Current Oil Crisis Shows the Flip Side of '70s Woes

By CHRIS KRAUL

Oct. 18, 1998 12 AM PT

TIMES STAFF WRITER

Layoffs at Atlantic Richfield Co., riots in Jakarta, Indonesia, a devaluation of the Ecuadorean currency and a collapse of cognac sales at Tokyo’s finest restaurants--all are linked to a 30% drop in oil prices during the last year.

For the fourth time since the first Arab oil embargo 25 years ago this month, an oil shock is wreaking havoc in the world economy, leading to civil unrest in some parts of the world and to deprivation in others. As with past upheavals, it comes with job losses and recessions rolling tsunami-like over the globe.

The current price shock hit home Thursday when Los Angeles-based Arco said it will lay off 900 workers and close 20 overseas offices in coming months. Arco might even vacate its landmark downtown headquarters to save on rent.

The main culprit: low oil prices, caused largely by the Asian economic crisis and the dramatic decline in that region’s appetite for energy.

One big difference between the 1998 oil shock and the legendary ones in the 1970s, of course, is that back then, prices went up, not down. But that’s not all.

“Now versus 25 years ago? It’s like night and day. This is a situation where the oil price is affected by the global economy rather than the other way around,” said Douglas Bohi, vice president of energy consulting firm Charles River Associates in Washington.

In the 1970s, Arab oil exporters pulled strings and sent the U.S. economy into a tailspin. Today, oil is more caboose than locomotive.

It is the best evidence yet that a more efficient and rational global oil market has evolved since 1973, when the Organization of Petroleum Exporting Countries, or OPEC, reigned supreme. Sweeping political shifts and technological advances have created a host of new exporting nations.

As with any new order, there are winners and losers. The price collapse has been great for many businesses and consumers. California gasoline prices, for example, are down 19% from a year ago. Lower energy costs are one reason that fears of inflation have all but vanished. But the tumble in oil prices has proved to be as much a destabilizing factor as a boon in the global economy.

In the numerous emerging markets in which crude oil has become an essential export--Russia, Venezuela, Mexico, Colombia and Ecuador--the result has been drastic budget cuts, devaluation of currencies and, in the case of Russia, outright economic collapse.

And companies such as Arco are now in a full-throttle race to cut costs to minimize the profit damage and appease shareholders. The new oil economics also prompted the epic merger announced in August of oil giants British Petroleum Co. and Amoco Corp., and no one expects it to end there.

Arco and other oil companies are seen vulnerable to takeover. With revenues down, companies are struggling to cut costs any way they can, and the expense sharing implicit in mergers is one way to do it.

To be sure, the current oil market malaise reflects short-term market conditions. Oil prices have behaved like those of other commodities, plunging along with prices of copper, steel, semiconductors and orange juice because the global downturn dampens demand for virtually everything.

In oil, the picture has been worsened by everything from unseasonably warm U.S. winters to the industry’s multibillion-dollar expansion to meet a projected 2% growth in demand this year and next--a prospect dashed by the Asian turmoil.

“There is a big hole in the market,” said Joseph Stanislaw, president of Cambridge Energy Research Associates. “That’s 2 million daily barrels taken out of the market for which people have been building capacity.”

But there are also longer-term economic factors at work in lower prices, which in a sense are fallout from the oil crises of the 1970s. Soaring prices sent oil companies exploring around the world for new reserves, while emerging nations relaxed barriers to foreign investment. And improved technology made oil easier to find.

The upshot: A dozen major oil-exporting countries have entered the market since the early 1970s.

Norway, Colombia, Gabon, Angola, Britain and Mexico were minor players in oil two decades ago. All have since become major exporters outside the OPEC domain, their budgets increasingly dependent on black gold.

Even countries within OPEC, notably Venezuela, have asserted their independence by ignoring their production quotas and opening their state-owned monopolies to participation by foreign companies, said Roger Diwan, director of global oil markets at Petroleum Finance Co. in Washington.

“You can count on one hand the countries that are still closed” to foreign oil companies, Diwan said, listing Saudi Arabia, Kuwait, China and Iraq as among them. “The rest have liberalized investment.”

Improved technology, especially in offshore drilling methods and seismic “mapping” of oil deposits, has lowered the cost of recovering oil and greatly added to the world’s reserves. The cost of finding and extracting oil now averages just $4.50 a barrel, one-third of the cost in the early 1980s, said Jay Hakes, director of the U.S. Energy Information Administration.

All this is why OPEC no longer holds sway as it did a quarter-century ago. An example that its dominance has slipped was shown earlier this year when efforts by OPEC members Saudi Arabia and Venezuela and nonmember Mexico to orchestrate a production cutback to boost prices fell through.

Perhaps nowhere is the decline of OPEC and the transformation of the oil market more dramatically visible than in Russia--to which Arco, for one, can trace some of its current financial troubles.

One big reason for the oil price collapse is Russia’s desperate need for cash. Thus it is flooding world markets with crude to generate cash.

Russia’s renegade status among oil producers is ironic: The OPEC-driven price run-ups of the 1970s were an enormous windfall for the Soviet Union. Those high prices boosted its revenue to the point that, Stanislaw said, they extended the Soviet reign.

“The Arab oil embargo staved off the Soviet Union’s financial day of reckoning by a good decade,” Stanislaw said.

Today, the open markets in oil have proved a big blow to the Russian economy--and to Lukoil, a Russian partner of Arco whose investment has soured and contributed to the layoffs announced Thursday in Los Angeles.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Barrel of Exporters

Since the first Arab oil embargo in 1973, the ranks of oil-exporting countries have grown significantly, diluting the power of the Organization of Petroleum Exporting Countries. Following are several non-OPEC countries’ average daily exports of crude oil to the United States, in thousands of barrels:

1973 1997

Angola

1973: 49

1997: 426

Australia

1973: 0

1997: 31

China

1973: 0

1997: 55

Colombia

1973: 2