That OPEC oil glut may well be vanishing soon

May 26, 1981

The Organization of Petroleum Exporting Countries has been blamed for almost everything that has gone wrong economically -- inflation, recession, low productivity, you name it.

So, when a glut of oil depressed prices in recent months, perhaps it was to be expected that the press in the United States gloated a little. "Turning Tables on OPEC," the headline in Newsweek read. "OPEC Feels the Squeeze," noted the head for a column in the Washington Post.

One odd aspect of this is that the oil glut has been deliberately created by a member of OPEC -- Saudi Arabia. If a deal is reached at the OPEC meeting now under way in Vienna, the Saudis could cut back dramatically their output from the current 10.3 million barrels daily. In other words, it may be rather early to crow.

Another point is that top OPEC economists and officials have long anticipated a reduction in their oil output.Indeed, for the sake of conservation of a depleting resource, many OPEC nationals would welcome such a decline if the price of oil could be maintained or increased.

One top OPEC official notes that production of the 13 OPEC nations has already declined from 32 million barrels daily in 1973 to 25 million barrels now. And he would not be surprised if it dropped to 12 million barrels a day by the year 2000.

Dr. Fadhil al-Chalabi, deputy secretary-general of OPEC, wrote in the winter 1979/spring 1980 issue of OPEC Review: "From the point of view of the world energy balances, OPEC is generally considered to be the 'residual' or swing energy supplier, ready to fill any deficit between the energy requirements and energy (including oil) supplies from non-OPEC sources. This is why OPEC's production shows such swings, up and down, in response to the variations of such deficits, both in terms of quantities and in timing. As a result, what exclusively determines OPEC production levels is the world demand for its oil, as reflected by lifters' decisions and policies on oil supplies, to meet not only consumption requirements but also the movements to stock buildup."

During 1979-80 there was something like a 6 percent decline in oil consumption.With the concern raised by the war between Iran and Iraq, however, oil companies, corporate consumers, or speculators raised their inventories dramatically. Other OPEC nations increased their production enough to cover the drop in Iran-Iraq production. But not enough to cover the inventory buildup.

Now that inventory buildup has come to an end. There is no incentive for private enterprise to store oil if its price will not increase in the near future. Moreover, oil from the North Sea, Mexico, and other non-OPEC fields began flowing into the market in heavier volume. If necessary, the new oil was offered at prices lower than that of OPEC's high-price producers to ensure market access.

The big question at the Vienna meeting of OPEC is whether the "upper tier" producers, those offering crude at $36 a barrel, will have to come down to the $ 32-a-barrel price of Saudi Arabia, or vice versa; whether the Saudis will raise their price to $36; or whether some compromise level will be decided on. The Saudis appear determined to see unified prices. It is politically embarrassing for them to sell their national heritage, their oil, at a bargain rate. They tried to equalize the price level awhile back, but the upper-tier countries just boosted their prices to restore the gap. The oil glut means that Saudi Arabia may now have the upper hand in determining prices.

In return for a unified price, the Saudis would presumably reduce their production enough to bring supply and demand into equilibrium. "This situation, " a top OPEC official said, "is not really alarming. The Saudis are in a position to lead."

A third point is that OPEC has really done the world a favor by making oil an expensive product. The price jumps produced by the cartel caused considerable economic discomfort, though much less than what the politicians claim. But they also prompted a search for conservation and energy alternatives that means there may be some oil left for future generations.

Despite President Reagan's campaign rhetoric about the abundance of oil, it is becoming an increasingly scarce natural resource. More and more feet of oil wells must be drilled each year to find the same amount of oil."The historical data do not suggest a promising future for US petroleum exploration," notes a 700-page report by the Rand Corporation, a research group based in Santa Monica, Calif. "It is likely that more than half of the conventional petroleum reserves that will ultimately be produced have been produced." The study adds that the petroleum industry is "running out of ideas" as to where domestic oil and gas may still be found. It warns that the US may continue producing domestic oil supplies at 1979 rates of production for only 20 to 40 years.

By then, nuclear power, solar power, shale oil, or other energy resources may come to the rescue in sufficient volume that the industrial world will stand a better chance of maintaining its high standard of living. Without OPEC and its price incentive for action, the US might have cruised along in its gas guzzlers until a real oil shortage developed. Then there would have been a dramatic, even worse price shock as the world struggled desperately to find alternative energy.

So, though a pause in price increases may be welcome for the moment, it would be best if oil remained an expensive product.