Interesting article on United Nations screwup on oil:
globe.com
As production outstrips demand, oil prices
keep falling
By Charles M. Sennott, Globe Staff, 07/19/98
HMADI, Kuwait - The last time oil prices were lower than now,
Grand Funk Railroad was on top of the music charts, bell bottoms
were in, and Watergate was engulfing Richard Nixon's presidency.
The reason prices are at 1973 levels, industry specialists say, can be
summed up in one word: overproduction.
Here in the Persian Gulf, which holds more than 40 percent of the world's
known oil reserves, companies have been overproducing crude for months,
pushing prices lower and lower.
Three weeks ago, the price for benchmark Arab light crude dipped to under
$11 a barrel. That represents a more than 40 percent drop in six months and
a dramatically more precipitous drop when compared with the high of $41 a
barrel just before the 1991 Gulf War. With prices adjusted for inflation,
experts say, the price of crude is lower than anytime since the summer of
1973.
The plummeting price of crude has been followed by tumbling gasoline
prices. At most US self-service pumps this week regular unleaded gasoline
was about $1 a gallon.
''We're going back to the good old days on gas prices,'' says Hani Iskinder,
Chevron's manager for the Persian Gulf. ''It may be bad for oil companies,
but it's great for American consumers. And it has a positive effect on the
American economy, helping to keep the 1990s boom going.''
Two main factors are at work here, industry experts say: a drop in demand
caused by economic crises in the former ''tiger'' economies of Asia, and a
sharp increase in supply caused by OPEC overproduction and the
oil-for-food agreement between Iraq and the United Nations.
The origins of the price drop lie in the blistering desert terrain of oilfields such
as Kuwait's Burgan Sands, in Ahmadi, 24 miles south of Kuwait City. On a
recent afternoon here, with temperatures over 115 degrees, a maze of pipes
flowing with crude stretched for miles across the desert. Orchards of
10-foot-high pumping stations known in the industry as ''Christmas trees''
sprouted from the sand for as far as the eye could see. On the distant
horizon refineries spit orange flames into the sky.
This furiously pumping field, and others like it in Saudi Arabia, Bahrain, and
the United Arab Emirates, are producing more oil than ever, and they're
doing it more efficiently. Using high-tech exploration and improved drilling
and extraction techniques, companies are drawing more barrels a day than
ever out of vast reserves that lie like sunken black pools of treasure beneath
the desert landscape.
And with the recession in Asia creating less demand for all this oil, experts
say, most OPEC countries are cheating on quotas that are spelled out in the
complex agreements that hold together the Organization of Petroleum
Exporting Countries. The 11 member countries produce the oil beyond their
quotas to make up for the cheaper price. It is a spiral that forces prices
down.
The Burgan Sands of Kuwait, which produce more than half of Kuwait's 2.2
million barrels a day, form the world's second-largest oil field, invaded by
neighboring Iraq in August 1990. After the Gulf War, as Iraqi troops
retreated in February 1991, they set these oil fields ablaze. The rusted and
burned-out remains of Iraqi tanks and troop carriers can still be seen along
the roadside. Kuwait, along with international teams of firefighters, had to
fight for months to put out the inferno.
The aftermath of the war has had profound consequences for the world oil
market, some of them leaving Iraqi dictator Saddam Hussein with the last
laugh as he squeezes his neighbors' oil revenues.
While it would seem that falling crude prices would hurt Hussein's Iraq as
much as other producers, there is another side to the UN oil-for-food deal,
experts say. After Hussein backed down from his saber-rattling earlier this
year, UN Secretary General Kofi Annan granted a huge increase in the
revenue ceiling for Iraqi exports to $5.2 billion from $2 billion every six
months. That dumps some 2 million barrels a day on the world market
without regard to price.
''Because the UN foolishly based the ceiling on revenue instead of volume,
the program is a market wrecker,'' stated the June 22 lead editorial in the
respected industry publication Oil and Gas Journal. ''The lower prices go,
the more Iraq produces in pursuit of the revenue cap, feeding a surplus and
weakening prices.
''He's getting what he wants. His neighbors are frantically slashing production
in defense of crude values. Their revenues are plummeting. Their populations
are getting restive. No one should doubt that Hussein is cunning enough to
have pulled this off,'' the editorial stated.
But some of the answers also lie beyond the Persian Gulf. The industry has
changed profoundly since the days in the 1970s and '80s when OPEC could
wield its might and create oil shocks that seemed to portend ever higher
prices. Today, oil is coming into the market from every corner of the globe,
including Venezuela, Mexico, the North Sea, and Indonesia. And more
exploration is going on around the Caspian Sea and offshore West Africa.
This diversification weakens OPEC's ability to send prices soaring.
''The days of OPEC may well be over,'' says Chuck VanAllen, vice
president of Saudi Arabian Texaco Inc. ''We are looking at the new world
order in the global oil markets where the Saudis, the Venezuelans, and
[non-OPEC member] Mexico will be the major players.''
Some analysts have even suggested that a clandestine movement is afoot to
create a group of producers to guide world prices led by Saudi Oil Minister
Ali Ibrahim Naimi. Remarks made by Naimi in a June 26 Wall Street Journal
article fueled such speculation. The interview also provided a candid
admission by Naimi that OPEC does not have great credibility in its recent
promise to cut up to 2.5 million barrels a day from the world production of
73 million barrels a day. Critics say OPEC's promises are too little too late,
and that reserves have grown so large that even if OPEC did live up to its
promise, the cuts would have no impact for at least a year.
Over the past year, the price collapse has cost OPEC's members an
estimated $45 billion in lost revenue, roughly one-third of their total income,
with no end in sight.
Eliyahu Kanovsky, one of the world's leading experts on oil, predicted the
collapse of oil prices in a series of research papers for The Washington
Institute for Near East Policy.
Throughout the 1970s and '80s there were ''lots of doomsday predictions
that the oil cartels would take over the world, but I've always been
skeptical,'' he says.
Although prices of oil dropped equally low in 1986, he says, they recovered
within weeks, whereas this slump has seen a steady and rapid decline for six
months. And OPEC's promises to cut production have done little to improve
the market. This is proof, he says, that we are down to the underlying or
''fundamental price'' of oil.
But Ann-Louise Hittle, chief researcher on world oil for the consultancy
group Cambridge Energy Research Associates of Massachusetts, cautions:
''If you wait long enough every forecast in oil comes around. It is a very
volatile commodity. But it is certainly true that we have an overabundance of
supply and a dramatic drop in world demand.''
Hittle points out that ''largely due to the Asian economic crisis,'' the growth in
demand for oil dropped 50 percent in 1998, down to 1.5 percent.
Kanovsky maintains that falling oil prices will increase instability in the
Middle East, especially in the Gulf. ''But it will also have a ripple effect in
more diversified economies like Egypt, which relies on oil for about 40
percent of exports, and Syria, which relies on it for about 55 percent.
''It is a tremendous drop. Some countries can cope with it, some cannot.
Saudi Arabia, for example, is going to have problems,'' he says.
For the past 25 years, the Gulf states have resolved domestic problems -
such as the lack of democracy and the violation of human rights - by
throwing petro dollars at its citizens in the form of free health care, housing,
and the promise of jobs. The price crisis, which is projected to produce a
$10 billion budget defecit for the government of Saudi Arabia, could make it
impossible for these countries to sustain this kind of approach and create
political and social turmoil in the near future.
''All of the region's problems are intensified by the oil crisis,'' says Shafeek
Ghabra, a political science professor at Kuwait University. ''The challenge
will be to keep moving forward with democracy, fufilling promises to a
surging population of youth and addressing the needs of the
disenfranchised.''
A Western diplomat says fallen oil prices will continue for the foreseeable
future, but that the Gulf states should see this as an impetus to diversify their
economies and continue to open them to the free market.
One Kuwaiti government official said: ''It is a crisis. The situation is very bad
for us. ... We are working toward a diversification of our economy. We
know we need to do that.''
This story ran on page A01 of the Boston Globe on 07/19/98.
c Copyright 1998 Globe Newspaper Company. |
