World oil prices keep falling, despite OPEC efforts to stem tide
Household budgets and the United States economy may get a boost if industry analysts are correct and Wednesday's meeting of the Organization of Petroleum Exporting Countries (OPEC) fails to halt the recent slide in oil prices.
The winners from a further reduction in oil prices would include not only those who heat their homes with oil or drive long distances. Lower oil prices also could weaken inflation by reducing the cost of items made using oil. And taking the wind out of inflation could also reduce interest rates, economists say.
For the economy as a whole, lower oil prices ''act like a tax cut,'' spurring economic growth and job creation, notes Edward Yardeni, senior vice-president of Prudential Bache Securities, a brokerage firm.
Among industries, gainers would include airline, automobile, chemical, and steel companies, says Robert Gough, senior vice-president of Data Resources Inc. , a forecasting firm. Losers would include domestic petroleum companies and banks that are heavily involved in loans to US energy companies or oil-exporting developing nations, both of whom could have trouble paying off loans if oil prices keep declining.
The OPEC oil ministers' meeting in Geneva is expected to focus on finding a way to defend the cartel's official price of $29 a barrel for oil sold under long-term contract. OPEC's problem is that, because of soft demand and excess supply, the price in the short-term cash or spot market has slipped below the official price of benchmark Saudi light crude, to around $27.50 a barrel.
With OPEC's official price above the current market price, an increasing share of oil is being sold in the spot market and not on long-term contract, thus cutting OPEC's share of oil sales and putting pressure on member nations to undercut the official price or violate OPEC production ceilings.
The result is that the spot market, which once accounted for roughly 5 percent of sales, now captures 40 to 50 percent, experts say.
A variety of problems loom for OPEC as its meeting approaches. In Ottawa, the National Energy Board is expected to reach a decision this week on reducing the price of Canadian oil exported to the United States by $1 a barrel, to $26.75 for light crude.
Meanwhile, both Norway and Britain are examining ways to cut prices to sell more North Sea crude. Norway's state oil company recently announced that it was negotiating prices based on spot-market prices and not the official government price. That is effectively a cut of $1 a barrel from its official price of $28. 65. Cuts in the price of North Sea oil triggered OPEC's need to reduce production at its October meeting.
And Saudi Arabian Oil Minister Ahmed Zaki Yemani recently said that ''any adjustment of prices by North Sea producers will open the door for a price war.''
Halting and reversing the slide in oil prices would require OPEC members to slash production quotas even further than they did at their October meeting, when the production ceiling was cut from 17.5 million barrels a day to 16 million. The price could also be bolstered if OPEC could agree on a way to narrow the $3-a-barrel premium charged for light crude, which has slipped in popularity and no longer brings the $29 price OPEC asks. The market is willing to pay slightly more than the $26 official price for heavier crude, which has gained in popularity due to changes in the way refineries operate.
Mr. Yemani says OPEC will reduce, but not eliminate, the differential at its coming meeting. But many analysts say OPEC will not be able to overcome internal political divisions to allow it to cut production or rearrange its pricing structure. Thus the oil-price slide in the cash market is likely to continue, analysts say.
Without decisive OPEC action, ''you could see a decline not limited to another 50 cents or a dollar'' a barrel, says John Lichtblau, executive director of the Petroleum Industry Research Foundation, an industry-supported group. ''I think it is very likely that in inflation-adjusted terms the price of oil will erode through the end of 1986,'' adds Mark French of Wharton Econometric Forecasting Associates. In fact, over the next several years it could drop as low as $18 a barrel, Yardeni says.
Some analysts expect a stalemate at the OPEC meeting, with no meaningful action. OPEC ministers will probably ''cross their fingers and hope for a cold January and February,'' which could boost oil demand and perhaps firm prices, Yardeni says.
Other analysts say there is a possibility that OPEC might announce a cut in its benchmark price. ''Some erosion of the OPEC price is called for,'' Mr. French says. ''Whether or not it will occur in December or whether in springtime as the heating-oil season tapers off is an open question.''
There are several reasons that OPEC's bid to halt the price slide in October did not work, experts say. Perhaps the most important is that OPEC members have engaged in widespread cheating on the cutback. Unusually warm weather on the US East Coast and in Western Europe also has hurt OPEC by reducing demand. And the high value of the US dollar also has cut into purchases by boosting the effective cost of oil, since oil prices often are expressed in dollar terms.
Finally, OPEC's inability to halt the decline in prices has created an incentive for oil companies to draw down inventories while waiting for prices to fall more, rather than purchasing as much oil as they otherwise would.
The amount of help consumers and the US economy eventually get from falling oil prices depends on the size of the eventual price drop. Data Resources Inc. estimates that a drop to $25 a barrel from the current $27.50 cash price would boost the nation's inflation-adjusted gross national product by 0.4 percent in 1985 and by 1 percent in both 1986 and 1987, Mr. Gough says.