Fall in price of oil

Press, 4 February 1986, Page 20

Fall in price of oil

The fall in the price of oil is having a marked impact on the fortunes of a number of countries. It is not having the profound effect on the world economy that followed the rises in 1973 and 1979. A few barrels have been sold below $2O a barrel and there has been talk of the price going as low as $l5 a barrel. So far it is just talk. Yet two months ago oil was selling for $3O a barrel. The price seems likely to settle about the $2O mark and therefore still represents a substantial drop. The falling price is rapidly bringing to a head a number of conflicts between Organisation of Petroleum Exporting countries and non-O.P.E.C. producers, within 0.P.E.C., among non-O.P.E.C. producers, and between oil producers and non-producers. The oil shocks of the 1970 s meant that, for a time, there was a huge shift in the world’s financial resources as importing countries paid for the oil they could not do without. It was a producers’ market to the extent that it almost gave a new meaning to the term. Those with oil have become used to the income that high-priced oil could give them. Some of those without oil sold services to those with oil and became used to the income the oil producers gave them. Within O.P.E.C. until recently the argument was about limiting output to keep the price high. More recent thinking in O.P.E.C. has turned to protecting each producer’s share of the market. Saudi Arabia was the producer which took the biggest falls in output and was also the disciplinarian in o:P.E.C., bringing pressure to bear on the O.P.E.C. producers who refused to cut their output to keep the price high. Saudi Arabia has grown tired of this role and, like some of the others, simply wants to sell oil at whatever price it can get to earn the income that the country needs. Saudi Arabia, which has large foreign reserves of currency, is as well placed as any of the O.P.E.C. producers to survive lower prices. Countries such as Indonesia, Venezuela, and Algeria are likely to be in severe financial trouble soon because of the lower oil prices. Nigeria and Mexico, the latter an oil producer but not a member of 0.P.E.C., will soon be in even worse trouble. Even if Saudi Arabia were inclined to impose discipline among O.P.E.C. producers once more, this by itself would not ensure that the price of oil stayed up. Non-O.P.E.C. producers, particularly the North Sea producers, Britain and Norway, have continued to pump oil and the O.P.E.C. producers fear that they will lose customers to Britain and Norway. One method of dealing with this conflict of interest is to work out a deal between the

North Sea producers and O.P.E.C. Britain has never been inclined to become part of 0.P.E.C., either in membership or by actions that imply co-operation. Norway, also troubled by falling oil prices, is not so unwilling to talk to O.P.E.C. The big price rises of the 1970 s were possible because O.P.E.C. had virtual control of the market. Since then, Norway, Britain, and Mexico have become important producers and the oil companies have changed themselves into groups of smaller companies. Spot market sales have also increased. The lower price of oil has been welcomed by some countries, such as Japan, which have no oil of their own. It is in Japan’s interests to see an even greater fall in the price of oil. This brings Japan into conflict with other industrialised countries, such as Britain. For countries such as New Zealand the drop in the price of oil may have a certain lack of relevance. When the price of oil was high New Zealand embarked on some very expensive projects to become more self-sufficient in oil supply. The projects have to be paid for and this will affect the price of petrol, even if the price of imported crude oil is lower. In 1973-74, New Zealand imported more than 4 million tonnes of crude oil and oil products. In the coming year, imports will run about 1.6 million. Even at lower world prices for oil, a return to the level of imports of a decade ago would add hundreds of millions of dollars annually to our import bills, and require extra overseas eamings to compensate for the extra spending. The local substitutions for imported fuel have been obtained at considerable cost in overseas borrowing, and this cost will stand, regardless of whether such plants as the Synfuel and methanol plants in Taranaki are used. There is no turning back on these substitutes unless even greater expense is faced if they were to lie idle. If the benefits of having Synfuel’s synthetic petrol are measured in savings of foreign exchange, it is claimed that the benefits are maintained until the cost of imported oil drops to $2O a barrel, or even lower. The world market price, now running about $2B, may well follow the spot prices down towards this level. Above a figure of about $27, Synfuel will still yield a cash flow to the Government Ultimately, the worth of this and other substitutes for imports will have to be assessed over a long period, during which the cost of imported fuel will no doubt continue to fluctuate. In the meantime, New Zealand is committed to them and is not likely to make any savings by making less use of them.