A leading Arab oil minister, speaking on the eve of the Organization of Petroleum Exporting Countries' winter meeting, warned today about the dangers of a price war among producers unless Britain and Norway cooperate with the cartel's efforts to prop up prices in the face of a persistent glut.
Mana Saeed Otaiba, oil minister of the United Arab Emirates, said after chairing a session of OPEC's market-monitoring committee that a mild winter and economic slowdown in the United States and Japan had contributed to "a continuing weakness in the world oil market."
Otaiba stressed that non-OPEC producers, specifically Britain and Norway, were "not encouraging the market to recover" by suggesting they might soon link the price of their oil to the free or "spot" market, where a barrel now sells at up to $2 below OPEC's $29 benchmark price.
"We are really at a crossroads now," Otaiba said, noting that non-OPEC producers would suffer most from a collapse of the market. "If we are forced into a price war, we are in the stronger position. OPEC will not be the first loser."
Otaiba's remarks reflected rising tensions among oil producers, who have not enjoyed the surge in demand for heating oil that was anticipated as a boon to their sagging fortunes.
Amid apprehension that the market is not living up to forecasts, the cartel's 13 oil ministers gathered for a meeting Wednesday that was originally intended to parcel out expanded production shares at the annual peak of oil consumption. Instead, world demand is now much lower than expected, adding to pressure for price cuts.
Seven weeks ago, the OPEC ministers held an emergency meeting here and decided to trim their total production from 17.5 million barrels a day to 16 million in an effort to halt slippage of prices caused by abundant supplies.
Ahmed Zaki Yamani, Saudi Arabia's oil minister, predicted at the time that prices on the spot, or noncontract, market would surpass official OPEC prices by the end of November. But prices on the spot market, which now accounts for nearly half of the world's oil trade, have continued to fall.
Yamani and other OPEC ministers have accused Britain and Norway, which together produce about 3.3 million barrels a day, of undermining the world market after provoking a crisis in October by a round of price cuts. Nigeria, an OPEC member whose light crude competes with North Sea oil, was forced to break the cartel's ranks and to follow suit.
The slump has compelled OPEC to slash production by half over the past four years to maintain prices. But its strategy has been foiled by mounting output among countries outside the cartel, as well as by consumers' conservation.
OPEC has sought cooperation with non-OPEC producers to regain control of the market. Egypt, Mexico and the Soviet Union have generally abided by OPEC rules, but Britain and Norway have been pursuing more independent policies to maximize their incomes.
Yamani and Otaiba have warned recently that if a price war should break out, the North Sea producers could be forced to shut many wells because their costly offshore drilling operations would become unprofitable with a sharp drop in prices.
But several OPEC members, notably Indonesia, Nigeria and Venezuela, would also risk turmoil if a price war led to a plunge in revenues. Their fears have acted as a brake on price threats from the relatively low-cost producers in the Persian Gulf.
Yamani has also criticized major American oil companies for "playing a dangerous game" in recent months by depleting their oil stocks in anticipation of cheaper future supplies. He says a sudden snap of cold weather may create shortages, leading to panic in the oil markets.
But oil traders and industry analysts have dismissed Yamani's contention as an effort to jack up a glutted market.
"At every meeting, OPEC sees demand picking up with winter months or an upturn in the economic cycle," a Houston-based oil trader said. "But the market is telling them that it's now a structural problem. There is too much oil around to support a price of $29 a barrel. And the longer they wait to cut prices, the worse the glut will get."
The oil market has not only been depressed by the unseasonably warm winter in the northern hemisphere, but also by the prolonged strength of the dollar. Oil is purchased in dollars, and European countries now pay more in local currencies for oil than they did three years ago when oil was priced at $34 a barrel.
Indiscipline among OPEC members, who have exceeded production quotas or offered price discounts to increase revenues, is also considered a prime reason behind the continued depression in the oil market. OPEC production for the past two months has ranged 500,000 barrels to 1 million barrels per day above the 16 million-barrel ceiling set at the end of October, according to oil industry analysts.
Nigeria and the United Arab Emirates are said to be pumping well beyond their quotas. Iran, which is producing about 1 million barrels less than its quota of 2.3 million because of the war with Iraq, is offering price discounts to lure reluctant buyers.