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Peace Dividend? How About Oil At $10 A Barrel?


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PEACE DIVIDEND? HOW ABOUT OIL AT $10 A BARREL?

What's the bottom on oil prices? Since March, the per-barrel cost has slid from over $20 to under $17. Now, with peace breaking out in the Middle East, prices may plunge even further. Some analysts figure $10 is a possibility--a price oil hasn't hit since the last boom came to an end in 1986.

Prices are dropping largely because OPEC is unable to cut production in Iran, the United Arab Emirates, Nigeria, and other cash-short members--a problem made worse by rising North Sea output and light demand. OPEC is now pumping more than a million barrels per day over the 23.5-million-barrel cap members agreed to in June. "Right now, OPEC has no credibility," says Lawrence Goldstein, president of the Petroleum Industry Research Foundation.

MORE PUMPING? The sudden improvement in Middle East peace prospects is complicating OPEC's quest for price stability. After trading above $18 per barrel for much of the summer, crude oil started falling apart on the news of talks between Israel and the PLO in August. If peace spreads, analysts say, declining security risks in the region could knock prices down more.

OPEC will try to regain its hold on the market at a Sept. 25 meeting in Geneva. Venezuela's energy minister, Alirio Parra, proposes raising production to 24.5 million barrels per day for the fourth quarter. That could leave room for Kuwait, which has broken ranks with OPEC, to keep replenishing its war-depleted treasury. Such a deal "would have a steadying effect," says Oryx Energy Corp. President Robert L. Keiser.

OPEC can ill afford to let oil prices plummet. A drop to $10 would cost its members $80 billion a year. So while mistrust between Iran and Saudi Arabia is even higher than usual these days, many analysts expect OPEC will patch things up. "OPEC is at its best when the oil market is at its worst," says Kidder, Peabody & Co. analyst Bernard Picchi. But even if OPEC pulls off a deal, stability may be short-lived. Dealing with overproduction, empty coffers, and spreading Mideast peace in one simple handshake is a lot to ask, even of a cartel.Peter Burrows in Houston


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