American energy analyst sees a sustained pickup in the price of OPEC oil
When key oil ministers who were gathered at Brioni, Yugoslavia, earlier this week began talking about pricing oil at $17 to $19 a barrel, it rather tickled economist Edward R. Fried. In an article in the summer issue of the Brookings Review, Mr. Fried assumed that the Organization of Petroleum Exporting Countries (OPEC) would manage to stabilize the price at $18 a barrel and keep it there until 1990, adjusted for inflation. Despite the failure of the OPEC ministers to agree on national production quotas this time, he still regards his $18 price as a reasonable assumption -- although the price on oil markets sank toward $10 a barrel after the OPEC meeting ended.
``They will meet and meet again and meet again,'' Fried said in a telephone interview. He figures that before the end of '86, self-interest will compel them to reach an agreement.
The OPEC ministers plan to get together July 28 for another attempt to specify both a ceiling on collective output and individual quotas. They will be taking back to their governments detailed recommendations on quotas drawn up by Indonesia's oil minister, Dr. Subroto.
Fried believes the drop in oil prices from $28 last year to around $14 now is ``a positive but not a risk-free economic development.'' Here's how Mr. Fried, a former White House adviser on international energy, explains that viewpoint:
At $18, the real price of oil (taking inflation into account) would be down one-third from the 1985 level. It would wipe out the price increases of 1979-81 and part of the first oil shock. Nonetheless, the real price of oil would be about three times the level of 1972, the year before OPEC quadrupled the price of oil.
This $18 price would boost oil use around the world, and reduce fuel substitution and conservation. The effects, the Brookings senior fellow says, would be modest at first, but would increase with accumulating force.
``In a world economy growing at 3 percent a year, oil consumption might increase annually at an average of 2 percent, or by 5 million barrels a day by 1990,'' Fried predicts.
The demand for OPEC oil (including natural gas liquids) would increase from 17 million b.p.d. in 1985 to perhaps 22 million to 24 million b.p.d. in 1990.
``That would be enough to relieve most of the pressure within the cartel while still leaving Saudi Arabia and its Gulf allies in the driver's seat,'' he speculates. ``Iran and Iraq each could increase production by at least half when their war finally comes to an end; those countries under severe financial pressure could produce near capacity; the others could divide modest increases in exports among themselves.''
Fried estimates the world's surplus capacity to produce oil would still be large in 1990: some 6 million to 8 million b.p.d., most concentrated in the Gulf.
``If events follow these projections,'' he says, ``Saudi Arabia, while still proceeding cautiously, likely would permit moderate increases in real prices toward the end of the decade.''
Beyond 1990, Fried expects further tightening of the oil market, depending on the price path OPEC chooses, its effect on restraining consumption, and how rapidly exploration and development expenditures in OPEC countries recover.
Noting the severe turmoil in the oil industry today, he speculates that the supply of non-OPEC oil in the early 1990s might be down by 2 million to 3 million b.p.d. from what it would have been on the basis of price expectations prevailing last year.
A ``plausible guess,'' he says, is that by the mid-1990s the real price of oil will have recovered to the 1985 level ($28 in 1985 dollars) and the demand for OPEC oil will have increased to between 26 million and 28 million b.p.d.
That outcome assumes no substantial interruption of supply from the Middle East.
What all this means is that today's relatively cheap oil is a short-lived phenomenon. The economic benefits of the price collapse, such as lower inflation and faster growth, will be reversed.
If that price reversal is gradual, however, as Fried forecasts, it should pose ``few problems.'' On average, it would shrink the growth in gross national product of all oil-importing countries by less than one-tenth of 1 percent a year, he calculates.
One problem -- security of supply -- could worsen. The depression of non-OPEC oil production and a reduction in OPEC surplus capacity to as little as 3 million to 5 million barrels a day in the 1990s will ``increase vulnerability to a sudden interruption of oil supplies from the Middle East.''
Fried figures the Arab countries today have a more realistic view of the limitations of using oil as a political instrument, having failed to deprive the United States of oil in 1973.
Nonetheless, he worries about the severe damage to the world economy that could result from an interruption of Persian Gulf exports during the 1990s. So he advocates a further increase in emergency oil stocks and strengthening of the international machinery for cooperating in oil emergencies.
The US, he says, should seek agreement in the International Energy Agency to raise emergency stocks by 50 percent over the next three years. For the US, this would mean restoration of the Strategic Petroleum Reserve objective to 750 million barrels. The US administration now plans to stop at 500 million barrels. Other industrial nations should make comparable boosts in stocks.
Financing the additional reserves could be facilitated through imposition of a special oil import tax of 50 cents a barrel for three years by all the industrial importing countries, Fried suggests.