Saudi Arabia and its Persian Gulf allies appear to be gearing up for an all-out struggle with other members of the Organization of Petroleum Exporting Coutries opposing a Saudi plan to stabilize oil price increases.
Oil analysts here say the main topic at a secret meeting of Saudi Arabia and three other Arab gulf producers Tuesday in the Saudi diplomatic capital of Jeddah was the state of the world oil market and the prospects for pressing the Saudi longterm plan at an OPEC meeting in Geneva May 25.
The Saudis, far from rushing to cut back their exceptionally high production, now slightly more than 10 million barrels a day, may have to maintain it for some months to enusre their goal of a reunification of oil prices, analysts say.
Without such a unification, they say, there is little likelihood of the Saudi plan being adoped by such OPEC "radicals" as Libya, Algeria and Iran, which until recently had been pushing for ever higher prices and charging the maximum the market will bear.
For the first time in years, a continuing oil glut has created conditions for the Saudis and their allies to press their drive for a long-range pricing strategy -- regular rises in prices pegged to the inflation and real growth rates of the main Western nations.
Accounting for about 40 percent of total OPEC production, Saudi Arabia enjoys enormous leverage over the market and other oil-producing nations. If it were to cut back too sharply, however, oil prices would almost certainly jump up again. This happened in the spring of 1979 when the Saudi government suddenly dropped production by 1 million barrels, sending prices spiraling upward by more than $10 per barrel in a few months.
On the other hand, if Saudi Arabia decides to maintain its production at the current level, the highest prices are almost as certain to continue declining, given the state of the market.
The glut has already begun to narrow the wide spread in prices, varying from $32 to $41 per 42-gallon barrel within the 13-nation cartel. Spot prices, those charged on the open market for sales outside long-term contracts, have been hovering around $37 a barrel and showing some signs of decline, according to the trade journal Petroleum Intelligence Weekly.
The glut has been caused by sluggish Western economies, a relatively mild winter, a shift to coal as an alternative source of energy and a decline in gasoline consumption by consumers reacting to rising prices over the last 18 months, particularly in the United States.
U.S. oil imports have dropped from close to 9 million barrels a day in early 1979 to around 5.5 million barrels today.
The main problem confronting the Saudis and their allies, according to oil analysts, is making an accurate prediction of world oil demands and supplies over the coming six to nine months in the midst of the Iranian-Iraq war.
The two warring nations now export around 1.5 million barrels a day, down about 2 million from their combined prewar production but inching upward. An expected intensification of the war, once the rainy season ends next month, could involve attacks on oil installations that would again cripple production.
If this occurred in addition to a Saudi cutback, prices could begin another spiral and end all hopes for the adoption of the Saudi pricing strategy.
Because the outlook for oil supply and demands is still so uncertain, some oil analysts are already hedging on whether Saudi Arabia will cut back production by more than a small amount. Much will depend, they say, on the attitude of Libya, Iran and Algeria -- the three most prominent Opec "hawks" -- at the May meeting.
As an enticement to get the "radicals" to go along with the Saudi plan, the Saudi government may offer to raise its benchmark crude from $32 to $34 or $36, thus helping to establish a unified pricing system, analysts predict. But whether this will be enough of an incentive in a world of continuing oil uncertainty remains to be seen, they add.