Decisions made in Riyadh in the next few months will largely determine whether the price of a barrel of oil at year's end is closer to $20 or $30. In other words, oil consumers' bills could vary by as much as $150 billion depending on whether Saudi Arabia succeeds in enforcing discipline on production and prices within the Organization of Petroleum Exporting Countries.
The Saudi strategy at the recent OPEC meeting appears to have been aimed at creating a crisis atmosphere by confronting other oil producers with the danger of a price collapse. The Saudis, usually so cautious, were tiring of cutting their own output in order to defend the $34 per barrel price, while countries such as Iran, Libya and Nigeria were cutting prices to gain a larger share of the market. This, of course, is the dilemna faced by every cartel, and the Saudis will fare better than many other countries if prices fall. Hence the credibility of their threat to increase production and let prices decline.
Do the Saudis, however, want to see OPEC and, with it, the current oil price structure collapse? Most certainly not. The Saudis are already confronting a sizable budget deficit this fiscal year, and next year could be worse unless expenditures are sharply reduced. Granted, the Saudis have a large overseas reserve to draw on, but no Saudi leader wants to see this insurance policy run down to rapidly.
Not only will Saudi Arabia be reluctant to see its oil income drop as low as $40 billion per year, which might be the case if the price falls to $20 per barrel, but also the Saudis will shy away from the political conflict that would accompany an all-out fight within OPEC over production and pricing.
Iran is the most immediate problem. Daily threats emanate from Tehran calling on the Saudi masses to rise up against their corrupt monarchy. Just recently, an Iranian fighter aircraft approached the Saudi oil fields. Fortunately, the American-operated AWACS planes detected it and Saudi jets scrambled to intercept it. This time the Iranian plane turned back, but one can assume that future attempts at intimidation will be made.
The Iran-Iraq war, which may be building toward a crescendo of sorts, has placed the Saudis in an acute dilemma. Their preference is to see some balance maintained between the major powers of the Gulf. For the past two years, the reduced levels of Iranian and Iraqi oil output have also served Saudi interests. But the Saudis have not been bystanders. They have heavily committed themselves to the Iraqi side, and it now seems as if that gamble may not pay off. The Saudis are reported to be reducing their aid to Baghdad, just at a time when Iraq has nearly exhausted its financial reserves.
Elsewhere in the Middle East, things are not going the Saudis' way. Negotiations over Israeli withdrawal from Lebanon seem stalled, and the Saudis are being blamed in Washington for not being more cooperative. King Hussein may be on the verge of entering peace negotiations, but if he does the Saudi-sponsored Fez Summit plan of last September will be shattered and inter-Arab tensions will rise. The Saudis will again be caught between extremists and moderates.
With these problems in the Gulf and in the Arab-Israeli conflict so much on their minds, the Saudis would seem to have little appetite for another big fight over oil prices. Consequently, we can probably expect some indication in the near future that Riyadh is ready to reach an understanding with Iran and the African oil producers. It may look like this: within an overall OPEC ceiling of 17 to 18 million barrels a day, Saudi Arabia will limit output to about 5 million barrels per day. OPEC will agree to a small reduction in the "marker price"--perhaps $30-$32 per barrel--and North African crude will not be reduced as much as "Arabian light," thus restoring the price differential sought by the Saudis.
If the price can be held at about $30 through this year, the Saudis will feel vindicated. They will still have to cut back on spending and will have to make adjustments in their development and military programs. Many Saudis would welcome this.
There is no guarantee, however, that an agreement within OPEC can be reached, or, if one is reached, that some members won't cheat. The Saudis are trying to ward off this danger, knowing that a downward price spiral could occur, leaving them both poorer and politically vulnerable.
The West and the developing world have much at stake in the ongoing debate within OPEC. While we cheer for lower prices, we can expect the Saudis to try one more time to firm up prices. OPEC has served the Saudis well, and they will be reluctant to hasten its demise.