Oil-price drop causing profound changes in world. Tide of petrodollars that washed over oil-producing nations in `70s is ebbing
London — Take a barrel of crude oil. Slash the price. This is some of what happens: Signboards outside gas stations during a blustery winter in Britain advertise lower and lower prices each day. Motorists are delighted. But a British income tax cut is being scrapped as a result, and the government is having to put on a brave face in the light of falling oil income.
In West Germany, gas prices are down 10 percent in the past three weeks -- ``very good for us,'' says a taxi driver in Frankfurt.
German economists, normally a cautious lot, are uniformly optimistic.
``It's similar to a warm Gulf Stream for the industrial countries,'' says Dr. Rudiger von Rosen, spokesman for the Deutsche Bundesbank, the West Germany's central bank.
In the United States, Europe, and Japan, stock market prices have soared, reflecting a huge bet by thousands of investors that business will boom, inflation fall, and interest rates ease -- partially because of lower oil prices.
But in Mexico and a host of other oil-producing countries, where oil prices are being slashed weekly, economic stability is a growing worry. Bankers who have lent to these countries are also beginning to be concerned about whether or not they will be able to service their debts.
These are just some of the first signs of a profound change taking place in world economics and politics. It is essentially the reverse of what happened in the 1970s, when wealth flowed out of industrial nations and into oil-producing countries.
Petrodollars move as tidal forces, and, as in the '70s, they are moving quickly, causing the kind of international distortions that economists call ``volatility.'' This, diplomats worry, could precipitate rash action by nations that increasingly are becoming desperate losers in the economic race.
The quick turnabout in oil power is straining the international banking system, altering political relations, and causing some economies to boom while others go bust. It's been less than three months since oil was trading at upwards of $30 a barrel. Today it's around $17 and may go lower. How did this happen?
``OPEC [the Organization of Petroleum Exporting Countries] dug its own grave by keeping prices very high,'' says Dr. Paul Frankel, head of the Petroleum Economics research group in London.
He and a dozen other economists and oil experts interviewed in the past week agree that eventually oil prices will rise again: The world has not yet weaned itself from oil. A finite and diminishing resource, oil powers everything from Fords and Toyotas to tanks and jets.
But the consensus is that, barring a war or other calamity, oil prices will remain low at least until the end of the decade, and any rise thereafter will be slow. There is simply too much oil available.
Meanwhile, here's a fairly middle-of-the-road view of what happens, as a result of lower oil prices, for the rest of the 1980s:
Western Europe and Japan boom. They are the biggest beneficiaries of this new economic order. Britain doesn't do as well relatively, since it loses North Sea oil revenue. However, British government economists point out, industry and consumers should enjoy the cheaper energy prices. Norway will also suffer severely from loss in oil revenues. In West Germany, economists are calling 1986 ``the year of the consumer.''
North America has winners and losers. Certainly the United States does well, since its bill for oil imports falls. But within the US, Texas and Oklahoma experience financial problems. Yesterday, spot prices for the US benchmark crude oil, West Texas Intermediate, dropped below $15 a barrel. Big US banks worry about the ability of Mexico to service its debt. Mexico faces especially tough times economically. It needs direct US aid and may still have to declare a loan payment moratorium. Canada's oil and gas industry will also suffer.
Among oil producers, Saudi Arabia and Kuwait, OPEC's the most powerful members, do better financially despite lower oil prices since they are selling more oil. Iran, Libya, Iraq, Nigeria, and a number of non-OPEC oil producers do much worse, however. Diplomats worry that this could cause some of the more hawkish oil countries like Libya and Iran to pressure Saudi Arabia -- by threats or by subversion -- to tighten the tap again.
The Soviet Union loses vital foreign exchange as a result of falling oil prices and finds its ties with Eastern European allies strained, since they receive oil from the Soviets. Deteriorating economic conditions could force drastic Soviet action, either of the hawkish or dovish variety. The Soviets may need loans and may need to slow weapons manufacture. Or, they may seek to crimp Saudi oil supplies somehow and thus drive up prices again.
Is this a temporary phenomenon, or are lower oil prices here to stay? They probably will stay until the 1990s, energy experts agree.
``The change in OPEC's strategy . . . is the result of a process that cannot be reversed in the short run,'' said OPEC's acting Secretary General Fadhil J. Al-Chalabi in a recent interview in the Petroleum Review, an industry journal. The aim, he said, is to boost oil demand, shut down some non-OPEC suppliers, and otherwise prompt ``very fast depletion of non-OPEC oil reserves'' so that OPEC again dominates the oil supply business.
Oil market watchers say lower prices are locked into the system now by a series of new ``netback'' contracts that Saudi Arabia, Kuwait, and other oil producers have signed with customers. These guarantee refiners a certain margin of profit and ensure producers a market.
One veteran oil expert here notes that it was the signing of these netback deals beginning last fall that really precipitated the drop in prices. In December, when OPEC ministers announced their intention to go after a ``fair share'' of the market, they were only articulating a policy that had already been embarked upon.
``The netbacks are here to stay,'' this analyst says. In her view, lower prices are not an overnight whim but are programmed into oil deals. ``Each side likes them.''
A recently concluded fighter-bomber deal between Britain and Saudi Arabia -- which includes a huge oil barter arrangement under netback conditions -- is the biggest manifestation of this trend.
And the oil glut, big as it is, is likely to increase in the next few months. Seasonal demand for oil slackens during March in the northern hemisphere. With most oil trading for about $17 a barrel today, prices could slip toward $10 a barrel, analysts in London and the US say.
Although no one knows where an equilibrium will be found, most experts do not expect a drop below $10 a barrel; a year from now, they say, oil should be trading in the $10 to $15 range.
This is because cheaper oil from places like Saudi Arabia will begin ``backing out'' more expensive-to-produce oil. Costly ``stripper wells'' in Texas and Oklahoma are already uneconomical at less than $25 a gallon. Some North Sea oil, too, becomes uneconomical at $15 a gallon, although most can keep going strong even if prices dip below $10, say British oil company officials.
Oil conservation in Europe, North America, and Japan is likely to wane, too, but not very much or very fast. With lower gas prices, US consumers may splurge on driving vacations, heating, and air conditioning. Manufacturers may use more energy.
Even so, experts such as Robert Mabro of the Oxford Center for Energy Studies see demand for oil increasing only marginally, not enough to sop up the glut very soon.
But it will not always be so. Dr. Frankel of Petroleum Economics expects oil exploration investment to decline. He also says ``fundamental changes in oil consumption might take place in a shorter period than one thinks.''
A British oil executive in London says, however, that this is two or three years down the road. And for now, his company is committed to some exploration and production in the North Sea and Alaska.
For the West, then, the next few years should be years of plenty, with low inflation and high economic growth. But, eventually OPEC should be in control of world oil supplies again. Saudi Arabia in particular will be producing oil well after other producers have run dry.
Still, given the current problems they've gotten themselves in, OPEC members probably will be more prudent in raising prices in the future.
``The pendulum has swung back,'' says economist Ulrich Ramm of Commerzbank in Frankfurt. ``But oil will remain a rare raw material. There will be lower prices, but we shouldn't stop saving energy or searching for alternative energies.''
First of a three-part series. Next: The Saudi ``rogue elephant.''