Commodities: Opec must summon up new resolve

AWASH in a sea of bad news, crude oil prices dived below dollars 14 last week. The tumble to new five-year lows of dollars 13.65 took world oil prices down dollars 2, or 12 per cent, from their level just a month ago, and 30 per cent lower than the beginning of this year.

Consumers should be benefiting from the decline in wholesale crude and heating oil prices. Fierce oil company competition on the forecourt, with supermarkets also joining the fray, is helping to keep pump prices down - even though some of the big oil companies have not announced price cuts recently.

In the near future, drivers may even be cushioned from the impact of the Chancellor's 3p per litre Budget increase in petrol prices because of the overall falling trend in oil prices.

Lawrence Eagles, commodities analyst with GNI Research, says: 'With oil prices down by around a third this year and such keen competition at the pump, chances are that the tax rises will be more than offset by lower pump prices.' In the longer term, UK automobile groups expect vehicle excise duties and the petrol rise to have 'massive implications for motorists' and cost average drivers pounds 52 extra a year.

Such a high percentage of pump price in the UK is tax that when world oil prices fluctuate, consumers do not feel much of a shock. The Government, and governments of some other large oil-consuming countries as well, have so often slapped taxes on petrol prices when wholesale oil prices are low that individual consumers have been deprived of the feel-good (or bad) factor.

Compared to the US, for example, we pay through the nose for petrol in the UK, and three-fifths of the pump price is tax. The International Energy Agency recently reported that of the 54.2p per litre that UK end-users paid for petrol in October, 39 per cent was tax. US consumers paid 30.2 cents a litre (20p), of which only 10 per cent was tax.

The overriding cause of the fall in world oil prices is the failure of the Organisation of Petroleum Exporting Countries to cut back production in line with lower world demand.

But last week, on top of that, the spectre of the UN lifting its embargo on Iraqi exports, in place since August 1990, gave the markets the jitters and sent prices spiralling lower. There were also hints that Iraq might be willing to accept conditions that would allow it to make a one-off, limited sale of oil worth dollars 1.6bn.

Worries about seasonal demand this winter, now that the Arctic cold snap affecting Europe has abated, the reopening of Russian ports and renewed loadings from the North Sea after bad weather delays also gnawed at the fragile market.

Opec triggered the recent slide in prices two weeks ago by agreeing to keep to the production ceiling of 24.5 million barrels per day agreed in September. Members believed that a small cut in output would not help prices and a big cut would be difficult to enforce. They hope for a cold January-March period to boost demand.

In the past year or more, supply and demand have tilted out of balance despite Opec members mostly sticking to their September agreement. Sluggish consumption from recession-bound industrial countries, increased output from non- Opec producers such as Britain and Norway, and high stocks in consuming countries have taken their toll.

Most Opec members have been pumping close to capacity since the Gulf war. According to Mr Eagles of GNI: 'There has been a sea change in the thinking of the oil market.' With oil supplies in consuming countries abundant, most of the world perceives that Opec no longer has the same power to tighten its noose on the market.

If Iraq returns to the oil market next year when supplies are seasonally most plentiful, 1994 could prove to be another year of lower oil prices. In the past, when Opec members have seen a battle for market share coming, they have sought to show their productive capacity by pumping as much oil as possible. The market would be awash with oil, at the time it needs it least.

Geoff Pyne, analyst with UBS Securities, said oil market participants are asking whether Saudi Arabia, Opec's largest producer, would be willing to pump less than 8 million barrels a day. Historically, when Saudi Arabia has cut production, other Opec members have not followed suit, so the Saudis are now unwilling to be the 'swing producer'.

Mr Pyne does not believe Opec has completely lost its will to affect oil prices, because many Opec members' economies depend on oil. But he says nothing will improve until Opec shows that it is ready to take action, and that is unlikely before Christmas. Perhaps by the new year prices will have fallen far enough to give Opec members renewed resolve to cut output further.

(Photograph omitted)