Soviets Willing to Cut Production in Effort to Boost World Oil Prices

By MICHAEL PARKS

March 7, 1989 12 AM PT

Times Staff Writer

MOSCOW — The Soviet Union is prepared to cut its oil production for at least six months in cooperation with the Organization of Petroleum Exporting Countries in an effort to raise world oil prices, Soviet officials said Monday.

Officials announced a 5% cutback in Soviet oil sold on the open market or delivered to Western customers on contract and said it would amount to 100,000 barrels a day over the next six months.

Western observers said it was the first time the Soviets--the world’s biggest oil producer--have publicly announced steps to bolster OPEC. But they said it wouldn’t have a dramatic effect on oil markets and noted that Soviet production might have fallen anyway.

The Soviets, which have long supported the goals of OPEC to boost and stabilize oil prices, join China, Mexico, Egypt, Malaysia, Oman and other non-OPEC oil exporting nations which have recently announced steps intended to bolster prices.

Vasily A. Dinkov, the Soviet oil minister, said at a news conference that Moscow viewed a price of about $20 a barrel as high enough to make production viable. World prices currently range from about $16 to $19 a barrel.

Further Efforts Possible

On the New York Mercantile Exchange, analysts credited the Soviet announcement for sending the April contract for West Texas Intermediate, the benchmark U.S. crude, up a modest 11 cents to $18.67 a barrel. OPEC crude oils typically sell for $1.50 a barrel less. The cartel’s official goal is to reach an average price of $18 a barrel.

Moscow is clearly hoping that the consolidated action by OPEC and non-OPEC members will eventually push oil prices back up and that it will be able to recover initial losses through subsequent price rises.

Grant Margulov, the first deputy chairman of the Bureau on the Fuel and Energy Industries, said the cutback symbolized Moscow’s desire to cooperate with OPEC pricing and supply policy and that further joint actions were possible.

“The Soviet Union shares in the efforts made by other states in maintaining closer cooperation with OPEC countries to achieve stable oil prices acceptable to both importer and exporter,” Margulov said, putting the 5% reduction in the context of Moscow’s participation as an observer at recent OPEC conferences.

“We are prepared to cooperate closely with OPEC countries and take possible joint actions if necessary,” he said. “As for cutting back our exports, the decision we have taken is for the first half of the year, and the future will show if we will maintain this form of cooperation. This question is being considered at the moment.”

However, the Soviet Union’s mature oil fields and weak technology have made it difficult to prevent declines in oil production anyway, analysts say.

“We put the Soviet announcement in the same category as some of the other announcements by non-OPEC countries,” said Thomas Burns, manager of the economic staff at Chevron Corp. in San Francisco, one of the leading oil giants in the race to do business in the Soviet Union. “It is nice to show support for OPEC, but it is not going to be terribly significant.”

Analysts generally agree that there is less to some of the non-OPEC pledges than meets the eye. Production cuts by Mexico, Egypt and some other nations are less policy decisions than examples of bowing to the inevitable, one observer said.

The Soviet Union’s oil totaled about 12 million barrels a day last year--roughly 45% more than that of the United States and three times that of Saudi Arabia--but it uses more than two thirds of that petroleum itself.

Revenue Problems

More than half of the Soviet exports of oil and oil products in 1987 went to Moscow’s partners in the Council for Mutual Economic Assistance, the socialist trading bloc known as Comecon, and to other close allies. Soviet officials said the cutbacks will not affect sales to the East Bloc.

Finland, France, Italy, Spain and West Germany also bought substantial amounts of Soviet oil, according to Soviet trade figures for the year, the last for which complete statistics are available.

Moscow, in fact, relies heavily on its oil and gas exports to finance its imports of Western machinery, and a 5% cutback represents a further reduction of hard currency revenue. Together, oil and gas constitute nearly 35% of Soviet exports by value--and about 60% of its hard currency earnings.

Declining prices for oil and gas on the international market resulted in $64 billion in lost export revenue for the country over the past three years, according to Finance Ministry officials. This has been an important factor in the growing budget deficit, which is emerging as a major economic problem here.

Time staff writer Donald Woutat, in Los Angeles, contributed to this story.