The price of oil

  • 2000-09-14
  • Gwynne Dyer
Last March, shortly after the oil price first soared through $30 a barrel, Sheikh Ahmed Zaki Yamani said: "OPEC (the Organisation of Petroleum-Exporting Countries) has a very short memory...It forces the price to go way up. The effect is much more production in non-OPEC countries, which means that OPEC will find itself in a few years from now in a situation where it has to further reduce its price, its production."

Yamani was Saudi oil minister (and a prominent hate figure in the West) during the 1973 oil crisis, when OPEC forced the quintupling of the oil price in a relatively short time and threw the world into a deep recession. The eleven oil ministers at the OPEC summit in Vienna on Sept.10 clearly understood his point, because they agreed to raise production a bit to ease the rising price.

The problem is that when oil prices are high, it becomes economically rewarding to develop new high-cost oilfields in non-OPEC countries. After a few years, therefore, global production soars, OPEC's share of it sinks, and the price collapses again. The market for oil is so sensitive to gluts and shortfalls - world supply is currently around 75 million barrels per day, but a change of just 2.25 million b/d can halve or double the price - that we've been around this cycle three times since 1973.

OPEC doesn't want to go around it again any more than the rest of us do, which is why its ministers have just agreed to increase output by another 800,000 b/d. The price duly retreated from its ten-year high of $35 - but only by about a dollar. And Yamani, who now runs an independent think-tank in London, was not impressed.

"OPEC...will pay a heavy price for not acting in 1999 to control oil prices," he said on Sept. 5. "Now it is too late. The Stone Age came to an end, but not for lack of stones. And the Oil Age will end, but not for lack of oil."

To be fair to Yamani's struggling successors, trying to micro-manage the level of oil prices by fine-tuning output levels is a thankless and almost impossible task. Consider the last ten years, for example.

The day before the Western-Arab coalition began bombing Iraq in January, 1990, the price of oil stood at over $40 a barrel. As Kuwaiti production gradually reentered the market, the price drifted down to the $20-25 range for some years and then fell off a cliff when the Asian financial crisis of 1997-98 cut the demand for oil in Asia, by far the biggest importer. (The Asia-Pacific region produces only 8 million barrels a day, but consumes around 21 million.)

By January, 1999, the oil price was below $10 a barrel. Allowing for inflation, that was half the real price of oil in the 1950s, and one-fifth of what it had been at the start of the 80s. So the desperate OPEC countries, galvanized by the charismatic leadership of the new Venezuelan president Hugo Chavez, managed to agree on production cuts and (more unusually) to keep to them. Eighteen months later, the price is back over $30, and maybe heading for $40 or beyond.

These wild fluctuations in THE key industrial input have typically caused big surges of inflation followed by painful recessions, but at least OPEC's leaders now understand the cycle very well, and are trying to damp it down. That's why they have raised production several times this year. But the market behaves in ways that make it very hard to stabilise oil prices in the $20-$30 per barrel range.

Some of the biggest producers are so dependent on oil income that they find it hard to observe production discipline for long. Even Saudi Arabia's per capita income has halved since 1980 (due to huge population growth), but even now its people are comfortable by world standards. For a poor country like Venezuela, however, each $1 drop in the price of oil means $1 billion less income a year.

The temptation for some exporters to push prices higher, even if it risks kicking the world into another swing around the familiar cycle, is almost irresistible. "We understand that (the consumers) start to feel uneasy when crude oil prices reach $30 a barrel," President Hugo Chavez said recently. "But they can imagine how it must have felt for us when it fell to $8."

The customers also behave in ways that make the price fluctuations greater. Apart from outright manipulation of the market by ruthless speculators (which has played a significant part in the current price surge), Western consumers and their governments generally display a grasshopper mentality about oil supplies.

As soon as the last bout of high prices and recession fades far enough into the past (about five years), everybody starts to act as if it could never happen again. Oil companies cut back on the search for more expensive non-OPEC oil because the immediate returns are too low when the price is down, and the effort to reduce oil consumption dwindles away. This year, for example, Americans actually bought more gas-guzzling trucks and sports utility vehicles than cars.

So we may be heading into one more swing around the familiar old cycle of soaring prices, inflation, recession, falling demand for oil, and price crash. But if so, it will probably be the last, because on one thing Yamani is wrong. The Oil Age WILL finally end for lack of oil, well within the lifespan of most people who are now alive. o

Gwynne Dyer is a London-based independent journalist whose articles are published in 45 countries.