Saudis Taking Risk in Keeping Oil Prices Low
Right in the middle of the summer driving season, the Organization of Petroleum Exporting Countries meets Monday in Geneva to talk, again, about controlling production in order to raise the world price of oil. But almost nobody filling his car’s tank with 75-cent-a-gallon gasoline is worried about that meeting. The OPEC nations failed to agree to production limits when they met less than a month ago, and the outlook is for more of the same on Monday.
Therefore, drive on. Gasoline prices are likely to fall to 60 cents a gallon or less before the summer is out. Heating oil in the Midwest and Northeast should be a bargain this fall. That’s because there is a tidal wave of petroleum washing through world markets at the moment--spot market prices have fallen to about $8 a barrel--and the full effects of that wave have yet to reach U.S. consumers.
Discourage Exploration
How long can such good times last? Longer than you might think. At a rough estimate, based on current thinking among major oil companies, you’re not likely to see gasoline much above $1 a gallon for the next three years. Oil companies look for the world price to recover to about $15 per barrel from today’s extremely low levels--but not to go back to last year’s $28-a-barrel price any time soon.
Why $15? Because, says Barry Good, oil analyst for the investment firm of Morgan Stanley, “at $15, OPEC can accomplish everything it wants.” What he means is that $15 is a price low enough to discourage new oil developments by Britain in the North Sea or the United States in Alaska and to shut down some current production, too. Indeed, if a $15 price were sustained for any length of time, about 30% of current U.S. oil production would become uneconomic and cease.
What is going on? Saudi Arabia, OPEC’s low-cost producer and the holder of what are probably the world’s largest oil reserves (the Soviet Union, the world’s largest oil producer, may have more, but who knows?) is driving down the price in order to drive its competition out of business, a technique pioneered in the last century by one of the oil industry’s founders, John D. Rockefeller. With other oil production either shutting down or phasing out due to the natural depletion of oil wells, Saudi Arabia hopes to bring supply into line with demand and return control of world markets to the OPEC cartel by the early 1990s.
Good Times for Refiners
Today, however, somewhat mysteriously, it seems to be hurrying the process. In recent months, Saudi Arabia has been pumping a great deal of oil onto the world market, and rumors in advance of the OPEC meeting in Geneva have it planning to produce even more in August. This aggressive policy is providing historically high--if unsustainable--profits for refiners, whose costs of raw material are falling faster than the prices that they charge at the pump. But it is threatening the very existence of U.S. producers, many of whom have production costs between $8 and $12 a barrel.
The Saudis are risking a backlash. If, as is likely, U.S. oil output shows a serious decline when the Texas Railroad Commission gathers and reports the current figures, it could produce a powerful reaction in Washington this fall.
Already, severe cutbacks in oil exploration and rising unemployment have led to calls for the government to impose an import fee to help the industry at home. So far, the idea is getting little support, and President Reagan is against it. Oil’s major companies are opposed, and so are many independent producers--in aid of whom President Dwight D. Eisenhower brought in import quotas in 1959 against an earlier threatened wave of foreign oil. “Such government programs just don’t work,” says energy investment banker Joseph Tovey of Tovey & Co., summing up the prevailing attitude.
But let low prices continue to decimate the U.S. industry and the prevailing voices this fall could belong to such as George Mitchell, founder and chairman of Houston’s Mitchell Energy & Development Corp. Mitchell is urging an import fee to protect the technology base of the U.S. industry.
“It was the skills of our people that developed the world’s oil,” Mitchell says. “Petroleum geology is a high technology we can’t afford to lose.”
Mitchell is right about our technology, but whether a government program that would result in $30-a-barrel oil--and a return to $1.50-a-gallon gasoline--is the way to hold on to it is debatable. So you have to wonder why Saudi Arabia seems to be driving us to such a program.
