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Cartel Crackup

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Oil-industry analysts are now talking about the price of crude dropping by $5 or more, down to $22 or even $20 a barrel. After that--say, by the early 1990s--prices should again start to rise because oil that has become too cheap will drive a lot of energy producers out of the market, shrinking supplies. The analysts, who have sometimes been wildly wrong, probably have it right this time. Oil prices are heading for a significant fall because that is what current market conditions require. Inevitably, though, the time must come when this process is reversed and market forces again push prices up. The trick for oil-importing countries is to postpone that time as long as possible.

For most of the 1970s the 13 countries that make up the OPEC oil-exporting group were able to control the market and to fix prices for a simple reason: They owned most of the world’s known supplies of oil. Over time, though, OPEC’s high dictated prices encouraged other countries to get into the game and to produce oil in quantities sufficient to erode OPEC’s control. Well and good. The trouble is that if oil prices now start to decline steeply the economic incentives to search for new oil or to develop alternative forms of energy will diminish as well. As that happens, OPEC should be able to reassert its importance, and the world is once more likely to find itself uneasily dependent on OPEC oil.

For now, though, cheaper oil prices loom, with or without OPEC’s approval. At its weekend meeting in Vienna the cartel again averted its face from market realities and left its official pricing policies unchanged. But that sham counts for nothing. Already three-fourths of OPEC’s greatly reduced oil output is being sold or bartered at less than official prices, under the steady pressure of price reductions by non-OPEC oil exporters. As prices fall, the economies of some oil producers--among them Nigeria, Mexico and Venezuela--seem destined to be beat up even more. Most of the world, though, will gain. If continued prudence in oil consumption is demonstrated even as prices drop, that gain could be made to last longer than the experts now foresee.

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