An attempt late last month by Saudi Arabia to prop up falling prices on the glutted world oil market inadvertently touched off the new, potentially devastating price war among the world's main oil exporters, according to both Saudi and western oil officials here.
A top Saudi official explained today that the kingdom had sought to restore order in a chaotic market where the price of the normally cheaper high-sulfur "heavy" oil was suddenly selling for nearly as much as low-sulfur "light" crude.
Abdul Hadi Hassan Taher, governor of Saudi Arabia's powerful General Petroleum and Mineral Organization (Petromin), said the decision was made in late September to dump more heavy oil on the market in an effort to depress its value but he acknowledged this move may have raised suspicions among other oil producers that the Saudis were making a grab for a larger share of the shrinking market.
"Some people may have just misunderstood the signal," he said. "It's very hard to judge the psychology of the market."
The shift in Saudi production sent shock waves through the already jittery world oil market.
Norway reacted by announcing on Oct. 15 a cut of about $1.50 a barrel on its North Sea crude and two days later Britain followed suit with a $1.35 reduction. Two days after that, Nigeria broke ranks with other producers in the 13-member Organization of Petroleum Exporting Countries (OPEC) by dropping its price by $2 a barrel, raising fears of an all-out price war among the world's major producers.
The influential Saudi Oil Minister Zaki Yamani has now taken the lead in trying to shore up official OPEC prices by promising a "substantial cut" in the kingdom's already low production of about 4 million barrels a day.
At a meeting of oil ministers from six OPEC countries and Egypt and Mexico in Geneva earlier this week, agreement in principle was reached for an overall reduction of production of up to 3 million barrels a day. But this arrangement will not be confirmed until all 13 OPEC members hold an emergency session Monday in Geneva.
Whether OPEC ministers, who are increasingly desperate to maintain their dwindling shares of the oil market, will succeed in coming to final agreement on who will absorb what portion of such a big cut remains to be seen. They fought for days over their respective production quotas in March, 1983 when the OPEC benchmark price was reduced from $34 to $29 a barrel and the overall OPEC production level set at 17.5 million barrels a day.
Yamani has gone to Lagos to try to persuade the Nigerians to revoke their decision to lower prices and hold the line for another month or two when the onset of winter is expected to raise demand for oil by a million or more barrels a day.
Although Saudi heavy crude oil is officially priced by OPEC at $26 per barrel, it has been selling recently on the open market for about $26.90 because of increased demand.
On the other hand, demand for the usually more expensive light oil has slackened and, as a consequence, the price for it on the world market has dropped to about $27 a barrel, which is $2 less than the official OPEC benchmark price.
The reason for this apparent paradox is that the major oil companies, which in the past had preferred light oil because their refineries could "crack" it into a higher proportion of high-priced products such as gasoline and jet fuel, had become concerned that light crude was becoming scarcer and spent billions to retool refineries to handle heavy crude.
In the interview at the headquarters here of Petromin, which is responsible for marketing more than half of Saudi Arabia's oil output, Taher, the governor, said the kingdom had decided to increase its production of heavy oil in an effort to force down the nearly $1 a barrel "premium" charge and, as a result bolster OPEC's pricing system.
"Our assessment was that if we inceased the supply of heavy by 400,000 barrels a day, there should be a reduction in that premium," he said.
He contended that the Saudi strategy had in fact worked to lower the premium on heavy oil but conceded it was still selling for more than the official OPEC price.
He blamed the misunderstanding of Saudi motives and "the psychology of the market" for the "surprise" decisions by Norway and Britain to cut their prices and insisted their action did not reflect "a true analysis" of the current world market demand for oil.
The oil market has improved since August, he said, and prices on the open "spot market" market for Britain's Brent Oil are already on the upturn. The oil "spot market", involves sales made outside regular contracts between producers and buyers. Prices on the spot market fluctuate day by day according to supply and demand.
Taher would not specify how large a cut in production Saudi Arabia could afford. Oil sources cited by news agencies in Geneva yesterday said the Saudis might be willing to reduce production -- already at the low level of about 4 million barrels a day -- by as much as 1.5 million barrels.
This would reduce Saudi production to around 2.5 million barrels a day and the amount available for export to less than 2 million since local consumption accounts for 700,000 barrels daily.
In 1980 Saudi production averaged just under 10 million barrels a day.
In the past, the need for the natural gas associated with the production of crude oil to meet local demand for energy -- liquid gas for exports and feed stock for the burgeoning petrochemical industry here -- was regarded as a major constraint on any cuts even below 6 million barrels a day.
Taher said that while the need for natural gas was still "the major factor," the kingdom had gained "additional flexibility" over the past few years because of the use of pure gas wells and the conversion of power plants to dual fuel systems.
While the kingdom clearly could not drop its production to only 1 million barrels a day, he said, "the minimum is elusive" and changing each year.