No end in sight to world's oil glut

The United States didn't take out the bulk of Iraqi oil production during its bombing raids last week.

And for American consumers, that was a good thing.

Limited by United Nations sanctions, Iraq's oil sales on world markets have averaged about 2 million barrels per day (b.p.d.), a bit less than 3 percent of the world's daily supply of about 74 million barrels.

If Iraq's oil production goes up in flames, that would eliminate an oversupply estimated by analysts at 1.5 million b.p.d.

Oil prices would go up.

It is declining gasoline and fuel oil prices that have helped keep inflation low in the US. Consumer prices rose a mere 0.2 percent in November, and only 1.5 percent since Nov. 1997.

But a price hike would delight OPEC and other oil producers, hit hard by low prices.

Merely the fear of trouble in the Gulf sent prices soaring last week. Oil traders saw the withdrawal of United Nations weapons inspectors from Iraq as a signal that President Clinton would bomb Baghdad for failure to cooperate with the inspectors.

They were right.

In London, the price of crude jumped 87 cents last Wednesday to $11.10 a barrel. It had dipped to just $9.60 the previous week.

But on Thursday, prices in London slipped back again. Iraqi facilities at the Gulf port of Mina al-Bakr were still loading a ship with some of the crude exports allowed under the UN's humanitarian program.

Oil prices are nearly half what they were a year ago. As a result, oil producers worldwide could see a $2 trillion loss in revenues.

For oil economist Thomas Stauffer, the Saudis are a "puzzling" element in this equation. Why, he asks, haven't they moved to boost oil prices?

Saudi Arabia produces a huge 8 million b.p.d., and has the capacity to produce even more.

Just back from a trip to the Middle East, including Saudi Arabia, Mr. Stauffer was unable to find out why Saudi leaders decided against taking the steps they did in 1986 to restore oil prices.

Then, Saudi Arabia flooded the world market with oil. Prices sagged, forcing fellow OPEC members to agree on lower production levels that promptly raised prices again.

At a meeting of the Organization of Arab Petroleum Exporting Countries in Cairo several days ago, Lybian leader Col. Muammar Qaddafi suggested a solution for OPEC: Just shut down oil shipments. After oil inventories are chewed up and prices are up again, it would resume shipping.

"It would work," says Stauffer. By his rough calculation, oil producers would be ahead financially in about four weeks.

Such action would prompt a political storm in the world. It certainly did with the oil embargo in 1973-74. That lengthy previous action also brought a deep US recession.

Conversely, if OPEC were to lift all limits on production, the price for crude might drop as low as $5 a barrel, surmises economist Morris Adelman.

For now, oil producers keep limiting their crude output by cartel-like action to sustain the price at a higher level.

Oil ministers from three major producing nations, Saudi Arabia, Venezuela, and non-OPEC Mexico, met in Madrid last Thursday to see if they could hammer out sufficient supply cuts to force the price higher.

It wasn't easy going. New cuts were discussed, but no concrete actions were taken.

"There is too much oil in the world," says Mr. Adelman, an oil expert at the Massachusetts Institute of Technology, Cambridge.

Yet US actions toward Iraq could do for oil prices what the oil ministers couldn't.

During his travels, Stauffer found considerable sympathy for Iraq in Yemen, the Gulf states, and even in Saudi Arabia. It is to a considerable extent a humanitarian feeling for their fellow Arabs suffering from the embargo on Iraq.

He also heard often the charge that the US will enforce UN resolutions against Iraq, but not those involving Israel.

At a demonstration Thursday in Amman, Jordan, a placard read: "Quick attack on Iraq, but 50 years of no censure on Israel."

Today about 25 percent of world oil supplies come from the Gulf. The US imports some 55 percent of its daily oil demand.

So Desert Fox is not without risk for the US economy.

Oil economist Thomas Stauffer is puzzled by the Saudis. Why haven't they moved to raise oil prices?