Vice President George Bush indicated Tuesday that he intends to use his trip to the Middle East this week to jawbone oil-producing nations about the importance of stability in oil prices.
Bush insisted that he will not ask Saudi Arabia, the world’s largest oil exporter, for production cutbacks to reduce the worldwide glut that has sent oil prices plummeting by nearly two-thirds since November. But his remarks immediately drove up oil prices in trading on New York futures markets, reversing the previous day’s sharp decline.
Favors ‘Market Forces’
“We’re not going on a price-setting mission. We ourselves favor market forces (to reduce the glut),” Bush told reporters. “My plea will be for the stability of the marketplace. . .
“I think it is essential that we talk about stability and that we not just have a continued free fall, like a parachutist jumping out without a parachute. That’s what has essentially happened to the price of crude oil in recent months, and it’s caused some hardship.”
Traders on the New York Mercantile Exchange interpreted Bush’s remarks as a sign that the Administration will intervene in the oil market. As a result, contract prices jumped by nearly $1 to $11.27 for a barrel of crude to be delivered in May.
Bush was the second Reagan Administration official in two days to comment publicly on the difficulties--as opposed to the economic benefits--created by this winter’s dramatic fall in oil prices.
Energy Secretary John S. Herrington said Monday, in remarks singling out Saudi Arabia, that the Saudis’ action to depress oil prices by increasing production could have “political implications” and that the recent price decline from about $31 to $11 per barrel is having “ramifications among their allies.”
The price collapse has prompted virtually all major oil producers to slash their exploration budgets and lay off employees. Thousands of marginal, low-producing U.S. oil wells have been closed down because they are unprofitable to operate at today’s prices.
Overall Outlook Gains
At the same time, however, the fall in oil prices has brightened the nation’s overall economic outlook by cutting the inflation rate and fostering higher economic growth. For that and other reasons, the White House has opposed an oil-import tariff that has been proposed as a way to support domestic exploration and avoid higher reliance on imported oil.
In a briefing to reporters on his nine-day trip scheduled to begin today, the vice president said he will talk to the Saudis about the “hardships” caused by the oil-price decline. But he insisted that the Administration will not directly intervene.
Perhaps the greatest hardship has been in Bush’s home state of Texas, where he served two terms as a congressman from Houston, headquarters of the U.S. oil industry. Bush himself co-founded a successful oil production company in the early 1950s. He later sold his interest in that company.
Despite the broad economic benefits of the decline in oil prices, most energy experts say it will weaken the domestic oil industry and ultimately increase this country’s reliance on often-unstable foreign sources of petroleum, as occurred in the 1970s.
“A strong domestic industry is in . . . the vital national security interest of this country,” Bush said.
Realistic Position Seen
One authority on the Persian Gulf nations and the Organization of Petroleum Exporting Countries, the once-powerful oil cartel whose current weakness contributed to the price decline, said Bush’s remarks indicate a more realistic White House position.
That is likely to be well-received in Saudi Arabia, where Bush will find “no argument” with the need for price stability, said Ragaei El Mallakh, director of the International Research Center for Energy at the University of Colorado.
“The Administration’s policy has been based on free forces of the market. In principle, that’s great,” El Mallakh said. “In practice, oil is a political commodity. Those who say you cannot interfere with the energy markets are misguided. We are dealing with a situation that can cause major problems for this nation.”
Whether or not Bush’s comments indicate an aggressive new government posture on the oil question, they served to extend the roller-coaster ride of the oil “futures” markets.
After falling sharply Monday to near the $10-per-barrel level, the price of a benchmark Texas crude fell to $9.75 in early trading Tuesday. The last time oil prices were consistently that low was in 1974.
‘Cascade of Buying’
But the prices paid for contracts for future delivery edged up during the day and then surged ahead on news of Bush’s statement, said John Hill, vice president of Merrill Lynch Futures in New York.
Even before the Bush comments touched off a “cascade of buying” at mid-day Tuesday, Hill said there were signs that many traders believe that the trough was reached when prices slipped briefly below $10 a barrel.
“I think we could drift lower,” Hill said, “but the bottom might not be very far off.”
Many OPEC observers believe that the Saudis, who traditionally acted as OPEC’s “policeman” by regulating their huge production to maintain stable world markets, boosted their output last December in exasperation after other cartel members refused to abide by OPEC production quotas.
That act, which significantly increased the world glut of oil, is believed to have been the principal cause of the recent price collapse. OPEC nations have since failed repeatedly to reach agreement on cutting production, most recently at a meeting in Geneva last month. Another meeting is scheduled for April 15.
If the Saudis now cut production unilaterally, they would likely lose more of their market to other OPEC members and to such big non-OPEC producers as Britain and Norway, neither of which has indicated a willingness to cut output. Thus the Saudis are believed to be caught in a bind, given their own declining oil revenues, which will make it difficult for them to accommodate any request from Bush to help reduce the oil glut.
Don Shannon reported from Washington and Donald Woutat from Los Angeles.