A striking collapse in the price of oil ushered in the year 1986. Prices which had ranged to $28 a barrel in the preceding autumn were down to below $15 by February. Even if prices stabilize around $20, that will be a spectacular change with many ramifications for the United States, the world's largest oil consumer and second largest producer. For countries like Japan, which import all their oil, the effects of the price decline are clearly positive. For Middle East producers and the Organization of Petroleum Exporting Countries (OPEC) generally, the impact threatens their economic viability and even the stability of their governments.
The decade of the seventies was quite different, punctuated by two major price. Between 1971 and 1973, as OPEC took over oil concessions and gained power over the decisions of how much oil to produce, the price doubled, up to about $3 a barrel. But following the so-called Arab oil embargo in October 1973 the price shot up suddenly to $12-the "correct" level, considering the restraints on production put into place mainly by Arabian oil producers. The embargo never succeeded in keeping oil away from its intended targets, the United States and the Netherlands, but it created a panic on the oil market as buyers bid up price expecting an oil shortage.
The second "oil crisis" struck after the fall of the Shah of Iran in late 1978. By 1980, the price had tripled to about $36 as buyers around the world grabbed for the available oil to fill their stockpiles. But hoarding has its limits, and in the normal course of events this price should have returned to its "correct" level of $12 as the accumulated inventories were sold off creating excess supply.
The Descent
But OPEC overreached itself. Probably through a combination of greed and ignorance, Arabian producers convinced themselves that oil prices should continue to rise. Saudi Arabia started to cut its oil output to keep the price high. They succeeded-for a while and at great cost. By March 1983, it should have been evident to all that the high price was causing a real decline in the demand for oil for by consumers around the world. OPEC reduced its price to $29, and Saudi Arabia reduced its oil output even further.
To no avail. The consumers had won the battle, by practicing conservation. The high price of oil encouraged not only greater efficiency in oil use, especially in cars, but also fuel switching. Coal, gas, and especially nuclear energy, were installed to 'back out" fuel out in boilers used to make heat and steam. In the United States alone, oil use of electricity generation fell by 70%, as nuclear plants came on line--even though no new plants were being ordered. In other countries, France, Japan, Republic of China (Taiwan), and South Korea, nuclear energy grew at spectacular rates.
In the meantime, Saudi Arabia's situation had become untenable. Other OPEC members were not willing to match the Saudi reduction in oil output. Non-OPEC producers, principally Norway, Britain, and Mexico, actually increased production and took advantage of the higher price that the Saudis had created. But Saudi income, by 1985, had dipped to nearly one-tenth of its 1980-81 peak, with Saudi oil production down to one-fifth of its peak and the real price of oil (measured in deflated dollars) down by one-half. The Saudis were running a $20 billion deficit,
...
Read Full Article
|
