Plunging Petroleum Prices

By Christopher Byron

The recession brings added relief from the high cost of crude

After years of heading mainly up and up, the price of oil has lately been heading down and down. Conservation and the weakening world economy have created a continuing supply glut, forcing major oil producers to lop dollars off their prices in order to attract buyers.

The downward pressure is apparent on the spot market, where relatively small quantities of oil are traded on a day-to-day basis. The cost of crude in these sales has often been the most sensitive barometer for world oil prices. During 1979 and 1980 leaping spot market prices encouraged oil exporters to begin raising their long-term contract prices to levels that eventually reached $40 per bbl. With demand now ebbing, more and more companies have been dumping their excess crude and petroleum products on the spot market. By last week spot prices had slipped to a low of $30.75. A market expert with one of the top multinational oil companies points out that even the Soviets, who have long been major exporters to East bloc nations, are dumping oil on the spot market. Some of the Soviet Union's supplies are coming from Libya, which has been selling the oil to Moscow in return for Soviet arms. But, says the source, the Soviets now have more crude on hand than they can sell, and so they are turning to the spot market to unload it.

The sagging spot market has also begun forcing the producers to cut their long-term prices. During the past year the average price charged by the 13 members of the Organization of Petroleum Exporting Countries has dropped 2.9%, to $33.80 per bbl. Last week the state-owned British National Oil Corp. (BNOC) startled the petroleum industry by knocking $1.50 off its quoted price. Britain is not a member of OPEC, but BNOC competes directly with the state-owned oil companies of Libya, Algeria and Nigeria. Oil traders now expect those nations also to shave prices.

Meanwhile, Iran, which is having trouble selling enough of its 600,000 bbl. in daily exports to pay for its war of attrition with Iraq, last week announced plans to cut $1 off its quoted price of approximately $33.20 per bbl., thereby threatening to spread price cutting to the Persian Gulf. OPEC's president, Sheik Mani Said al-Oteiba of the United Arab Emirates, last week indicated that further price reductions might force the organization to institute some cuts in output in order to firm up prices. But OPEC has never in its history been able to agree upon a program to curtail production by all members.

Only one OPEC supplier, Saudi Arabia, which is currently exporting about 7.5 million to 8 million bbl. a day, could cut back production sharply enough to tighten the world market without doing grave damage to its own internal economy. Though Saudi Petroleum Minister Sheik Ahmed Zaki Yamani has been purposefully vague about his country's plans, reports out of the Persian Guff banking center of Bahrain last week suggested that the desert kingdom may be preparing to trim production at least somewhat this spring.

The influence that OPEC and Saudi Arabia have on the world oil market, however, is much less than it was just a few years ago. Those producers are now responsible for less than half of the Western world's oil supply. In 1973, when the first oil shock began, OPEC provided more than 70% of the crude used in the industrialized nations. In the past decade, such countries as Mexico and Britain, which are not OPEC members, although they generally follow its pricing closely, have become major oil producers. That has decreased the ability of OPEC to dictate the world price of crude.

Over the short term, the drop in oil prices promises further progress in the U.S.'s fight against inflation. Consumers no longer have to contend with ceaselessly skyrocketing costs for gasoline, which over the past year have leveled off at about $1.22 per gal. for leaded regular, or heating oil, which is now selling on average for about $1.23 per gal. on the East Coast. Moreover, lower crude prices hold down the cost of the thousands of consumer and industrial products made from plastics and other petrochemical products.

On the other hand, the weakening market means that oilmen will be less willing to invest the millions, and sometimes even billions, of dollars needed to explore for new sources of crude. That, in turn, could lead to a renewed supply squeeze in two or three years. Energy Analyst Constantine Fliakos, of the Merrill Lynch investment brokerage firm, warns: "There is really no doubt that demand eventually will bounce back; the question is simply when."

American drilling activity has already leveled off in the Williston Basin of Montana and the Dakotas and the Austin Chalk of central south Texas. Chesley Pruett, a drilling contractor operating out of El Dorado, Ark., said recently, "Last year at this time I had my rigs booked up six months in advance. Now the work is coming in well by well."

Experts also fear that a leveling of oil prices could lead to complacency about the worldwide energy situation. Says James Tanner, editor of Petroleum Information International, a weekly energy newsletter: "The current situation reminds me all too much of 1977 and 1978, when another glut lulled the world into thinking that the energy crisis was behind it."

That false sense of security was shattered by the Iranian revolution which resulted in a loss of more than 6 million bbl. daily on world markets and pushed the price of oil from $12.50 to $34 per bbl. Veteran oil industry watchers are always nervous that a comparable upheaval in Saud Arabia would cause even more dramatic price increases, and have even more disastrous consequences for Western economies. Thus the curren oversupply of oil should be used by the West as an opportunity to decrease further its dependence upon OPEC rather than as an excuse to ignore an energy crisis that will not go away. --By Christopher Byron. Reported by Lawrence Malkin/Paris and Frederick Ungeheuer/New York

With reporting by Lawrence Malkin/Paris, Frederick Ungeheuer/New York

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