A sentence in Hobart Rowen's column in the Sunday Business section should have read: "According to (oil expert Eliyahu) Kanovsky, the Saudis won't wait until their monetary reserves are totally exhausted before raising oil production." (Published 7/13/87)
Since OPEC announced last August that it intended to resume its old tactic of holding back oil production, prices have staged a solid recovery, jumping to $21 per barrel on a spot market basis here from less than $10 per barrel at the low point just a year ago.
At that time, the now-deposed Saudi oil minister, Sheik Zaki Yamani, was counseling a strategy of flooding the markets with Middle East oil, his theory being that non-OPEC producers would be forced out of business and that, ultimately, OPEC could resume monopoly-based higher pricing.
It didn't work, whereupon Yamani was fired. OPEC members then set a price target of $18 a barrel, cut their output about 20 percent in the final months of last year, and agreed on a further 7 percent reduction for the first quarter of 1987, with a ceiling of 15.8 million barrels a day.
According to Morgan Guaranty Trust Co., the cartel members overall kept surprisingly close to their agreed quotas. Notably, the Saudis came in under quota in February and March, offsetting excess production by Iraq and some others.
The fact that OPEC is sticking to its agreement -- something not universally predicted -- plus fears of inflation and anxieties about the security of the Persian Gulf have given strength to prices. OPEC has been able to maintain the $18-per-barrel benchmark target, and restated it at its June meeting in Vienna, while cautiously raising the third-quarter production ceiling to 16.6 million barrels a day. Given the market's recent strength, the cartel may raise the benchmark price to $20 per barrel at its next meeting scheduled for December.
But looking ahead, the old questions are still pertinent. How long can the Saudis, their cash reserves dwindling, keep up their balancing act? How long can the OPEC cartel set world prices in the face of a huge capacity that exceeds demand? And what should the United States be doing about its reliance on imported oil, which after a hopeful downturn following two oil price "shocks" is rising again?
Eliyahu Kanovsky, the brilliant American-Israeli oil analyst who for years has argued that over the long term oil prices in constant dollars must weaken because of oversupply, said that he hasn't changed his mind despite the current recovery in prices.
"One of the important factors, possibly the single most important factor," Kanovsky said, "is the deteriorating financial situation in a growing number of OPEC countries." In simple terms, OPEC countries need the money, a fact of life recently recognized by The Economist.
At the Vienna meeting, The Economist observed in a piece headed "Araby's lost glory" that Yamani successor Sheik Hisham Nazer was congratulated by well-wishers for pushing prices up to $18 by cutting his country's production to half its capacity.
"They did not point out," the article continued, "that he is thereby driving his country toward becoming the world's most astonishing debtor. If Saudi Arabia keeps on its present course all this year. ... it will earn no more than $27 billion from its oil exports. As recently as 1981, it earned $119 billion. ... Araby could be asking the bankers for an overdraft by the end of 1988."
The Saudis aren't likely to be in debt that soon. But Saudi government sources in and outside of the oil industry suggested in February that unless Nazer could wring more annual revenue out of oil, the Saudis -- who have been running down their monetary reserves -- could eventually be a major borrower.
According to Kanovsky, the Saudis won't wait until their monetary reserves are totally exhausted before raising oil prices. Although OPEC as a whole boosted its first-half revenue over the same period last year, Saudi revenue declined. "Remember," Kanovsky said, "the Saudis have a morbid fear of running out of money."
Saudi Arabia is not the only country where the need to dress up the financial balance sheet could eventually determine the levels of oil production -- and, therefore, prices. War-torn Iraq, which has a quota of 1.5 million barrels a day under the cartel agreement, is already producing 2.4 million barrels a day and is completing a second pipeline through Turkey that will add another 500,000 barrels a day.
"Some of the other ministers will have a difficult time explaining this to their constituencies at home," notes a Salomon Brothers analysis.
Meanwhile, global oil consumption has risen far less than had been feared as a consequence of the decline in prices from those that prevailed during OPEC's heyday. "One of the least publicized statistics is the fact that even in 1986 with low oil prices, energy efficiency continued to improve in the United States at about the same rate as in the past 10 or 15 years," according to Kanovsky.
The combination of cheap oil prices and declining U.S. production last year touched off an expectable new surge of anxiety about increased American dependence on imported oil. One knee-jerk reaction calls for a fee or duty on oil imports, the idea being that domestic production would be encouraged, while the higher resultant prices would cut consumption.
But as the Morgan Guaranty commentary observes, one result of oil import duties would be an immediate drain on domestic oil resources at the expense of future output. Yet, the extent of consumption savings through higher oil import fees is debatable; a much cleaner way of achieving conservation would be a gasoline tax, which also would help cut the budget deficit.
And if our nation is truly concerned about excessive future reliance on foreign oil, it is time to do some other things: for example, increase the fill-rate for the Strategic Petroleum Reserve; stand up to the auto industry by toughening -- rather than weakening -- government standards for auto mileage efficiency, and reverse the current backsliding on highway speed limits.