days because of the price.
Mexico decided to try to keep its export volumes high by reducing the price by $4. Moreover, in announcing its cut, Pemex sought to exploit its momentary price advantage and explicitly invited new purchasers to seek its more "secure" oil.
In sum, Saudi Arabia seems well on the way to achieving its stated goal of price reunification. Most analysts expect the Saudis to begin to trim production as much as necessary to keep from driving the spot market price much below its official selling price and thereby putting pressure even on itself.
Virtually every other oil exporter is having the same troubles as Mexico and Nigeria. Buyers have begun to tell Libya they will cease buying together next quarter if its prices don't come down, PIW reported. Algeria has warned buyers that if they walk away from present contracts they will never have access to the oil again.
Iran and Iraq have their own special woes. Both want to increase oil exports to help pay for their continuing war with each other, but there is little prospect they will be able to.