Oil crosses line to competitive market

Press, 30 January 1986, Page 8

Oil crosses line to competitive market

NICHOLAS KRISTOF,

of “The New York Times”

(through NZPA) Los Angeles

Plummeting oil prices suggest that the world may be crossing a threshold, marking the emergence from a dozen painful years in which expensive petroleum skewed economies, geopolitics, and national and individual priorities. If sustained, the drop in prices would affect everything from Sunday driving habits to solar energy projects, from the Soviet Union’s economy to immigration from Mexico.

In the last few months alone, crude oil prices have fallen one-third, to less than SUS2O ($3B) for a barrel of 42 U.S. gallons. Today’s prices are roughly half what they were at their peak five years ago, and now some analysts are talking about SUSIS ($2B) oil.

“We went from economic slavery to economic freedom,” said Pierre Rinfret, who runs an economic consulting firm in New York. “The decline in the price of oil is one of the most bullish things for the future (fsf the industrial world ffiat I’ve seen in 35

years of forecasting.” “Twenty per cent of world commerce involves oil,” said Rosemary McFadden, president of the New York Mercantile Exchange, where oil futures contracts are traded.

“It’s the single largest commodity in the world. There’ll be ripple effects everywhere.” Of course, predictions of oil prices have gone awry repeatedly. For example, in 1975 many American oil experts predicted that oil would settle at SUS 6 ($11) or SUS 7 ($l3) a barrel in the 1980 s. In 1981 the consensus was for oil in 1990 to be priced about SUS7S ($142) a barrel in today’s money.

But now some oil experts say that with the Organisation of Petroleum Exporting Countries crumbling, oil prices will be set largely by the free market for the first time since the Texas Railroad Commission moved to regulate oil prices in the 19305, when oil had fallen as low as a nickel (US5c) a barrel. The decline in oil prices — particularly in the last two weeks — was sparked in part by a decision O.P.E.C. mad®, in. December to try torpro-

tect its share of the world oil market by reducing the prices its members charge to secure sales. As part of this policy Saudi Arabia, O.P.E.C.’s largest producer, decided to increase its output, saying it could no longer afford to be the organisation’s "swing producer,” varying its output to balance the world market and support the official O.P.E.C. price of SUS2B ($53) a barrel. The consequences could be manifold.

Car trips and plane rides should become less expensive. Inflation and interest rates should drop. People are likely to buy bigger cars. Probably fewer people will insulate their homes. Products made with petroleum, such as plastics, synthetic fabrics, and fertilisers should drop in price.

“Your fertiliser bill can run a pretty penny, so if the price drops on that, it would' be great,” said Shawn Skiles, a wheat farmer with his father near Wasco, in north central Oregon. Although Mr Skiles relishes the drop in petroleum prices, many others do not

Oil exporters such as Mexico, Nigeria and Saudi

Arabia will face serious economic strains, and maybe political unrest, as well.

Their bankers, and perhaps the entire global financial system, will feel the pressures. And young men from Bangladesh to Egypt, who previously found oil Industry jobs in the Gulf, may have to remain in their villages.

On the other hand a poorer Mexico could cause many more Mexicans to seek economic opportunity in the United States.

In looking ahead at what a world of cheaper oil would be like, it helps to look back at what happened when prices soared from SUS 3 ($5) a barrel after the Arab-Israeli war of October, 1973. Both that price leap and the one during the Iranian revolution in 1979 transferred about 2 per cent or 3 per cent of world-wide wealth from oil consumers to oil producers such as Saudi Arabia, Indonesia, Britain, and the Soviet Union.

The United States, as the biggest oil importers, perhaps lost the most Spiralling oil prices reason the decade after 1973 brought

inflation and unemployment rates in industrial countries that were double the levels of the decade before 1973. Industrial economies grew at only about one-third of their previous pace. Oil prices and O.P.E.C.’s marketing discipline have been crumbling since early 1980 and 1981, when oil officially sold for SUS 36 ($6B) a barrel under long-term contracts and reached SUS 42 ($79) a barrel in the day-to-day spot market.

Cheaper oil has implications for all kinds of life-styles. No longer would it seem so important for people to live near work, keep the thermostat down, or install solar panels on a roof for renewable energy. “Driving habits are going to change,” said Thomas O’Grady, president of Integrated Automtive Resources Incorporated, a Wayne, Pennsylvania, concern that does market analysis and consulting for the car industry. “It used to be common for people to go out for a drive, and that may happen again.” Mr O’Grady also said, people were likely tajfcuy bigger, faster

though not the gas-guz-zlers of 15 years ago.

Of course consumer prices — for petrol, airline tickets or petroleumbased products ranging from fertiliser to plastic bags — may not drop as much as expected if manufacturers and retailers retain some of the savings. Whether they do will shape the impact of the oil price cuts on everyday life.

Whatever benefit reaches the consumer, it seems clear that many changes of the last dozen years have been permanent.

Governments, companies and individuals have spent billions of dollars insulating buildings, designing fuel-effi-cient engines, and instituting other changes that are not easily undone. The United States speed limit of 55mph (88kmh), for example, was introduced as a way to save fuel, but it also has won support because of its contribution to highway safety.

Entrepreneurs who entered the alternative energy industry also hope they have found a permanent niche, despite the growing competition they

can now expect from cheaper oil.

“We have some concerns about falling oil prices,” said Michael Guglielmino, president of Sun Resource-Energy Systems, a manufacturer of solar hot-water heaters in Pacoima, a Los Angeles suburb.

“Two years ago, energy was the No. 1 item on a home-owner’s mind. Today it’s down about twenty-fourth.” But solar power would be needed in the future, Mr Guglielmino said, and many analysts say that oil prices may again rise significantly before the end of this century.

Known oil reserves around the world will last well into the next century, but as prices drop it will no longer be profitable to develop many of these oilfields, says Philip Verleger, an oil consultant in Washington.

Experts worry that cheaper oil will mean less conservation and less exploration. If the United States is likely to benefit from cheaper oil, the Soviet Union is not That nation is the world’s largest oil producer, and its oil and gas titles are a big source

of foreign exchange, providing the Russians with cash to pay for imported equipment and food.

“The Soviet Union is suffering from this new development,” Adam Ulam, director of the Russian Research Centre at Harvard University, said of the latest round of oil price cuts. "It makes the economic situation more difficult.”

Some Arab countries that came to depend almost wholly on oil income — such as the United Arab Emirates, Libya, Qatar, and Saudi Arabia — also will suffer. They have savings, which will help cushion the blow, but they have already been feeling the pinch for two years or more. s \

“Hopefully, this will not be used as an. excuse to decrease contributions of Governments .. to the P.L.0.,” said Hasan Rahman, the representative of the Palestine Liberation Organisation in Washington.

He said that falling oil prices not only would cost the jobs of many Arabs in Gulf countries but also would affect relations with Israel. The nature; of the change was - impofc, sible > foresee/ lie said?