Oil for Nothing?
STELZER, IRWIN M.
Oil for Nothing? by Irwin M. Stelzer Oil is not like other commodities, as Winston Churchill found out early in his career. In 1911, Churchill, then First Lord of the Admiralty, decided to rest...
...Its energy minister, Luis Tellez, acted as honest broker between the Saudis, who more or less adhere to their quotas, and the Venezuelans, who never do...
...With much fanfare, Saudi Arabia, Venezuela, and Mexico (the last not an oPEC member) have cobbled together an agreement to cut back their output, with the Saudis reducing the flow of oil from their prolific wells by 300,000 barrels a day to match an equal cut by Mexico and Venezuela combined...
...The temptation to step up output will prove irresistible, increasing the supply coming to market...
...Unable to develop appropriate policies to cope with crude-oil prices that rose from under $2 per barrel in 1972 to over $10 in 1974, and then to almost $36 in 1980, the industrialized nations entered a prolonged period of high inflation and low economic growth...
...America's policy of discouraging outside investment in Iran, combined with the Mullahs' hostility to such investment, has reduced the country's oil infrastructure to such a run-down condition that Iran could not increase the flow of oil from its under-maintained wells even if it wanted to...
...But don't rush to trade in your gas-guzzling sport-utility vehicle for a Geo...
...Here is the reasoning of an oil-country finance minister desperate for cash to finance the lifestyles of his nation's rich and famous princes, its latest arms purchases, and the welfare state that keeps the people in line: If everyone except me adheres to his quota, I can produce some extra oil and sell it covertly at the new, higher price...
...Iran's agreement to curtail its output was not exactly a gesture of solidarity with its fellow cartelists...
...The lesson was well learned...
...And into Iraq, to increase that country's production capability...
...In short, the world's capacity to produce oil will continue to increase...
...Like many statesmen who were to follow him, Churchill found that reliance on oil involved him in the industry's economics and the Middle East's politics: The Admiralty soon purchased a controlling interest in the Anglo-Persian Oil Company in order to assure itself a secure supply and avoid what it claimed were the extortionate prices being charged by shell...
...Iran's policy of wooing the West seems to be working, despite its refusal to apologize for its taking of American hostages or to rescind the death order against Salman Rushdie...
...Meanwhile, worldwide demand for oil will fail to keep pace with supply, as the recession in Japan and other Asian countries continues, environmentalists force drivers into more fuel-efficient (but, alas, more lethal) cars, and revenue-hungry governments in industrialized countries dampen demand by raising gasoline taxes and concocting new levies on the use of oil and other carbon-based fuels...
...They have repeatedly agreed to production limits, and then cheated on those agreements...
...One or two decisions like that, and enough extra oil flows to market to cause prices to crack...
...Moreover, OPEC's share of world output has fallen from around 75 percent in the mid-1970s to about 40 percent now...
...When a series of "oil price shocks" hit the world in the 1970s, they brought on stagflation...
...At the oPEC meeting in Vienna on March 22, other producing countries hopped on board the reinvigorated cartel: Kuwait, Algeria, the United Arab Emirates, Oman, Libya, and Iran promised cutbacks, and even non-member Norway emulated Mexico in volunteering to hold some oil off the market...
...That has been the history of cartels generally, and of OPEC in particular...
...More important, by agreeing to cut its own production, Mexico assured the others that it would not seek to win a bigger share of the U.S...
...When America demonstrated to the world in 1991 that we would fight rather than allow an iraqi dictator to gain control of the oil fields of Kuwait and Saudi Arabia, we laid the basis for the stable energy supplies that have helped fuel a long-running, inflation-free era of prosperity...
...With stability thus assured, markets have worked their customary magic...
...So do Iran and Iraq...
...But that is about to change...
...indeed, they will send men to die merely to make sure that the price is right...
...The Europeans are increasingly unafraid of the consequences, if such there any longer be, of defying America...
...And the cost of finding and producing oil will continue to fall—to as low as $5 per barrel...
...There is no honor among thieves, and even less among cartelists...
...and the members of the organization of Petroleum Exporting Countries (OPEC) have been unwilling to withhold their oil from the market in order to drive prices up...
...Even if the agreement holds, the cutbacks in supply won't be big enough to affect the price of oil very much, if at all...
...only a few weeks ago, a gallon of gasoline was selling in some places for less than it had since the 1920s...
...After all, at a cost of $5 per barrel, so-called "depressed" prices of $12-15 still leave a profit margin large enough to tempt producers to cheat on their agreed quotas...
...The causes of this decline are various: Amazing advances in technology have driven down the cost of finding and producing a barrel of oil...
...The reason is simple: New supplies are increasingly being found in countries beyond OPEC's control...
...Plus ga change . . . Some 80 years later, George Bush also found that oil is unique...
...That's what George Bush did when saddam Hussein's grab for Kuwait threatened to give him control over oil supplies and prices...
...They need hard currency, and they need it now...
...Welsh coal might have been near at hand and secure, but oil offered the advantage of speed and efficiency...
...Fill 'er up...
...market by filling any gaps that production cutbacks in Saudi Arabia and Venezuela might create...
...ironically, if the deal holds, the only country that will be selling more oil in the near future is iraq, its increased output being the U.N.'s reward to Saddam for once again promising to honor the agreements he long ago agreed to honor...
...Every member has a huge incentive to free ride...
...So fear not: The new OPEC press release is no serious threat to America's burgeoning prosperity...
...Now, we are told, this era of cheap oil is over...
...the sclerotic economies of Western Europe have not grown, and Asia's economies are in free-fall, pushing down demand for oil in those parts of the world...
...And with reason...
...Nations will send men to die in order to insure an unimpeded flow of the stuff...
...The combined reductions in output are likely to total only 1.5 million barrels per day, out of a total of over 75 million...
...Some of these new producing areas are in woefully poor West African countries and in nations that were once part of the Soviet Union...
...Cheating has been the order of the day since the OPEC cartel was first founded in Baghdad in 1960...
...Better still, count on the agreement's coming unraveled...
...Between early 1997 and early 1998, oil prices fell in half...
...Irwin M. Stelzer is director of regulatory policy studies at the American Enterprise Institute...
...In 1911, Churchill, then First Lord of the Admiralty, decided to rest Britain's naval supremacy on oil...
...Mexico was the key to the deal...
...France's Total and other European oil companies are likely to begin pouring money into Iran...
Vol. 3 • April 1998 • No. 30
