OPEC worries about coming world oil glut -- but it's too late to save US from 10 cent price rise

The oil sheikhs looking across the water to where bullets fly between neighboring Iran and Iraq are dreading a cease-fire almost as much as they worried about the Gulf war when it erupted nearly five months ago.

The Arab oil producers are concerned that once peace is restored, cash-hungry Iran and Iraq will dump nearly 5 million barrels of oil a day onto a market a already awash with crude.

Even if a cease-fire is not achieved, some analysts believe a substantial oil surplus will develop in international markets by this summer if consumption continues to drop as in 1980. Some producers have already lowered their prices.

If Iran and Iraq output is added to the total, oil traders in London and the Middle East say, the result would be an unavoidable glut of crude worldwide by early 1982, or perhaps sooner. As one Cyprus-based petroleum analyst warned, "It could be the worst oversupply problem that OPEC has faced in 10 years."

OPEC's misfortune, this time, may be the West's gain. In the United States and Europe, the cost of gasoline will not necessarily fall, but it could just mean that the dizzying rise in oil prices has finally hit the top and stabilized.

Before this can happen, moderate Saudi Arabia, the biggest producer by far in the Organization of Petroleum Exporting countries, must face a showdown with price hawks Kuwait, Algeria, Libya, Qatar, and Iran.

Industry sources with access to Saudi policy files claim that the oil minister, Sheikh Ahmad Zaki Yamani, will use the Saudi kingdom's high production level as a club to knock the other cartel members back into line. The Saudis need to pump only 6 million barrels per day to cover the sparsely populated country's expenses, but are sticking to around 10 million barrels per day.

Sheikh Yamani's strategy will be to sit back and let the sagging market demand force Kuwait, Qatar, and the North Africans to abandon the extra premiums -- sometimes as high as $5.50 a barrel -- they tack onto every barrel.

The Saudi oil minister is not new to this game. He used the same keep-'em-pumping tactic to soften prices in 1977 and 1978. But until now, the oil market has snapped up crude at any cost. Now, signs of a serious oil glut are everywhere:

* The Islamic Republic of Iran offers a $7-a-barrel discount off its asking price of $37 to compensate ship captains for sailing into the Kharg Island terminal, well within the Gulf war zone. (Iraq claimed to have attacked and damaged the terminal Jan. 25.)

* Ecuador, one of the OPEC small-fry, this week quietly sold a substantial amount of crude for $3 below its official $40-a-barrel price.

* Rotterdam spot prices, usally a reliable gauge of the market's health, last week showed a drop of 43 cents to $38.49 a barrel, well below the $41-a-barrel ceiling that OPEC set for itself at the recent Bali summit.

* With a drop in Western consumption in 1980, tankers are collecting more rust than crude oil. In Japan and in California, oil companies find it is cheaper to rent tankers for storage space than to keep crude in onshore facilities.

However, the success of Sheikh Yamani's strategy depends on the three wild cards in Middle Eastern politics -- Iran, Iraq, and Israel.

First Iran and Iraq. Mr. Yamani presumably is counting on the former combatants to make a big return to the market- place. A European executive dealing with the National Iranian Oil Company calculates that Ayatollah Ruhollah Khomeini's regime, which now sells between 700,000 and 900,000 barrels per day (bpd), can and must boost exports to at least 2.5 million bpd to replace the billions of dollars drained from Iran's treasury by the war with Iraq.

For now, sales from Iraq, once OPEC's second-largest producer behind Saudi Arabia, have fallen to a negligible 100,000 to 200,000 barrels a day, according to an American oil man recently back from Baghdad.This source that Iran's Navy and artillery scored direct hits on Iraq's two main Gulf loading terminals, Khor El Amay and Al Bakr, near the Shatt at Arab waterway.

"Both offshore terminals are very badly damaged. They'll be down for six months, maybe a year, if and when the war ends," he said.

Ayatollah Khomeini's jet fighters also blasted the pipelines leading from the largest Iraqi oilfields at Kirkuk over to the Mediterranean. However, according to this businessman, pipeline damage was minimal. He said that within three months Iraq could be pumping 2.35 million bpd to its pipeline outlets in Turkey, Syria, and Lebanon.

"There's one thing stopping the Iraqis," the oilman explained. "That's the Iranians. The moment these repairs are made, the Iranians jets will be back to blow up those pipelines all over again."

Neither side is liable to risk a production boost until a peace settlement is reached. So far, no end to the Gulf conflict is in sight; both Iraq's President Saddam Hussein and Iranian President Abolhassan Bani-Sadr have rebuffed all mediation offers.

Though chances for a swift cease-fire seem remote, the Saudis are predicting that an oil glut will hit the international markets anyway. They say that by this summer an unwanted 2 million barrels will pile up on the market, and this should give Mr. Yamani room to maneuver a cartel coup.

However, that is not the entire story. As one European energy official cautioned, "All these nice, scientific figures add up to a severe oil glut all right, but in the Middle East here are so many unpredictable political factors that could cause a shortage again overnight."