OPEC pact indicates that oil industry can come out of its tailspin
After last winter's excitement over free-falling oil prices, the latest OPEC session in Geneva mostly elicited yawns in the Western press. Oil is selling for about $15 a barrel, and no one expects it to climb past $20 anytime soon. Last year at this time, it fetched nearly $30 a barrel.
``It certainly wasn't any epochal event,'' comments Stephen A. Smith, an energy analyst at Data Resources Inc. in Lexington, Mass, ``but two times now they have shown that despite bitter differences they have enough respect for what they accomplished in August [when they arrived at a production agreement] to keep things together.''
What the ministers of the Organization of Petroleum Exporting Countries accomplished in Geneva was important for three reasons:
They renewed their self-imposed quotas, although they agreed to allow a small increase to Kuwait. For the most part, rampant price and production cheating -- the bane of OPEC's existence since the decade began -- has been kept under control.
Their actions helped stabilize the price of oil in the mid to upper teens; it had slipped toward $8 a barrel last summer. The agreement on extending the OPEC production accord through the end of the year indicates common ground was found in an organization characterized by deep fissures, notably those between Iran and the Gulf Arab bloc.
They indirectly made a number of non-OPEC oil producers party to their price fixing, thus increasing the likelihood that oil prices will hold in the $18-to-$20 range that OPEC desires. The Soviet Union, Egypt, Mexico, Brunei, Malaysia, Norway, and Oman have all said they will cut oil exports or otherwise support OPEC.
Oil users in Europe, the Americas, and Asia are no doubt happy to hear that nothing so drastic as an immediate price rise is in store. With oil prices 50 percent lower than they were a year ago and oil inventories at high levels, gasoline and home heating costs will be moderate this winter.
Around the world, oil exporters were in desperate straits when prices were plummeting. The steep drop has not been erased, but, barring a collapse of the OPEC agreement, an equilibrium does seem to have been reached.
In Latin America, for instance, Brazil, Argentina, Chile, and Colombia benefit from the lower oil prices. Mexico and Venezuela, the major oil exporters, don't fare very well, but they obviously hurt less with oil at $15 to $20 a barrel than when oil hovered at $8 to $10. In Africa, Asia, Europe, and North America, the story is much the same.
Lenders and governments worldwide are relieved, moreover, to see a return of oil price stability and a consequent amelioration of credit and banking problems in areas such as the Southwestern United States and Latin America.
But the agreement is temporary and fragile. A December OPEC meeting will try again to set permanent quotas. Saudi Arabia and Kuwait have indicated they will walk away and boost output if cheating persists.
And the problems are not over for the oil industry, says Jack Wolfman, senior economist with Merrill Lynch Economics Inc. ``There are still loans that haven't been written off. You'd have to see oil closer to $20 a barrel to see sufficient easing.''
A study of the oil industry by Arthur Andersen & Co., the international accounting firm, notes that ``realistic appraisal of the industry provides no evidence that another `boom' is likely to recur in the near future.'' The oil industry, says the study, ``is not simply in a down cycle. Its essence has been markedly and permanently altered.''
Dr. Wolfman expects oil prices to remain about $15 a barrel this year and next. This will increase consumption, he says, cut production, slash exploration and development, and dramatically boost imports. Eventually, this will mean higher prices.
He says total capital spending on energy projects will fall 20 percent this year and 6 percent more in 1987. At present, there are about 800 active oil drilling projects in the US, Wolfman notes. Back in December of 1981 there were 4,530. Each rig, he says, accounts for 50 employees.
The slump is deep. The latest OPEC agreement helps. But it must hold together for months -- perhaps years -- to bring about a resurgence in the oil industry. And Saudi Arabia and Kuwait don't necessarily want that.