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OPEC Agrees on Quotas, Cut in Production : News of Oil Accord Helps Boost Prices on World Markets

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Times Staff Writers

Freeing itself from the grip of the Iran-Iraq War, the Organization of Petroleum Exporting Countries took a big step Monday toward re-establishing its credibility and market clout with a unanimous agreement to slow its production of crude oil.

Despite prospects of a worsening of the oil glut in the near future, news of the accord immediately drove prices up 7%, to just over $15 per barrel on U.S. markets, as OPEC appeared to close ranks after two years in disarray. The agreement eventually could cause gasoline prices to spurt by 5 cents to 10 cents a gallon.

But analysts viewed the pact as more noteworthy for the OPEC unity it showed than for any dramatic effect it might have on world oil prices. Even strict adherence to the new set of production quotas might not result in OPEC reaching its $18-per-barrel target soon.

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Saudis Drove Down Prices

And that would remain far below the $30-per-barrel price that prevailed as recently as November, 1985, when Saudi Arabia, the cartel’s biggest producer, flooded the market with oil and drove prices as low as $9 per barrel.

Also, numerous problems went unaddressed in the agreement, especially the continuing demand by the United Arab Emirates for a dramatically higher quota and the issue of the large pending increases in Iraqi production capacity.

Nonetheless, the oil ministers’ agreement after 12 days of wrangling at their winter meeting here marked the first time in two years that an OPEC agreement has been embraced by Iraq, the cartel’s second-largest producer.

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The Iraqi refusal to abide by the previous agreements, because its quota was smaller than that of its war foe Iran, had triggered similar cheating by other member nations and undermined the cartel’s efforts to shore up prices.

The breakthrough achieved here, coming as world prices appeared on the verge of collapse, boosts both nations’ quotas but gives Iraq the parity it wanted with the nation it has now joined in peace negotiations.

“I am truly impressed,” said a longtime OPEC skeptic, Vahan Zanoyan of the Petroleum Finance Co., a Washington oil trading and finance firm.

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The agreement confirms a production ceiling of 18.5 million barrels per day that the ministers tentatively had agreed on last week. They also retained an $18-per-barrel target price, first fixed in 1986 but rarely approached since then because producing countries widely ignored output quotas.

While oil prices were climbing on the Tokyo, London and New York markets, inflationary expectations triggered by the OPEC announcement depressed stock prices in Tokyo and London.

Rise in Texas Crude

West Texas Intermediate crude oil for January delivery rose $1.06 to $15.03 per barrel, although the closing price was down sharply from the midday high. The price for the U.S. benchmark crude is normally about $1.50 higher than the Arab crudes, on which the “official” OPEC average price is largely based.

The new production ceiling is effective for six months starting Jan. 1, and most OPEC countries are expected to produce at current higher rates until then. The cartel’s present output is running about 22.5 million barrels per day, and the world market is glutted.

Kuwait’s oil minister, Sheik Ali al Khalifa al Sabah, said his country will pump 2 million barrels a day until Jan. 1, roughly double its new quota. Meanwhile, the United Arab Emirates’ minister was quoted as saying the accord does not represent his country’s “official quota.”

Such continued high production over the next month will tend to worsen the glut, making it all the more difficult to work off the world’s excess inventories of crude oil and delaying the day when OPEC can hope that a supply-demand balance will bring prices to $18 a barrel.

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William D. Hermann, chief economist at Chevron Corp., said the market will be so flooded in the first quarter of 1989 that it will be midyear before OPEC will have a realistic chance to realize the $18-per-barrel target.

Less Effect than Usual

A rise of $1 per barrel in the price of crude theoretically causes the price of gasoline to climb by about 2.5 cents a gallon. However, tightening refinery capacity and other factors lately have kept gasoline prices higher than would otherwise be the case, and Hermann said higher crude prices might have less retail effect than usual.

Zanoyan said $18 remains “out of the question” for the near term and noted that by June, the cartel will have to confront a big scheduled increase in Iraq’s capacity to produce oil. In the meantime, he said, “it always pays to be the first cheater.”

“But if you accept the idea that their most important goals were to avert a price collapse and to bring Iraq into the fold, this is an absolute success,” he added.

Iraq’s insistence on parity with Iran finally was met by raising the individual quotas of both countries to 2.64 million barrels a day, with each to receive 14.27% of the cartel total. Iraq’s new, higher percentage was achieved by making cuts in the percentages of other members, an arrangement that Iran finally accepted Sunday.

Currently Iran’s quota is 2.4 million barrels a day and Iraq’s is 1.5 million barrels a day. But Iraq has recently been pumping about 2.7 million barrels, whereas Iran has not been able to achieve its quota because of damage from its eight years of fighting with Baghdad.

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Iraqi Oil Minister Issam Abdul-Rahim Chalabi said Monday that his country “will certainly abide by” its new OPEC quota. However, within six months the completion of pipeline projects could enable Iraq to produce 4 million barrels a day. Iran is also feverishly repairing its damaged oil facilities.

Both countries desperately need revenue to rebuild their economies after the long war, and oil is their chief source of money.

Some members reportedly were unhappy about having to yield parts of their shares to resolve the Iran-Iraq squabble.

“It was their stupid (Persian Gulf) war--and now we are being asked to pay for it,” one member of Venezuela’s delegation commented.

One industry specialist said Monday: “The countries with poor economies want to maximize revenues, and they have been doing it by overproduction. The big question today is whether those countries will try to raise their revenues by restricting production according to their quotas, thereby raising prices. We will have to wait and see.”

The newly assigned individual quotas are: Saudi Arabia, 4,524,000 million barrels daily; Iraq and Iran, 2,640,000 barrels each; Venezuela, 1,636,000; Nigeria, 1,355,000; Indonesia, 1,240,000; Kuwait and Libya, 1,037,000 each; United Arab Emirates, 988,000; Algeria, 695,000; Qatar, 312,000; Ecuador, 230,000, and Gabon, 166,000.

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Earlier Monday, after a controversial, last-minute move on pricing by Saudi Arabia had undermined an expected conclusion of the new production agreement Sunday, oil prices had initially fallen in Tokyo and elsewhere in the Far East. But when news circulated that the Saudis were dropping their proposal, the spot price of crude soared in Europe to $14.95 a barrel for North Sea Brent--up about $3 from a week ago and the highest price since August.

Saudi Arabia had proposed to fix a $15-a-barrel “floor” under crude oil prices in the new production agreement. But OPEC’s price hawks, including Iran, Algeria and Libya, protested loudly that any mention of a $15 “floor” was likely to establish that figure, rather than $18, as the effective reference, or target, price.

Saudi Oil Minister Hisham Nazer withdrew the proposal Monday, reportedly after having been ordered to do so by King Fahd, the Saudi Arabian monarch.

The next general meeting of OPEC ministers will be held in June, OPEC President Rilwanu Lukman of Nigeria said, unless cheating on quotas forces a special earlier session sooner.

Reading the final communique, the OPEC president declared: “The conference expressed concern about the continued deterioration in world oil prices, caused . . . by overproduction of oil by some members of OPEC as well as non-OPEC producers.”

Lukman stressed OPEC’s “determination to restore stability to the world oil market.”

He said the meeting decided to form a committee to monitor oil production and “ensure the stability of the world oil market.” The committee, he said, would “supervise strict adherence” to individual quotas by OPEC members and would call special meetings of the cartel in the event of violations.

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Lukman also said OPEC members will contact non-OPEC producing countries “with a view toward soliciting their cooperation in support of market stability through production cuts.”

Tuohy reported from Vienna and Woutat from Los Angeles.

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