10 DECEMBER 1983, Page 20

In the City

Opec at the brink

Jock Bruce-Gardyne

It might be an exaggeration to say that all eyes this week have been trained on Athens. If one was trying to run an insur- ance company, for example, speculation about where the loser in the Eagle Star af- fray would pounce next must have seemed of more immediate interest than the future of the butter mountain. Still, the Common Market summit on the Parthenon had such expectation invested in it that the commen- tators had to try to make it live up to its advance billing. And as a result another international gathering, this time by the shores of Lake Geneva, which was just get- ting under way as the heads of government packed this bags in Athens, has hardly received the attention it deserves. For this meeting of the Opec club just might turn out to mark a bigger watershed for all of us than Athens.

I remember vividly the circumstances of the last Opec circus. It happened to coin- cide with the final weeks of preparation in the Treasury for what proved to be Sir Geoffrey Howe's last Budget. We were looking to the North Sea to deliver nearly £8,000 million in tax and royalties in the year ahead — not far short of 10 per cent of the Government's total income. Yet up the road at the Dorchester and a handful of adjacent watering-places, the delegates of Opec were engaged in cliff-hanging negotia- tions which were quite liable to make our sums a nonsense. For weeks before they met, pundits in the City and elsewhere speculated aloud about the implications of a failure by Opec to 'get its act together'. The world oil price, we were told, would go into free fall, with no stopping place short of the marginal cost of pumping the oil in the Persian Gulf. If that — or anything remotely like it — happened we could whis- tle for our £8 billion.

In the event, as we know, they did get their act together, and after some delicate and discreet contacts with our own Energy Department, set a price of $29 a barrel. Even then majority opinion was that it would not stick. But it did. So fears — or hopes — of a reverse 'oil shock' gradually receded. In recent weeks there have been signs of some revival of concern, and the pound has taken some of the strain. But so far it was probably no more than the sort of speculation which tends to build up when the publication of a major company's results are imminent. The general feeling seems to be that Opec's fate rests largely with the weather. If the northern hemis- phere feels the chill of winter Opec will have little to worry about; whereas another mild winter could presage trouble. Alternatively, if the Iraqis grow careless with their Ex- ocets, and the mullahs block the straits of Hormuz, we are reminded, then we could indeed have another 'oil shock' — but of the traditional kind.

All of which is plausible enough. But international gatherings, like the House of Commons, rarely conform to expectations. When we are promised high drama we usually get a let-down (or at most the sort of total deadlock that occurred at Athens): it is the routine occasion that provides the fireworks. As they assembled in Geneva the oil men promised quick agreement to freeze prices and production. Nevertheless there did appear to be some combustible material around.

The key to the survival of the cartel through the world recession up to now, after all, has been the readiness of Saudi Arabia to act as 'swing producer', adjusting its production to keep the markets reason- ably hungry. There were those who told us that there were physical limits to the Saudis' freedom of manoeuvre: I remember being told at a City lunchroom in the summer of 1982 that if they cut their output below 6.5 million barrels a day their pipeline system would seize up. They did — and it didn't. Those who argue that the Saudis can sus- tain Opec indefinitely have been proved right — so far.

A lot of thanks they have had from their partners. The Opec 'hawks' — Libya and Algeria to the fore — have regularly accus- ed them of over-production and price sabotage (before hurrying off themselves to offer discounts to anybody interested).

Now the Iranians and Iraqis have taken to demanding that Saudi Arabia should relin- quish its role as lead producer so that they can increase their sales and raise the cash for extra armaments to hurl at each other.

Yet already the Saudis are being obliged to cut back on their own development pro- grammes (with consequential 'risks to their fragile internal security) because of the shortfall in oil revenues, The temptation for them to walk out from Geneva and 'do their own thing' must be stronger than ever before.

Messrs Nigel Lawson and Peter Walker must be united — for once — in praying that they will resist it. For if the Saudis did succumb, the embarrassments for the Government would be considerable. Sterl- ing, and the Treasury's oil income, could take a hefty knock; and although the two repercussions tend to set each other off (a cheaper pound means more pence per dollar of dollar-denominated oil income) a further fall in sterling would make the Chancellor's inflation predictions look op- timistic and put pressure on interest rates. And while oil importers among sovereign debtors like Brazil would benefit, others such as Nigeria, where the British banks have a relatively heavy stake, would be in much worse trouble.

It probably won't happen at Geneva, for however much the Saudis may resent being pilloried for the behaviour of their partners they still must have a very powerful vested interest in preservation of the price cartel. But the pressures upon it are not diminish- ing, and if it survives Geneva safely a mild winter could prove its undoing. At any rate the Chancellor's relatively modest provision for asset sales next year in his autumn statement looks more sensible than some of the predictions currently go- ing the rounds; for if oil prices were to weaken significantly 1984 might not seem the ideal moment to dispose of Enterprise Oil. But then Chancellor Lawson must sometimes wonder whether asset sales are worth the trouble anyway. Two years ago he was charged with giving Amersham away by insisting on a fixed price which was over- taken by newspaper excitement, and then of ripping off the underwriters by doing the same with Britoil. Now he opts for tender in the case of the second tranche of Cable and Wireless, and it is the underwriters who seem to have done the ripping-off: and to add insult to injury he is then told by Sir Ian Gilmour and Mr Christopher Johnson of Lloyds Bank that his asset sales are nothing more than closet Keynesianism.

In fact, as 1 have argued before in these pages, the breast-beating over the terms at which the various sales have been effected is greatly overdone (although the City wants to beware of laying itself open to the allega- tion of operating a ring). In every case the Treasury has got its cash and the businesses involved have passed out of the PSBR for good — which, after all, is the object of the exercise. 1 have more sympathy with the snide comments about the way the Treasury enters asset sales in its books (although not with Sir Ian Gilmour's assault upon the abolition of hire purchase controls as 'foolhardy': why, pray, should only the unbanked be regarded as not to be trusted with free access to credit — particularly when they have to pay over the odds for it?). It really is a nonsense to treat such sales

as diminishing the need to borrow. Natural- ly both Sir Ian Gilmour and Mr Johnson re- joice in the Treasury's sleight of hand, since they are both 'reflationists': indeed Mr Johnson wants to have his cake and eat it, for he tells the Chancellor not only to go on pretending that assets sales reduce his need to borrow, but also to raise his money targets to perform the trick twice over. I can't see Nigel Lawson falling for that one. But he would be well advised to come clean when he makes up the books at Budget

time: to say that the national accounts have always been cooked up this way is no good

reason why they should be in the future, particularly with a long and imposing pro- gramme of asset sales ahead.

'I sentence you to Christmas shopping in Oxford Street.'