In the political debate over collapsing oil prices, one idea frequently advanced is that prices have come down too fast, "destabilizing" the economies of the producing countries. This notion usually is coupled with a search for the "correct" price for oil, one that would reflect some mystical level fair to both producers and consumers.
Those who worry about the precipitate drop in oil prices -- from more than $30 a barrel last November to about $13 now -- rarely mention the precipitate rise. Thus, against the 50 to 55 percent drop from the peak, oil rose 40 percent from 1978 to 1979; another 73 percent from 1979 to 1980; and yet another 47 percent from 1980 to 1981.
Not surprisingly, the "correct" price advocated by those who worry about the decline turns out to be substantially higher than the current price of oil.
The Amex Bank Review, published in London, argues that $15 a barrel "is emerging as a desirable level for a new floor for oil prices." A collapse to single digits would benefit the world economy only if a later oil price hike could be ruled out, the review says.
Sam Nakagama, a Wall Street analyst, argues that oil at $15 a barrel is too cheap. At that price, he says, several major Texas banks will be in trouble. (Obviously, that's what George Bush had in mind when he tried -- successfully -- to jawbone the price higher.)
Like Nakagama, former presidential adviser Alan Greenspan warns that the initial impact of lower oil prices on the American economy will be negative before the benefits for industry and consumers are felt. Part of the current sluggishness of the economy that led to last week's cut in the Federal Reserve discount rate probably can be explained by the effects of the oil price drop in the Southwest.
But Greenspan thinks that world oil prices will stabilize soon, if for no other reason than production is beginning to fall in the United States. Much high-cost production will be lost unless prices quickly recover to above $17 a barrel, Greenspan says.
With all this talk about a "right" or "equilibrium" price for oil, Paul Mlotok and Michael C. Young of Salomon Bros. have done a service by compiling a historical record of oil prices going back to 1901, in dollar and inflation-adjusted terms.
And the bottom line of their fascinating study is that "current 'low' oil prices are not really an anomaly; rather, they are in line with historical real prices." Thus, over the period 1901-1985, the real price of oil averaged just under $5 a barrel. To match that price, in current dollars, oil today should cost no more than $12 a barrel.
The only rationale for higher prices, the two Salomon Bros. analysts conclude, would be rooted in political, rather than economic, considerations. Yet, efforts to achieve an artificially high "correct" price for oil may be doomed to failure in view of the enormous oil surplus.
The reality is that Saudi Arabia is flooding the markets with oil and will continue to do so for some time, because it needs the money to keep its economy going and to finance its foreign-policy commitments in the Middle East.
That explains why the Organization of Petroleum Exporting Countries has been struggling fruitlessly to reach a meaningful accord on cutting production. After a week's haggling in Geneva, the 10 OPEC oil ministers adjourned last Monday, with no agreement on how to divide a theoretical 16.7-million-barrel-a-day ceiling on production.
According to the Amex analysis, at $15 a barrel, Saudi Arabia needs to produce between 5 million and 6 million barrels a day to prevent its budget deficit from worsening, and an output of between 7 million and 8 million barrels a day to achieve a balanced budget. When the price was rocking along at last year's artificially high level of $30 a barrel, the Saudis were producing only 2 million barrels a day, leaving themselves with about a $20 billion annual gap in their income; their share of free world production, meanwhile, had plummeted from 19 to 6 percent.
"Effectively, they were drowning in a pool of other countries' oil," says Philip Verleger, an independent Washington economic consultant. Significantly, Sheikh Yamani of Saudi Arabia told reporters after the OPEC session that "OPEC alone cannot do it control production and prices . We have to have the cooperation of non-OPEC" oil exporters.
That doesn't seem to be in view. Mexico, for example, has decided to cut its prices to try to regain the share of the U.S. market lost to the Saudis. That may be difficult, as Norman Higby, the president of a small consulting firm in Menlo Park, Calif., notes.
Higby, who has been remarkably accurate in his predictions on oil, observes that Mexico must deal not only with cheap Saudi oil, but an onslaught of "free oil" from the Saudis. This phenomenon comes about because the Saudis will be rebating some $5 billion -- in the form of oil -- to buyers who contracted for delivery when the price was in the $26 to $28 range in December and January. Under the new system of so-called "netback" pricing practiced by the Saudis, price declines are made retroactive, either in cash or oil.
So despite the search for that elusive "correct" price, the chances are that oil prices will continue to drift lower, resuming their pre-George-Bush slide. For big and small nations alike, that's a big economic plus.