Oil Prices Rise in Response to OPEC Accord

Crude oil prices rose sharply on world markets Tuesday in reaction to the Organization of Petroleum Exporting Countries’ agreement to a major cut in production. The response raised a specter of higher retail prices later in the year if the cartel can enforce the reductions.

OPEC officials confirmed in Geneva that its 13 member-countries have agreed to reduce daily oil production during September and October by 3.3 million barrels a day, or about 20%, to soak up the surplus oil in world markets and to boost prices, which had dropped to less than $8 a barrel on some markets.

Analysts Divided

Despite the immediate increase in the price of crude oil, analysts were sharply divided on whether the higher prices would last.

The news also boosted the prices of oil company stocks. The companies have made deep cuts in oil exploration and furloughed thousands of workers in recent months, due to the sharp decline in oil prices.

In trading Tuesday on the New York Stock Exchange, Chevron’s stock closed at $41.50, up $1.25, Atlantic Richfield closed at $67.875, up $3.125, and Unocal closed at $31.375, up $1.125.

The price of oil for September delivery rose Tuesday by $1.73 a barrel to $15.02 on the New York Mercantile Exchange.

Slump Since November

Oil industry analysts said that an OPEC agreement on production cuts was essential to reverse the slump in oil prices, which have dropped from $31 or $32 a barrel since last November.

In California, Tosco, the largest independent refiner in the state, raised the wholesale price of its gasoline by a penny a gallon, effective today.

William Floyd, senior vice president of marketing and product supply for Tosco, said the company raised the price in line with increases taking place on the East and Gulf coasts because of the OPEC agreement. Floyd said, however, that he was not sure the price increases will show up at the gas pump.

“It’s very difficult to predict what kind of lasting effect this (OPEC agreement) will have,” he said. He added that West Coast gasoline supplies are high, a factor that would limit price increases.

W. D. Hermann, chief economist at Chevron in San Francisco, said oil prices would have to remain high for one month to six weeks before motorists in California would see any price difference at the gas pump. Usually, a $1-a-barrel rise in the price of crude oil, passed on entirely to consumers, causes a 2.5-cent increase in gasoline prices.

Peter Beutel, an analyst with Rudolf Wolff Futures in New York, said that the OPEC production cut could push world oil prices to more than $20 a barrel by the end of the year and boost gasoline prices by about 10 cents a gallon in that time.

“Consumers should enjoy low prices now, because they are not likely to see them again for a long time,” Beutel said, adding that he believes OPEC members will stick to their agreement. He acknowledged, however, that “it’s difficult not to imagine them fighting among themselves.”

In the last few years, members of the cartel, because of their widely varied economic and political priorities, have often been unable to stay together for long on production or price increases.

Iraq Exempt From Cut

In Geneva, Rilwanu Lukman, OPEC president and oil minister of Nigeria, said the cartel agreed that 12 of its members will abide by the production quotas they were assigned in October, 1984. For political reasons, however, Iraq, which is at war with Iran, will be allowed to produce as much oil as it wants. Iraq currently is producing about 2 million barrels of oil a day, and said that it will continue to do so. Both Iran and Iraq are OPEC members.

The result of the production cuts--assuming that Iraq is now producing at about its capacity--will be that OPEC as a whole will cut back from about 20 million barrels to 16.7 million barrels daily.

Besides reducing its own production to stabilize prices, OPEC called upon other oil-producing countries to reduce production. In a statement released Tuesday at the end of a nine-day meeting in Geneva, OPEC warned that it “would not be committed to defending the price structure alone.”

Later in the day, Lukman said that non-members Egypt, Angola, Malaysia, Oman and Brunei had expressed a willingness to go along with a production cut.

Separately, and less helpfully from OPEC’s standpoint, Norwegian government officials said they are willing to curb growth in oil production if OPEC’s action results in stable oil prices. Britain, along with Norway a major North Sea oil producer, made no official comment, and analysts said it is not likely that Britain will curtail production.

Mexico said it will cut its crude oil “export production target” by 10%, or 150,000

OPEC Impact Debated

Some analysts said that unless non-OPEC producers cooperate with the cartel’s effort to reduce production, prices are not likely to rise significantly, but others argued that OPEC’s production is large enough to force an increase in prices.

Lukman said that OPEC will continue to seek a permanent system of quotas and to review its price structure. He said that he will chair a monitoring, or watchdog committee that will make sure the OPEC countries do not exceed their quotas.

Analysts were divided, however, on whether OPEC would be able to stick to the new agreement.

Fereidun Fesharaki, an OPEC specialist at the East-West Center in Hawaii, said it was significant that OPEC did not put its plan into effect immediately. He said the OPEC countries will probably continue to flood the oil markets during August, and thus increase the surplus.

“This is important in terms of stopping further price declines,” Fesharaki said of the OPEC agreement. But he added that it is unlikely that oil prices, which surged on both the spot and futures markets Tuesday, will remain high.

Ideal Price Disputed

He said the agreement is likely to be strained by a continuing disagreement between Iran and Saudi Arabia over just how high oil prices should be. Saudi Arabia favors oil prices in the low teens, he said, while Iran would like to see them rise to $28 a barrel.