Looking Ahead on Oil

If all 13 members of the Organization of Petroleum Exporting Countries strictly honor their new agreement to cut oil output by nearly 20% in September and October, the price of oil almost certainly will rise. The problem is that getting a durable production-limiting agreement in OPEC has proved to be like getting a durable cease-fire in Beirut. What in theory promises benefit to all soon gives way to a grab for special advantage by the few. OPEC has more than a few cash-hungry members who put national need ahead of institutional loyalty. Given economic realities, that priority is not likely to be reversed anytime soon.

Letting August slip by before the planned quotas take effect won’t help matters, either. In July oil supplies exceeded world demand by 50 million barrels. Over the next three weeks a lot of OPEC states will probably push as much oil onto the market as they can, putting further downward pressure on prices and letting the oil consumers add to their stockpiles. Those larger stockpiles should create that much more resistance to any effort in autumn to force a run-up in oil prices.

Some non-OPEC oil producers indicate that they will curb their own production as part of the price-boosting effort. Others, notably Great Britain, say that they won’t, and, with routine maintenance shutdowns on North Sea production platforms about to end, Britain will soon be putting another 200,000 barrels a day on the international market. OPEC will be closely watching the market as a test of the efficacy of its plan. If prices don’t rise soon, the temptation of its members to cheat on their quotas will become all the greater.

Cheaper oil generally has been a good thing for most of the world. The danger, already apparent in some places, is that if oil gets too cheap higher-cost producers will be forced to shut down. Over time, that could work to reconcentrate control of the market in OPEC’s hands, restoring the power that it used to such disastrous results for the world’s economy in the 1970s. In time, probably by the early 1990s, a natural equilibrium between supply and demand will be restored. OPEC is eager to speed up that process by crimping supplies now. It is not likely to succeed.