Oil prices and quick conclusions
On Oct. 29 the Senate ratified by 52 to 48 votes the United States government's proposal to sell modern weapons to Saudi Arabia, including reconnaissance and control planes known as AWACS.Skip to next paragraph
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Later on that same day, in Geneva, the representatives of the Organization of Petroleum Exporting Countries (OPEC) agreed after years of effort to a common base price of $34 a barrel for crude oil, said price to last at least to the end of 1982. This was $2 a barrel above the previous base price used by the Saudis, but well below the price other OPEC members had been charging.
On news broadcasts that night I heard several reporters and commentators predict a rise in the prices for fuel oil and gasoline in the US. During succeeding days I read many comments in various newspapers berating the Saudis for raising the price of their oil, particularly on the same day that the Senate agreed to let them buy modern American weapons.
The story was widely presented as being a flagrant case of ingratitude toward the US by Saudi Arabia.
Well, has the price of gasoline at your neighborhood pump or the price of heating oil from your local dealer gone up?
And was the Saudi role in obtaining OPEC agreement on the $34 base price an act of ingratitude to the US?
World oil prices have for some time been chaotic. The Saudis have been selling some of their oil at $32 a barrel, but charging more for much of it. There is a spread between the price of ''spot'' and ''contract'' oil. Most other OPEC members had been charging much more than $34 a barrel. Some were getting nearly $45 a barrel.
The Saudis have been pumping at the rate of 9.2 million barrels a day. Their legal limit is 8.5 million. They have wanted to get their pumping rate down to their legal limit to conserve their own supply. They delayed cutting production as a means of putting pressure on the other oil producers. They are now in the process of getting their production down to the 8.5 million level since they have finally achieved OPEC agreement on what they consider to be a fair price.
The net effect of establishing the $34 price will be to stabilize oil prices and wipe out the extra high prices that other OPEC members have been charging.
All of this happens at a time when there is still a glut of oil on world markets. American refineries are processing at only 65 percent of capacity. So many Americans are driving smaller cars for shorter distances and setting the thermometers lower in their houses and offices that the supply of gasoline and heating oil is still well above demand.
The amount of oil in inventory is beginning to come down a little because of lower processing rates and the cutback in Saudi production. But there are still a lot of oil tankers with full cargoes lying at anchor off the US and Europe and more proceeding at slow speed from oil fields to refineries.
Refiners and dealers would be delighted to raise gasoline and heating oil prices to US consumers. The new OPEC base price was seen by some as an excuse. But it is difficult to raise the price of any commodity which is in long supply. Oil is.
It it too soon to calculate precisely the effect of the OPEC changes on the oil flowing into the US from overseas. Some say the average OPEC prices may go up as much as 40 cents a barrel, but it is doubted that this will affect the net price to the US since some domestic oil is now selling on the American market for less than imported oil. Refiners are not eager to pay more to outside suppliers than they pay for domestic oil.
Some local retail dealers are reported to have raised their prices at the pump by a cent a gallon, and then had to come back again due to competition. There are reports of further recent price cuts. The retail price varies with locality. I have paid as much as 5 cents a gallon more for diesel fuel at one dealer than another only 10 blocks away was advertising.
But the OPEC decision of Oct. 29 has not caused any general rise in gasoline or oil prices in the US. It has brought down the price of a lot of OPEC oil while raising the price of Saudi oil, which was the Saudi strategy. It was purely coincidental that the OPEC ministers reached their conclusion in Geneva on the same day that the Senate voted on AWACS. The OPEC meeting had been scheduled long before the date for the Senate vote.
There is no basis for thinking that the OPEC decision injured the US and its interests. A case can be made that the American consumer will gain from having a more stable oil market and for putting a lid on the prices other OPEC members were charging.
But the Saudis got a lot of bad publicity out of the affair which, so far as I can see, they do not deserve.