SURVIVING THE OIL FLOOD

David Howell on why

Britain refuses to play Opec's game

JUST before Christmas a senior Opec official told me that his colleagues were absolutely determined to make Britain curb North Sea oil production. He forecast that early in the New Year Opec, or, to be more precise, Saudi Arabia, would aban- don its self-restraint over oil output and the price would go through the floor. Then Britain would have to talk.

That which was spoken has come to Pass. But has it the slightest chance of achieving the intended result? I think not. As I pointed out to the official, if the crude oil price really is going to drop right down to $10, and stay there, then it will be not just a question of talks between Britain and Opec. The entire world financial commun- ity will be embroiled. The talks that would be needed then would be ones to prevent Mexico and Nigeria defaulting, rescue Venezuela from bankruptcy, save the other Gulf producers from economic ruin and shore up the world banking system.

These would undoubtedly be subjects meriting discussion. In fact they would require the most careful international co- ordination and perhaps a spot of contin- gency planning. It is not impossible that a thought to this effect passed between Sir Geoffrey Howe and the Saudis on his recent visit.

But that is quite different from what the Opec strategists have had in mind. Their plan is to see the price come down to about $15, at which point Britain would join with the Norwegians in cutting North Sea out- put by, say 300,000 barrels a day. There are at least three good reasons why this strategy has not the slightest hope of success. The first is that Britain will not play. The second is that she cannot play, and the third is that even is she did and could, it would make virtually no differ- ence to the condition of the glutted oil market.

The reason why we will not play the Opec game is to be found in Mr Nigel Lawson's frequent speeches on the subject. Oil production is not our main business and never will be. We are an oil-consuming nation and lower oil prices benefit us. That is where our fundamental long-term in- terest lies. It may be that because of the North Sea, the exchange rate will have to `adjust' — i.e. fall — as production passes its peak and as, and when, prices drop back from their artificial heights of the early Eighties, and the ride down could be a bit bumpy. But the idea that we might connive with Opec to keep the price up to $25 is not worth entertaining.

It is true that lower oil prices do immedi- ate and nasty things to the revenue side of the Chancellor's budget. But the answer to that is 'so be it'. The pluses will eventually come through. Besides, I imagine it has crossed Treasury minds that if sterling holds up better than feared, so that oil drops in sterling terms as well, and the effects show through at the petrol pumps, an extra bit of tax on a gallon would be both painless and useful.

The same attitude has so far conditioned the monetary authorities, policy on interest rates. Falling oil prices are not to be allowed to screw up the domestic financial situation and force rates through the ceil- ing. It is a thoroughly sensible approach. I hope their nerve holds.

But could the British have acted dif- ferently, even if they had wanted to? The reality which I always found the greatest difficulty in getting over to my Opec friends is that the North Sea is not under `Its certainly more boring.' total day-to-day government control. It is part of the international oil industry and has to be if it is to be properly developed. In extremis, powers exist for the govern- ment to intervene, for instance if there were another major supply interruption and world shortage. But that is about as far from the current position as it could.

Of course, the oil producing companies will have their own reactions. If the feeling grows that the price has hit bottom and will rise, then output will be slowed from the platforms where possible. We might see the effects of that this summer, depending on the way world oil prices move. Produc- tion in the North Sea is anyway scheduled to come off its peak slightly this year, so if Opec wants 'a gesture', as they say they do, there may be one already in the making without any overt government intervention at all. The Opec line of thought seems to be that Britain must somehow be bullied into making this 'gesture' so that all their own members can then come back into line and cut production without losing face.

This really reveals the hopelessness of the Opec position more clearly than any- thing else. For the clear assumption is that the Saudis and Opec are in a strong bargaining position and can push the Brit- ish into quite pointless acts of policy to satisfy internal Opec sensibilities.

But the bargaining position is not in practice strong at all. Time is against the Saudis. Every day that they keep produc- tion up and thus depress the price, even to the present level above $15, brings cries of agony from the smaller Opec members and, indeed, from members of the Saudi government itself, who see a far from healthy budget situation deteriorating further.

The theory that the Saudis will increase market share at the expense of non-Opec producers is not immediately working. Non-Opec prices all go down as well, and who really cares where the stuff comes from? Besides, it is extremely questionable whether Saudi Arabia can in practice hold the price as low as $15 for very long, even if they are prepared to shoot their friends' and their own feet full of holes.

On the supply side, the Russians, already in difficulties over production, have given notice they are going to hold back further at these prices. On the de- mand side things are quite buoyant and should get more so. The 'market' price for oil — i.e. the price with Saudi output up, but not at flood levels — is probably around $20 to $22, which would put it back in real terms to roughly the level it was before the 1973 oil crisis and the whole shemozzle began.

Sometimes I suspect that the Opec lead- ers must dearly wish they had never wrested responsibility for the world's oil markets away from the American giants in the first place. It might have made their lives a lot easier.

David Howell MP was Secretary of State for Energy from 1979-81.