Stable Oil Prices for a Stable World
Very soon we will see a large world surplus of oil because of a steep rise in production. As in the 1970s and 1980s, this will lead, I fear, to a cycle of sharp price decreases followed by increases.
No one can be expected to plan effectively under such volatile conditions. That is why a new mechanism must be established to find a middle path for stabilizing oil prices--a path that would be in the best interests of both consumer and producer.
OPEC alone cannot prevent the oil-price “countershock” we can expect to see now. Only a new arrangement between major oil consumers, major oil producers and major oil companies can provide the necessary clout to set a binding, stable price.
The producer-consumer cooperation that I propose would seek to define a reasonable price range for oil based on the supply-demand situation during a minimum seven-year period, not on a one-year or daily period, as is now the practice in the market. If an oil company knows the price will remain stable over that time span, it can calculate the economic risk of exploring, drilling and pumping.
The price of oil, of course, would not be rigidly set, but would move within a certain range. Through research conducted by the Centre for Global Energy Studies, we found that $18 per barrel would be the ideal price for OPEC crude oil. The ideal price for light crude produced outside of OPEC would be slightly higher, around $20 per barrel.
Certainly, a process that would prevent oil prices from falling too low would oblige richer Arab oil-producing nations to promote economic development and diminish disparities within the region. But given the financial burdens Kuwait and Saudi Arabia now face, they are in no position to act alone.
George Bush, a former Texas wildcatter, may be the only American president who has understood the oil industry. He knows that, while a low price for oil may get him reelected, it is not good for the long-run interests of the United States or the Middle East.
I hope he will direct the same sensibility and clarity that he displayed during the Gulf War toward the need for a new producer-consumer approach to stabilizing oil prices now that the armed conflict is over.
