Now Let the Oil Market Fend for Itself

The Organization of Petroleum Exporting Countries tries again, and this time the cartel has acquired a new problem: Can Iran and Saudi Arabia manage Persian Gulf oil production to stabilize and increase prices? Saudi Arabia has the production range to sharply affect prices and volumes. Iran is presumed to have the political influence and military power to affect Saudi decisions.

Their new-found relationship is obviously going to be of greatest importance whether or not they cooperate. Their long-standing mutual mistrust and rivalry will not be set aside in the interests of OPEC at large. We are watching a return to the geopolitics of oil supply, and the mix of interests is highly volatile.

Nevertheless, since international oil prices determine domestic oil prices, there is cautious optimism that somehow prices will go higher and that very large industry, banking and government interests will be brought back from the brink. It’s possible, but not probable.

It is undeniable that the collapse in oil prices, which led to the recent OPEC accord, has inflicted grave injury on private and national interests. The central effect is on exploration budgets. For many years the U.S. finding rate for new, large oil fields has been disappointing. Since the 1968 North Slope discovery there have been marginally important additions, mainly to existing fields, but no new giants. In response, the U.S. oil industry has reduced exploration outlays by 50% since 1985. This means that the nation will become increasingly import-dependent, which is bad for the country’s security and finances.

The carnage that low prices cause has to be of national concern because the technology, experience and management skills for oil investments constitute vital interests. Once dispersed through mergers, bankruptcies, canceled investments and layoffs, they cannot be quickly replaced in better economic times or in a national emergency.

If the anticipated gross national product growth rate (3%) won’t rescue the oil industry and those who lend to it, the other option lies with government subsidization. Almost anything proposed--fill up the government emergency-storage strategic petroleum reserve (now agreed to reach 750 billion barrels) far in excess of what security calls for, impose an import fee, add fresh tax incentives on exploration--has its costs: Why should government be able to determine the price? What sort of regulatory apparatus will be found necessary? Who gets the government-sponsored assistance and who does not?

Since April, however, on three important occasions the Administration has backed away from its market emphasis and has begun to intervene. Vice President George Bush, reversing a decade of U.S. government efforts to get the Saudis to push oil prices down, publicly lectured the King of Saudi Arabia that what the United States wants is price “stabilization.” A second, perhaps less-noticed, step was U.S. approval of the International Monetary Fund’s setting an oil-price range affecting new Mexican debts: At $9 a barrel Mexico will be helped in getting more loans, or at $14 a barrel Mexico has to repay loans. (In between $9 and $14 Mexico is supposed to manage its economy on its own.) This condition must reveal something of an Administration rethink. Secretary of the Treasury James A. Baker III told the American oil industry that if it got its act together an oil-import fee could be a reality.

The Administration has several options besides the import fee. One is to sit back and hope that OPEC succeeds. Another is to take up OPEC’s urgent plea for an “understanding” with non-OPEC suppliers to define world oil prices. Could the 14 important oil exporters, represented by governments, do the job? Who would be invited? Through what alchemy could they agree on a price? How would cheaters be punished? Should banks be included, given their large role among the debt-ridden producers?

It is always possible that the objectives of an expanded cartel could be achieved more easily by a small roomful of really key players: Saudi Arabia, Mexico, Indonesia, Venezuela, Great Britain, the United States and the Soviet Union.

The option of doing nothing has its attractions. The OPEC governments were what gave the world two astonishingly abrupt and steep price increases--a profound miscalculation by those who really believed that they could set crude prices without regard to consumer reactions. Of course, all producers then followed the OPEC lead, so why should an effort be made to sustain through artificial means those who made the mistake? Why not let commercial forces set oil prices? It would be tough on those who caused the situation to develop, or who have been caught up in it.

These considerations all bear on the U.S. national interest. We must have oil; we must keep finding oil; we must limit our imports; we must have an active, technologically advanced and financially strong industry. How best to secure these objectives? The guideline has to be to preserve a commercial market in oil as much as possible, and to limit government intervention to an absolute minimum.