Can good thing go too far? US seeks stable oil

Prices fall, motorists smile . . . but political and economic tensions mount. Until this week, the White House painted lower oil prices as almost universally beneficial to the United States. They dampen inflation, fuel economic growth, and even help the foreign trade and federal budget deficits.

But the Reagan administration is now worried about the damage cheap oil is doing to the domestic oil industry, banks, and to overall US energy security.

The Reagan administration ``is giving a clear signal to oil markets that it doesn't want prices to go down any more,'' says Allen Sinai, chief economist with Shearson Lehman Brothers in New York. ``The negative impact on Texas, Louisiana, Oklahoma, and the oil companies is frightening the Reagan administration politically.''

Vice-President George Bush, who arrives in Saudi Arabia Saturday, says he will express US concern. Mr. Bush (who profited in the oil industry as a businessman in Houston and has his eye on the '88 presidential race) says he is not going to talk about fixing prices but will tell the Saudis that ``stability in the market is a very important thing.''

So is regional political stability, says G. Henry M. Schuler at Georgetown University's Center for Strategic and International Studies. Mr. Schuler says the Saudi production strategy has riled Iran, intensified tensions in Egypt, Sudan, and North Yemen, and could be dangerous internally for the kingdom.

``The Saudis have to worry about how this is being played,'' says Schuler. ``They thought that [production of] 4.3 million barrels per day would solve all their problems, but at current prices they get less revenue now and the strategy doesn't work. The Saudis have to do something else.''

The Bush visit appeared to be helping push up prices on oil markets Wednesday. In early trading in New York, west Texas intermediate crude for May delivery rose to $11.60, continuing a recovery from an eight-year low of $9.75 early Tuesday. Prices were higher in Europe as well.

The oil market is highly prone to influence, says Dr. Sinai, and ``all it takes is the Bush announcement -- this is the event that the market was ready for.''

But if Bush is simply ``jawboning'' the Saudis into working toward more stable prices, that is not likely to affect oil markets for long, says Bijan Mossavar-Rahmani, director of the oil and gas division at Temple, Barker & Sloan, a Boston consulting firm.

Eventually, the downward motion could resume, Mr. Mossavar-Rahmani says, especially if the planned reconvening of the Organization of Petroleum Exporting Countries (OPEC) meeting April 15 is delayed -- or if it fizzles like previous ones.

In discussing price stability, the United States echoes Japan, which has been lobbying to put the energy topic on the agenda of the May 4 summit of industrialized nations in Tokyo. Japanese envoys have told OPEC members that they are willing to cooperate on a ``floor price'' for oil.

Britain and Norway, which have seen the value of their North Sea oil plummet, have a stake in more stable prices, too. As early as February, Norway indicated willingness to cooperate with OPEC. Britain held out while the price of North Sea Brent crude was in the teens. But at around $10 a barrel, much more British production becomes uneconomical.

In recent days, the risks of lower oil prices have become more evident in the US economy:

Major oil companies are announcing layoffs and cuts in exploration and capital investment.

The governors of hard-hit states like Texas and Louisiana are complaining about swelling unemployment rolls.

Banking regulators are increasingly concerned about banks that are heavily committed to the domestic energy sector and to oil-exporting nations such as Mexico. Some Texas banks have had to increase loan-loss reserves in the event of future bankruptcies among borrowers.

And at extremely cheap prices, domestic oil wells get shut down more rapidly, thereby reducing US output and necessitating more imports. Many of these imports are coming from the Middle East -- in particular Saudi Arabia -- which again raises concern about US vulnerability to a future oil embargo.

Lower oil prices under newer,``netback'' contract arrangements have moved the Saudis up to No. 3 (behind Canada and Mexico) in the ranks of import sources for the US.

Nevertheless, the benefits of lower oil prices still outweigh the costs to the US, West Germany, and other key oil importers, says economist Sinai -- even at $10 a barrel.

You've read  of  free articles. Subscribe to continue.
QR Code to Can good thing go too far? US seeks stable oil
Read this article in
QR Code to Subscription page
Start your subscription today