Falling oil prices help US but hinder some in third world
Boston — Oil prices are weak. That bodes well for a world still trying to get back on its feet following the recession of the early 1980s. The price of oil has actually been falling on the ''spot,'' or free, market: A barrel of ''Saudi light'' fetched $26.85 early this week, compared with almost
This is putting pressure on the Organization of Petroleum Exporting Countries (OPEC). A Soviet price cut has added to the pressure.
Even so, most oil analysts don't expect an OPEC price cut - at least not right away. That would be politically dangerous for Saudi Arabia. In fact, it is possible the Saudis, currently producing an estimated 5.5 million barrels a day, will take up some of the slack by tightening their taps.
''We've been figuring for some time that it is about 50-50 that the price will drop by $4 a barrel,'' says Fred Leuffer with New York's Cyrus J. Lawrence Inc., a securities firm respected for its oil analysis. ''That can look better or worse on a day-to-day basis. But there is still a way out - and that is for Saudi Arabia to drop its production.''
Even if OPEC rides out the pressure to cut its benchmark price, it is still significant that despite a booming United States economy, OPEC prices are not about to increase.
Moreover, on the spot market - where oil is bought and sold for immediate delivery and not on the long-term contracts that OPEC countries employ - prices could fall further. The spot market now makes up a hefty 20 to 40 percent of world oil trade.
Those lower oil prices mean lower gasoline prices at the pumps for US consumers. Already gas is down an average 2 cents a gallon at a time when prices usually creep up due to summer driving. Lower oil prices also mean cheaper energy and transportation costs for business. That's good news for the airlines, for trucking, and for petrochemical refining. Continued low energy costs also help keep inflation under control. And the prospect of lower inflation over the long term could cause interest rates to ease.
But if weak oil prices are good news in the West, there are qualms also - especially when one considers the global economy.
Many of the same nations that are heavily in debt to US banks also rely on sales of oil to service those debts. Mexico, Nigeria, Egypt, Venezuela, Algeria, and Indonesia would be among countries adversely affected by an oil price drop, since that is their ''cash crop.'' Mario Ramon Beteta, director of Petroleos Mexicanos, noted last week that ''for producers like Mexico, the costs of surprise reductions in oil revenues are very high.''
But Argentina, Brazil, South Korea, and other debtors would be helped, because they import oil. Mr. Leuffer of Cyrus Lawrence figures that the ''benefits outnumber who it hurts'' among less developed countries. He also notes that the reaction of financial markets to news that oil prices are weak has been bullish, indicating a view by investors that lower energy costs will help the economic recovery continue.
Ironically, a booming US recovery should be consuming more and more oil. Such has not been the case. While oil use has edged up, it has not resumed the voraciousness of the 1970s.
That leaves the world awash in oil and oil producers competing to sell their product. Discipline within the OPEC cartel has been ignored: Members are producing an estimated million barrels per day above their self-imposed production limit of 17.5 million.
The heating up of the Iran-Iraq war earlier this summer also had the unintended effect of contributing to competitiveness within OPEC. The anxiety about the war prompted Saudi Arabia to pump more oil than usual and store it aboard tankers at sea. Other oil-producing nations outside the Persian Gulf - and outside of the cartel - increased production in an attempt to take over part of the market for Iranian crude.
But the Gulf war, as it has for almost four years now, remains viciously inconclusive. Iranian crude is making it to market, despite the hostilities around the country's key oil terminal at Kharg Island - and is doing so at a discount to encourage oil tankers to hazard a trip to the Gulf war zone.
Last week, the Soviet Union added to the pressure on prices by offering a temporary $1.50-a-barrel discount to attract buyers. An immediate price war was averted, however, by Egypt's decision this week to hold to its current price. (The oil it sells is similar in grade to that discounted by the USSR.) That took some of the pressure off Britain, Nigeria, and OPEC to bring their prices down.
The next move seems to be Saudi Arabia's.
''What happens now all depends on the Saudis,'' says G. Henry M. Schuler, a Mideast-energy specialist with the Georgetown Center for Strategic and International Studies in Washington. ''If Saudi Arabia, Kuwait, and the United Arab Emirates continue to produce at high levels, then there is a real threat to oil prices.''
Mr. Schuler says that if the Saudis decrease their production by 1 million barrels a day, the glut will ease. In his view, it would be politically dangerous for the Saudis not to cut back their production, because they are the swing producer for OPEC and have promised to defend the $29-a-barrel benchmark.
The Saudis, Schuler contends, ''deliberately engineered the price cut 18 months ago (when the benchmark was lowered from $34 to $29) and said they would make it stick,'' and ''if they are perceived to have undercut their own pledge to maintain the price, they will come under both external pressure and domestic political pressure.''