Eight major oil companies yesterday cut prices they will pay for domestic oil by $1 a barrel, and others are expected to follow suit as pressures continue to batter the oil industry.
Industry economists and analysts said the price cuts were a reaction to a continuing weak market and confusion over the course of the Organization of Petroleum Exporting Countries. Many analysts predicted a $2- to $4-a-barrel reduction in OPEC prices, but said they did not view the events as the beginning of a free fall in world oil prices.
The round of price cuts, which appear to pave the way for further reductions in gasoline prices--already at their lowest level in three years--began Monday when Gulf Oil Corp. said it was lowering the price it would pay for domestic crudes by $1 a barrel.
Yesterday, Texaco Inc., Shell Oil Co., Phillips Petroleum Co., Marathon Oil Co., Conoco Inc., Cities Service Co., Standard Oil of California and Standard Oil Co. of Indiana matched the reduction by Gulf. While some analysts said that the U.S. oil companies' price cuts were in anticipation of a drop in the OPEC benchmark price, at least one company denied that.
"The Shell posting decrease is in response to the softening products market, in particular the U.S. products market," the company said in a statement about its price reduction. "It is not in anticipation of any future OPEC price reduction or other foreign crude price reduction."
Anticipation of oil price reductions began last month when OPEC was unable to reach production and price agreements during its meeting in Geneva. A tentative agreement on production ceilings fell apart when the Saudis and their allies demanded that African countries raise their prices slightly and stop trying to undercut other OPEC members.
The Kuwaiti news agency reported yesterday that major oil-producing nations in the Persian Gulf area were prepared to drop prices by $4 a barrel within a week unless OPEC oil ministers reach an agreement.
If the price of OPEC's benchmark Saudi Arabian light crude falls from $34 to $30, such a price could be sustained for as long as the Saudis were willing to hold it, said Steve Brown, an economist with the Federal Reserve Bank in Dallas.
"The spot market shows that $34 for Saudi light is too high and that $30 is more reasonable," he said. "Price-cutting that falls in that range is something that simply reflects market conditions."
"Obviously there's a very serious problem, but the magnitude of the problem is being compounded by negotiations through the press and the media" by OPEC members, said Sanford Margoshes, an oil industry analyst with Shearson/American Express.
Margoshes said that there are signs that OPEC still can resolve its differences and that, in several respects, OPEC is in a stronger position today than a year ago.
"For one thing, we're much closer to being on the verge of a worldwide recovery than a year ago," Margoshes noted. He also said that the dollar is weaker than a year ago, which generally strengthens the spot market price of crude. Margoshes said other factors are that the huge inventories of a year ago have been reduced and that there is a mechanism for allocating production, notwithstanding the cheating that has occured.
"Although it's going to be very hairy and very difficult, the odds of coming to an agreement are greater than most people imagine," he predicted.
A spokesman for the Department of Energy's Energy Information Administration said yesterday that prices, at an average of $1.18 a gallon for leaded regular gasoline in December and $1.26 for unleaded, were lower than they have been since February 1980, when regular leaded sold for nearly $1.16 a gallon and unleaded sold for about $1.20.