Hard Times for OPEC
There was a time, not long ago, when the world would wait in grim expectation each time the OPEC oil ministers met, for out of those sessions almost always would come news of still-greater price increases to agitate the global economy. Now the Organization of Petroleum Exporting Countries’ get-togethers command slight attention and less concern. OPEC is not dead, or even necessarily irrevocably powerless, but it is in unmistakable disarray, and its sovereign ability to dictate the cost of oil has been transformed from a threat to a memory. The mighty are tottering, as surely as are the oil prices that they once so firmly controlled.
The latest OPEC session exposed the dissension as well as what has largely become the irrelevance of the organization. Unanimity of outlook and policy, which used to be OPEC’s strongest tool, is no longer even pretended at. Neither is internal trust. The one substantial decision that OPEC has been able to reach in recent months was to hire a Dutch accounting firm to monitor its members’ books in an effort to halt the widespread cheating on prices and production quotas that have contributed to OPEC’s weakness. But unreality persists. The price cuts that a majority of OPEC members reluctantly agreed to in Geneva this week still leave the organization’s official prices considerably higher than what the free market will accept. This approach to marketing strategy isn’t going to win new customers, or hold on very long to old ones.
Since its glory days in the 1970s OPEC’s oil production has been reduced by more than half, and its revenues have dropped drastically. Once OPEC’s members were awash in cash surpluses. Now most are running deficits, and there are no immediate signs that their fortunes will soon be reversed. Oil experts, who have been wrong before, think that oil prices won’t begin to go up again until the 1990s.
The oil-price declines that have taken place, with probably more to come, don’t mean that the great transfers of wealth from oil consumers to oil producers that took place in the last decade are being reversed. They do mean that the world may be able to get through the next four or five or more years without sudden and debilitating new economic shocks brought on by arbitrary pricing actions. The gainers will be oil consumers, since stable or cheaper prices should help keep inflation down and cut the trade deficits that most oil-importing countries run. The big losers will be the oil-producing countries that had based their development plans on the prospect of ever-rising prices. These countries, Mexico and Nigeria chief among them, could be in for still tougher times.
Cheaper oil is generally a good thing. But, in the long run, oil that drops too much in price is not. A lot of the non-OPEC oil that has reached the market in recent years and helped so much to dilute the cartel’s power is expensive to find and produce. Below a certain price, which varies from place to place, the production of much of this oil becomes uneconomical. If sharply lowered prices drive dearly produced oil from the market, the advantage will swing once again to OPEC, particularly to Saudi Arabia and other Persian Gulf states where production costs are a fraction of what they are elsewhere. If that happens, OPEC can again come to dominate supplies, and the cycle of price run-ups will start all over.
So the good news about oil prices must be looked at with prudent concern. OPEC has had its power curbed because the world has learned to get along with less oil--consumption is lower today than in the early 1970s--and because rising oil prices provided the rewards for seeking out new sources in frontier areas. The lessons ought to be obvious. The world can’t afford backsliding on energy conservation. Neither will it gain if non-OPEC oil sources come to be priced out of the market.
