In Aftermath Of Gulf War, Oil Prices Remain Stable

By , Staff writer of The Christian Science Monitor

DESERT Storm accomplished one of its goals: stabilization of the world's oil price at a moderate level.

"We have just come through one of the most stable periods we have seen," says Kevin Lindemer, director of oil markets at Cambridge Energy Research Associates of Cambridge, Mass. Moreover, oil-market experts anticipate only small increases in crude prices in the near future.

Frank Knuettel and Meg Saegebarth, two analysts with Prudential Securities Inc., forecast price increases of 2.5 percent to 3 percent per year over the next few years. That's about 50 cents per barrel more per year.

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"The current political climate will cause governments to do all they can to maintain price stability," they write in a report. "Therefore, excluding any major accidents, we do not envision a repetition of the oil price swings caused by the 1973 Arab oil embargo, the oil shock of 1979, or the invasion of Kuwait."

During the last two events, prices rose briefly above $40 a barrel. But since the end of the Gulf war, prices of West Texas Intermediate crude have mostly ranged between $18 and $22 a barrel.

A stable, moderate oil price, economists note, restrains inflation and encourages investment within consumer nations.

With the world's supply of and demand for oil balanced at this time, any jump in the supply could depress the price.

For instance, the oil market has been concerned about the impact of a reintroduction of Iraqi oil. George Freisen, an international oil analyst with Deutsche Bank Group of New York, says a gradual resumption of the flow of Iraqi crude, rather than a sudden one, would help the OPEC nations maintain the current price.

Iraq has been banned by the United Nations from selling oil outside its borders since August 1990, when it invaded Kuwait. Iraq and the UN ended three days of negotiations in Vienna last Saturday with no agreement over a proposed emergency sale of Iraq's oil. Further talks are to be held soon.

The UN initially had proposed that Iraq sell 500,000 barrels per day over six months, earning about $1.6 billion for internal humanitarian purposes and reparations. Iraq asked for at least 1 million barrels a day and $2.6 billion.

Oil experts figure world oil consumption will increase only modestly this year and about 1 million barrels per day next year. So other OPEC nations, particularly Saudi Arabia, might have to lower production to accommodate Iraqi oil if it flows quickly.

"As long as we have a nice, friendly regime in Riyadh that is beholden to the United States, there shouldn't be any threat to oil prices or supplies," says Henry Schuler, director of the energy security program at the Center for Strategic and International Studies in Washington. "Nobody else matters."

That is seen as true even of the largest producer of oil in the world, the former Soviet Union. Its republics, chiefly Russia, produced 10.2 million barrels per day (bpd) last year. Mr. Freisen expects that to drop to a 9.2 million bpd rate by the end of 1992 and to 8.7 million bpd in 1993.

But as prices are moved up toward world market levels within Russia over the next few years, this will depress domestic consumption. So Russian exports of 1 million bpd to 1.5 million bpd will not be so hard hit.

"If the Russians can get their act together and make their investment policies attractive to foreign investors, they can stabilize production," says Freisen.

Oil output in the US will also drop from its level of about 7 million barrels per day as old fields dry up and are not replaced. That production barely met half of domestic demand of 16.5 million bpd last year, almost 3 percent lower than the year before.

"Nothing can stop our dependence on oil imports," says Freisen. "The energy strategy of the US, to the extent it exists, is to defend access to the reserves of the Middle East."

Mr. Knuettel expects US oil consumption to remain flat over the next few years. With rising environmental concerns, clean natural gas will be used for more energy needs. The auto fleet will become more efficient as new cars meet tougher gallons-per-mile requirements.

Freisen would like the US to impose higher gasoline taxes to reduce consumption and that level of dependence.

The political risks for oil prices are seen as lying in the Middle East. Saddam Hussein is still in power in Iraq. Iran is building up its weaponry. And the long-term stability of the kingdom in Saudi Arabia remains a question.

"I don't think the real interest of the kingdom is served by prices at less than the market can bear," says Schuler. "They are leaving money on the table."

By that he means today's world oil price, maintained by Saudi production restraint, is presently lower than necessary to prevent a surge in new non-OPEC oil production, a burst of greater efficiency in the use of oil, or massive substitution of other energy sources. Though Desert Storm saved Saudi Arabia from a possible Iraqi invasion, it also accelerated change in that kingdom. Schuler sees the possibility of the overthrow of the House of Saud at some point. "Change there will be," he warns.

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