US Imports Rise As Do Oil Prices
WERE there no cartel of oil-exporting countries, the price of oil might be near the $10 that the world saw in 1986, when producers competed to boost output, an oil company economist says. But there is an Organization of Petroleum Exporting Countries, and the 13 OPEC members meeting in Geneva on Friday agreed to raise their reference price by $3, to $21 per barrel.
``Just saying it doesn't necessarily make it so,'' notes Tom Burns, manager, economics at Chevron Corporation in San Francisco. The market must accept OPEC's price first.
That will depend on whether the producers demonstrate more restraint than in 1986 or, for that matter, this spring, when OPEC members Kuwait and the United Arab Emirates violated their production quotas and drove January's $20 weighted average world price below $14 last month.
Burns says that the new 22.5 million b.p.d. OPEC production ceiling, being about 700,000 b.p.d. lower than its recent output, should allow for a price rise. New discipline may be guaranteed by Iraq, which rattled sabers at the quota busters before the OPEC meeting opened. Spot prices have rebounded.
But it will be months before larger-than-usual oil inventories in the US are used up. That supply, estimated at 50 million barrels, will slow the rise of prices to OPEC's target.
Meanwhile, an inexorable increase has also been seen in reliance on imported oil by the United States, which consumes one-third of the total free world production. For the first half of 1990, the US imported 50 percent of its needs, the highest proportion ever, according to Edward Murphy, an economist with the American Petroleum Institute in Washington. Over half of US imports came from OPEC.
Surprisingly, US consumption had actually declined slightly during the period, meaning that domestic production fell even more. Outside Alaska it stands at 5.5 million barrels per day, the lowest level since 1950. The yearly rate of decline is now 400,000 b.p.d., Mr. Murphy says.
``Oil imports per se are not bad,'' Mr. Burns says. ``We have to distinguish between dependency and vulnerability.''
The Iowa farmer filling his tractor with fuel pays a ``world price ... set in a competitive market,'' Burns says, though influenced by the ``imperfect'' OPEC cartel. ``From the standpoint of the economy, there's no negative'' in the fact that half of the farmer's fuel is refined from foreign oil.
OPEC-influenced or not, each $1 rise in the price of oil eventually adds roughly five cents to the price of gasoline at the filling station pump.
As for vulnerability, the US has built up the Strategic Petroleum Reserve, oil stored in salt dome caverns that could be drawn upon in case of a disruption in imports. Further, it could try to lessen vulnerability by stimulating domestic production, but the incentive would be a public expense. ``It might be worth it to the consumer to buy an insurance premium against a disruption down the road - or it might not,'' Burns says.
Other strategies include diversifying supply and purchasing imports originating closer over those from farther away. Burns says also that the US could emulate Japan, which depends 100 percent on imported oil. Japan pursues a foreign policy ``that is aware of some of the real basic interests of producing countries.''
ON the question of balance of trade, Norman Fieleke, an economist and vice president of the Federal Reserve Bank of Boston, also points to Japan.
``You have to look beyond oil. Japan manages to run trade surpluses,'' Mr. Fieleke says. ``Oil imports alone is not an excuse for running a trade deficit.''
Rather, general business competitiveness and the amount a population saves determines the trade balance, he says. Oil-exporting nations ``want the money so they can spend it. They're not putting it under their mattresses.''
``If we're competitive they'll spend that money on goods from us,'' Fieleke adds.
``The trade deficit need not go up in proportion to oil imports,'' he says. ``I'm not saying it won't. It depends on how we manage our affairs.''
Even if the US continues to run a current account deficit (the net amount by which our debt to the world increases), that isn't necessarily a problem, he says. The additional debt becomes ever smaller in relation to the growth of the US $5.5 trillion gross national product.