RUNNING a cartel is no bed of roses. It sounds simple in theory: you only have to hold down production in order to hold up prices. But how does it work in practice? Ask the Saudis about oil and OPEC.
There's been widespread cheating among OPEC's members on the oil production ceilings, a common failing in cartels. Worse, the Saudis underestimated the success with which their customers in the industrial world would conserve energy and cut oil imports. When Saudi Arabia forced the rest of OPEC to follow it in lowering prices from $34 a barrel to $29 in early 1983, they made a tacit promise. Saudi Arabia was to absorb any further production cuts necessary to enforce the new price. But the necessary cuts have turned out to be far larger than anyone expected 21 months ago.
Even with a strongrecovery of the American economy from the recession, world oil consumption is running much lower than most forecasts indicated. It was the failure of the annual stock-building surge to appear this year that was the immediate cause of the price cuts of the past several weeks. And those cuts in turn were the reason for OPEC's anxious meeting in Geneva this week.
OPEC's policy and power come down essentially to Saudi Arabian policy and power. The Saudis have generally succeeded -- not always at once, but over time -- in imposing their purposes on their partners. In the years after the Iranian revolution they feared that the oil radicals, with their extremely high prices, would wreck the market for oil, and they played the moderates in pushing prices down -- moderately. Now Saudi Arabia and its smaller neighbors along the west side of the Persian Gulf are to absorb nearly two-thirds of the production cuts on which OPEC has agreed.
The Saudis, capable of producing more than 10 million barrels of oil a day, have been able to reduce the actual flow to about 4 million barrels a day with no signs of financial strain. The question now is how much farther down they can, or will, go to prevent any further erosion of prices for all the world's oil producers from Indonesia to Texas. If they can actually get the production of OPEC's 13 member countries down to the 16 million barrels a day that they now promise, and hold it there, they would certainly keep prices from falling further and might even raise them.
But Americans, and OPEC's other customers, are not without resources of their own. They have the weapon with which any customer can retaliate against overpricing. They can conserve further and buy less. If they do it effectively, OPEC's sales will drop again, and then there will have to be another emergency meeting of the cartel. The industrial countries are on the right track, and their conservation is paying off.