What future may hold for world oil

Faced with a flurry of warnings that world oil prices might collapse, triggering either an international financial crisis or a bonanza for the recession-squeezed West, oil industry leaders respond with a string of ''don'ts'' for Americans.

* Don't panic.

* Don't expect more than the modest oil price decline.

* Don't write off OPEC as a cartel past its prime.

* Don't abandon your energy-saving efforts.

* Don't forget that a sharp oil price rise could be as close as the next Middle East conflict.

* Don't expect a plunge in your gasoline or heating costs even if oil prices do take an unexpected tumble below the $28-a-barrel price many industry analysts consider the likely floor, given present conditions.

Warren Davis, chief economist for Gulf Oil Corporation, comments that ''our best judgment as of this moment is still that the official OPEC [$34] price will probably not be decreased by any very great amount.''

After noting that the volatile Middle East situation can produce endless surprises, Mr. Davis concludes, ''It is conceivable that the marker crude might go down as low as $30 a barrel, but I think it's also quite conceivable that Saudi Arabia might manage to keep right on holding it at $34.'' He rates the likelihood of an open price war among members of the Organization of Petroleum Exporting Countries ''very small.'' Davis says the more likely possibility is that the Saudis will respond to reduced world oil demand by ''cutting the price of their marker crude to shock the other OPEC members back into line, and the shock will work, with OPEC prices stabilizing $2 to $4 below where they are now.''

OPEC members have an incentive to stick together, says Davis: ''If they get to fighting each other, what's to keep the price from falling back to $2 a barrel? . . .''

One measure of the strain on OPEC is that this cartel, which sold 31.4 million barrels per day (b.p.d.) in 1979, reached an internal agreement last month to reduce output to 17.5 million b.p.d. Many experts estimate that OPEC currently supplies only 16 million b.p.d. because of the combination of slack world demand, stiff competition from non-OPEC producers, such as the Soviet Union, Britain, and Mexico, and customers drawing down their oil inventories in expectation of refilling at lower prices.

But even if OPEC unity breaks down, sending world oil supplies higher and prices lower, Davis says, ''I don't think the US consumer should expect to see very much difference.'' Along with other oil industry spokesmen, the Gulf Oil economist expects that the US government would impose an oil import fee to prevent domestic oil prices from falling.

Davis says the government would be the chief victim of a price drop. ''Under the current tax structure, out of every dollar that the price goes down, the US government loses about 75 cents and the oil companies lose about 15, with the other 10 cents coming from royalty owners and state governments.''

Although the recent slide in oil prices may be hurting government revenues more than the oil industry, the American Southwest has felt the effects. Layoffs have hit many sectors of the energy business and bankruptcies have spread. But Davis and others expect the industry to emerge stronger from the current shakeout as less efficient operators are squeezed out. Barrett Monday, a vice-president with the investment firm Rotan Mosle in Houston, which specializes in analyzing the oil industry, adds that because drilling costs are down and efficiency up, oil companies ''should continue to make profits even if the price [per barrel] drops into the low 20s.''

Hugh Liedtke, chairman of the Houston-based Pennzoil Company, expects no ''major break'' in oil prices. Instead, he sees signs of economic recovery boosting oil demand. Mr. Liedtke explains that his oil company is busy expanding, not contracting, because ''sometimes the greatest business opportunities . . . come at times when everything looks pretty bad to other people and they assume it's going to stay that way forever.''

Energy consultant Henry Keplinger, head of the Houston-based Keplinger Companies, argues that economic recovery and rapid increases in the developing world's energy needs will eliminate today's apparent oil glut. He warns that ''unless energy prices rise steadily to provide adequate incentives for new exploration, we could see severe price increases and possible supply shortages in the 1985 area.''

Davis notes oil companies have learned important lessons about how unexpectedly well the traditional laws of supply and demand regulate energy supplies and prices.

''We used to think an increase in price of about 10 percent would probably lower demand about 2 to 3 percent in the long term,'' Davis says. Instead, the public response to oil price hikes is turning out to be far greater. Davis now estimates that ''a 10 percent increase in price over the longer term will eventually lower demand by 6 or 8 percent or even 10 percent.''

James Griffin, an economist at Texas A & M University, who forecast stable or falling oil prices in his book ''OPEC Behavior and World Oil Prices'' last September, warns that ''if world oil prices do come down, the United States will slip right back into becoming more dependent on imported oil.''

Along with several academic colleagues, Griffin advocates using an oil import fee to protect US gains in conservation.

You've read  of  free articles. Subscribe to continue.
QR Code to What future may hold for world oil
Read this article in
https://www.csmonitor.com/1983/0207/020739.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe