OPEC: from gloom and doom to optimism

By , Fereidun Fesharaki, energy adviser to the prime minister of Iran in the late 1970s and a delegate to OPEC ministerial conferences, directs a research project at the East-West Center in Honolulu.

Earlier this year the news media were flooded by articles from experts, politicians, and academics all repeating the same prognosis: oil prices are going to collapse to below $20 per barrel, oil market turmoil will continue, and OPEC is finished as an organi-zation.

But now, less than three months later, the oil market is returning to normal. Spot prices are up, nearing the level of official OPEC prices. OPEC oil exporters are sticking to their production quotas and refraining from discounting their prices. In short, the oil market psychology is beginning to turn around to a mood of optimism.

Non-OPEC producers, a major factor in the instability of the oil market, are also behaving themselves. Mexico has pledged that its 1983 export volume will be restricted to 1.5 million barrels per day. The Soviet Union and Egypt have actually raised prices by 25 to 60 cents per barrel, closing their price gap with the official OPEC market price of $29 a barrel; and even free market-oriented Britain is staying in line by holding firm to oil prices acceptable to OPEC.

Recommended: Could you pass a US citizenship test?

At the same time, signs of economic recovery, the key to oil market strength, are seen everywhere. The demand for oil is expected to be slightly up in 1983-84 in the industrial world. The developing world, which experienced its first-ever decline in demand for oil in 1983, is also returning to higher levels of demand. More important, withdrawal of oil from stockpiles, though still significant, has slowed down and is likely to be reduced to minor levels by mid-summer. This will further strengthen the oil market, OPEC, and oil prices.

What has brought about such a fundamental change in attitude in so short a time?

First, the oil market - much like the stock market - responds more to perceptions, rumors, and hearsay than to solid facts. The negative market psychology stemmed from a perception that OPEC can no longer defend its price and that forces of excess supply over demand will push prices down, with no end in sight.

Some academic experts even attempted to prove that OPEC is dead. These pronouncements made the market even more nervous, with the result that oil buyers reduced their stocks heavily and refrained from buying oil. After all, they reasoned, it makes no sense to buy oil today when it will be cheaper tomorrow. The fundamental error in such thinking is the assumption that OPEC nations operate like private firms. They do not. OPEC nations have to respond to a whole set of non-economic factors. Indeed, to assume that sovereign states behave like private firms distorts the whole foundation upon which such conclusions were founded.

The second error is the perception that OPEC producers are foolish and greedy; that they cannot see the dangers of destroying themselves by competitive price cutting. Anyone who is familiar with the oil ministers knows they are extremely sophisticated, well informed, and with access to better market intelligence than their counterparts in the industrial oil-importing nations. After all, they buy the best talents, the best econometric models, and have developed an excellent sense of the market developments over the past 20 years.

The third major error in perception is related to the budgetary needs of oil exporters. Again, anyone familiar with budgeting and planning procedures in oil exporting nations knows how much padding exists in budgets, much of which could be cut without any fundamental impact on domestic economies. Other affluent OPEC nations have been able to make allowances for cash-strapped countries, such as Nigeria, trapped in a short-term foreign exchange squeeze.

Though the situation has improved, OPEC is not out of trouble yet. OPEC production was just over 15 million barrels per day in April/May 1983 - 2.5 million below its target. But the market has begun to believe OPEC, and perceptions of gloom and doom have given way to optimism. By late summer OPEC production is likely to reach its target, and by year's end it could well reach 18 to 19 million barrels per day. Prices will firm up further and spot prices for oil could exceed official OPEC prices by a dollar or so in the fourth quarter. Though official prices may not be raised, it is not unreasonable to expect an additional $1 to $2 per barrel added to the price of oil in 1984 - either through spot prices or the reemergence of premiums.

The turmoil in the market has, in fact, done OPEC a world of good. First, it showed the oil exporters the dangers of divisiveness and the high price they have to pay for it. Second, it brought into line non-OPEC exporters who had hitherto abused OPEC's resistance to reducing prices. They, too, realized that they could lose heavily in this game. Third, the reduced revenues from oil will reduce the excesses in the economies of oil-exporting countries and force them to operate more efficiently and with fewer subsidies.

For all its troubles in the past, OPEC and the oil market will see a safer, more stable, and more realistic period in the years to come - one of the few instances in our history where everyone is going to come out ahead.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...