The persisting glut on the world oil market, engineered almost entirely by Saudi Arabia, is beginning to cause serious repercussions in a number of petroleum-exporting nations and has touched off the most intense struggle between producers and Western companies in nearly a decade.
Companies that before willingly paid high permiums and even handsome bribes to middlemen to secure top-quality oil from countries like Libya, Nigeria and Algeria are suddenly ready to risk their future access to treasured sources by refusing to buy at demanded prices.
As a result, production by members of the Organization of Petroleum Exporting Countries (OPEC), other than Saudi Arabia itself, is plummeting---in some cases by as much as 50 percent---setting the scene for potential financial crises in nations once regarded as the Third World's richest. Even some non-OPEC producers, notably Mexico, have been forced to cut way back in their exports as substantial prices cuts fail to lure once-hungry Western customers.
Not since the start of the last decade have the oil companies dared to challenge the producers so boldly over prices. Since the boycott during the 1973 Arab-Israeli war and the spiraling price increases that followed, there has not been a sustained glut permitting such a reaction.
The glut is explained partly by a dramatic drop in Western imports, particularly by the United States, the world's largest importer, which is buying roughly 3 million barrels a day less than it did two years ago.
But to a large degree, the oil surplus has been manufactured by Saudi Arabia, OPEC's largest producer, which has in effect sided with and used the Western companies to work against its opponents within the organization.
While there is no hard evidence of collusion, several of the biggest American companies---Exxon, Mobil, Texaco, and Standard Oil of California -- are all longtime partners of the Saudis in the Arabian American Oil Company (ARAMCO), and are still responsible for marketing the bulk of the kingdom's oil at prices set by the Saudi government.
The ultimate consequences of what may turn out to be a short-lived phenomenon are still far from clear. But the bitter power struggle within OPEC is threatening to tear the cartel apart.
"It is a very, very big struggle, a monumental one, for control of the market," remarked Robin Mannock, Managing Editor of the Beirut-based financial weekly Arab Report and Memo.
At stake is not only whether Saudi Arabia eventually will impose its will on the other 12 OPEC members, but also whether consumers in the West will save tens of billions of dollars in oil and gas bills over the next few years.
In addition, the crisis jeopardizes the development plans, budgets and possibly even the futures of some governments, which had counted on far higher revenues than they are now getting to fulfill promises and meet the expectations of their citizens.
Despite the risk of a backlash, Saudi Arabia is continuing its campaign to keep the world awash in oil until OPEC opponents bow to its long-term pricing strategy, which is designed to lower prices and preserve oil as the West's main energy source.
With a steady production of 10.3 million barrels a day, Saudi Arabia accounts for nearly half of all OPEC exports, giving the kingdom unusually powerful leverage with its fellow producers.
In fact, even some of the Saudis' closest allies, like Kuwait and the United Arab Emirates, have begun to show signs of unease with the Saudi muscle-flexing, finding that they are under pressure to cut prices or production more than they want. They have begun warning companies that the glut will not last forever, and that the companies had better not break contracts now if they hope to sign new ones later.
Last week, the Emirates' oil minister, Sheik Mana Saeed Oteiba, said in an interview that the OPEC states will base their future dealings with firms on their present behavior, and there will be a blacklist of firms that forego their contractual obligations.
But the companies hardly seem to be listening. Instead, they are taking advantage of loopholes in existing contracts to suspend their purchases, refusing to sign third-quarter agreements for more oil and pressing the highest-priced producers to make major cuts.
Italian, British and American companies are demanding that Libya drop the price of its high quality crude by as much as $5. In France, the state-controlled Compagnie Francaise des Petroles has balked at purchasing Mexican oil even after a $4 price cut.
Virtually all the "majors," as well as many of the smaller companies, are refusing to take what they now regard as vastly overpriced oil from the four main African producers---Libya, Algeria, Nigeria and Gabon---which had been demanding, and getting, $40 to $41 a barrel for oil used primarily for gasoline.
In their attempt to force a price reduction, the companies have been greatly aided by a recent decision of the British and Norweigan governments to cease pegging the prices of comparable North Sea oil to those of African producers, aligning them instead with the far lower rates of Saudi Arabia.
Saudi light crude, which serves as the benchmark for all its sales, is set at $32 a barrel, the lowest rate of any OPEC producer and the one the Saud government is apparently trying to establish as the pacesetter for the entire organization. Other producers, in and out of OPEC, presently charge anywhere from $36 to $41 for a barrel of oil.
The net effect of these pressures has been a sharp decline in production, not only for the African exporters but even for some others. While the figures are not always known with precision, industry analyst believe Libya has dropped from 1.6 million barrels of daily exports to around 1 million since January; Algeria from 900,000 barrels to 700,000; Nigeria from 2 million to possibly as low as 850,000; and Mexico from 1.1 million to 700,000 barrels.
The respected New York-based Petroleum Intelligence Weekly estimates total OPEC production has sunk from 25 million to about 22 million barrels a day since the beginning of the year. In 1979, it was almost 32 million barrels a day.
Still, industry analyst are talking about a better than 2 million barrels a day surplus on the market.
This may be an exaggeration, however, as spot prices -- those charged for oil outside regular contracts -- have recently been rising slightly, a sign the glut may be finally starting to dry up.
Meanwhile, the African oil producers are desperatedly trying to hold the line. At a meeting in Algiers in mid-June, they pledged to keep their high prices and stand up collectively to the Saudi challenge.
Mexico, for its part, has threatened France with the loss of lucrative supply contracts for development projects and even ordered French firms to withdraw their bids on them. This has spurred the French government into ordering the Companie Francaise des Petroles to reopen negotiations for the purchase of Mexican oil, even if it is unwanted.
Still, recent reports suggest the African producers are slowly yielding to market forces. Nigeria is reported to have agreed in early July to a $2.50 per barrel discount on a two-year contract with Swiss traders for 100,000 barrels a day, and Libya is said to have offered a $1.10 discount to British Petroleum on the sale of 55,000 barrels it had arranged for but no longer wants.
While Libya has the reserves to hold out on bigger cuts for some time, the same in not true for either Nigeria or Algeria, which are both badly strapped.
The tug-of-war within OPEC and between the producers and companies is not over yet, but some analysts do not rule out an emergency OPEC meeting before the next regular, bi-annual gathering in December to resolve the struggle through a compromise. This almost certainly would involve a Saudi cutback in production to put the market in balance once again in return for an acceptance finally of the longstanding Saudi demands, both for lower oil prices and a for a system of regular increases based on inflation rates and currency values in the West.