After a year of volatility, many hope OPEC's oil pact succeeds
It is a big ``if.'' But if the Organization of Petroleum Exporting Countries can constrain oil pumping and shore up prices at $18 a barrel, a lot of good - and a little bad - would occur in the world economy. Prior to the OPEC agreement, there were fears of a new collapse in prices. Now, at least that has been arrested.Skip to next paragraph
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``It takes the pressure off problem areas such as the Southwest, which has been marching down the road to recession,'' notes Daniel Yergin, head of Cambridge Energy Research Associates. ``It takes pressure off the financial system from debtors such as Mexico. And $18 a barrel is still good for consumers.''
True, $18 a barrel oil would mean slightly higher gasoline prices and slightly more inflation throughout the world. And if the OPEC agreement works, radicals in the cartel could be emboldened to try for even higher prices - rekindling the energy/inflation fires of the 1970s.
But that's an unlikely scenerio - largely because oil-rich Saudi Arabia and Kuwait do not want to see the West resume its drive towards import independence, conservation, and alternative energy. These nations plan to sell their vast stores of crude well into the 21st century; it is their only cash crop.
On balance, $18 oil is economically stabilizing around the world.
``The problem is that low oil prices are generally beneficial for the US, but the benefits are distributed broadly,'' observes Stephen A. Smith, international energy analyst with Data Resources Inc. in Lexington, Mass. ``But four states - Texas, Oklahoma, Louisiana, and Alaska - get the lion's share of the hurt.''
Stronger oil prices would directly benefit Texas, Oklahoma, Louisiana, Alaska and debtor oil nations such as Mexico while only marginally inconveniencing other Americans.
Still, holding the line at $18 is going to be extremely difficult for OPEC.
Many OPEC watchers worry about the lack of unanimity in the latest accord, the possibility of cheating on quotas by OPEC members, the probability of non-OPEC producers sliding into the gap left by the cartel, and a vast oversupply of oil in the inventories of the industrial world.
The authoritative Middle East Economic Survey, in its latest issue, concludes that OPEC is not likely to succeed in its goal of cutting output to 15.8 million barrels a day and cites as reasons ``quota slippage'' by other countries and extra oil produced by dissident member Iraq.
``They have to keep production below 16 million barrels a day for at least two quarters,'' says William L. Randol, senior petroleum analyst with First Boston Corporation in New York. ``If they can make it until summer, the agreement has a pretty good chance.''
For OPEC, 1986 has been a white-knuckle year. Oil prices tumbled from around $28 a barrel to $10 and then settled in the $14 vicinity with dire predictions of another drastic fall.
Saudi Arabia, the most oil-endowed nation in the world, was largely responsible for what happened. It was Saudi Arabia that tired of having to take up the slack in the world oil market. In mid to late 1985, the Saudis decided to go for more market share. In the process, prices tumbled.
But as the year closes, it appears that the Saudi strategy has succeeded. Mr. Smith of DRI points out that Saudi production had hit a low of 2.5 million barrels a day in late '85 - about 15 percent of OPEC's 16 million barrels a day.
In recent months, however, Saudi output has averaged 4.35 million barrels a day - about 25 percent of OPEC's 17 million barrels a day. The production cuts in the latest agreement are proportional, so the Saudis will retain their 25 percent.
``There's been a recognition by non-Saudis that the Saudis meant business,'' Smith notes.
Or as Mr. Yergin puts it: ``They've been to purgatory and didn't like it.''
Neither did bankers, nor some very anxious governments. Now, at least there is a plan to restore stability.