Spot prices for oil are rising again. There is, as usual, a chorus of official assurances that actually very little oil is ever bought at spot prices. But, as usual, a rising spot price indicates strain in the world's fuel system. It's the yellow warning light on the control panel, so to speak, and it's currently flashing.
These spot prices provide an indication of the impact of the Iranian revolution on world markets and are precursors of effects that have not yet reached consumers in the industrial world.
Most crude oil -- perhaps 19 barrels out of every 20 -- is sold under contracts pegged to the prices set by OPEC, the Organization of Petroleum Exoporting Countries. These countries provide the big buyers and sellers with continuity of flow, with the prices open to renegotiation usually every 90 days.
The spot price is the price at which the occasional shipload, or even tankful, of oil changes hands. Sometimes a trader has a little more than he needs. Sometimes a refiner comes up a little short in meeting an unusual one-time need.
Normally, spot prices run below the OPEC prices. Everybody in the oil industry finds it convenient to run the system with a little slop in it. Most governments like it because it dilutes the ability of their old adversaries, the oil companies, to manage markets. Most companies like it because it's generally more profitable to buy a little more than you need, and dump the excess on the spot market, than to risk shortfalls that interfere with deliveries to your regular customers.
That was why, until last fall, you kept hearing about a glut in the oil market. The system runs best with a little slack in it.
But with the Iranian revolution, the normal oil market is reversed, and now the spot market is higher -- occasionally much higher -- than the OPEC price. Suddenly there's less oil for sale than the industry expected. All of the big multinational companies have already announced cutbacks in deliveries to their customers for reasons that, the companies say, are beyond their control. Refiners with commitments to meet are grabbing for the odd lots where they can find them.
The OPEC price for the standard barrel of Saudi light crude oil is currently $13.34. Odd lots of crude have been traded in recent weeks for prices up to $25 a barrel.That has serious political consequences.
Take the example of Britain's North Sea oil. Some of the producers there routinely sell oil on the spot market. In January, the spot price for North Sea oil rose 10 percent. The British government took a hands-off position.
Keep it in mind that OPEC's Jan. 1 price increase was 5 percent, an increase that the industrial nations all denounced as far too high.
One of the companies joining in the North Sea price increase was the government-owned British National Oil Corporation. There you have the dilemma of the government-owned company. Should it protect consumers by keeping prices low? Or should it protect its owners, who are the same people as the consumers, by selling at the best possible advantage? BNOC chose to sell high.
The North Africans reacted with astonishment and fury. They produce the same high grades as the North Sea, and the British were selling it for more than they.
Libya has pulled some of its production off contract delivery to sell for one-third more on the spot market; it has also raised the price of the rest 5 percent, effective immediately. Algeria has warned its customers to expect a second-quarter price rise well above the previously announced OPEC schedule. Two small Persian Gulf producers, Abu Dhabi and Qatar, raised prices 7 percent last week. Pressure on OPEC is rapidly increasing for another worldwide jump in prices.
When the spot price rises above the OPEC price, that fact becomes an accusation that the OPEC governments are selling out to the rich and arrogant industrial nations by giving them oil at less than its true value. That accusation has an edge like a razor in the OPEC countries -- most of which have only one product to sell and know they have only a limited supply of it.
Suppose that you were the economic adviser to the government of an oil-exporting country. The United States warns you that any further price increases will damage economic growth in the industrial oil-importing countries and threaten the stability of the world's central currency, the U.S. dollar.
But you observe that the industrial economies are still growing, although OPEC has increased world prices sixfold over the past eight years.
You also observe that the Americans imported only 6.3 million barrels of oil a day in 1973, when it cost $4 a barrel delivered to U.S. ports -- but they are importing 9 million barrels a day now, with a landed price of nearly $15. As an economist, you conclude that the Americans are apparently determined to keep expanding their oil consumption, regardless of their own president's remonstrances and regardless of the price.
As its economic adviser, what would you tell an OPEC government to do?