Psychologists say that for a period of time after getting out of prison, inmates can't get used to freedom. They miss the security of the prison walls.
In much the same way, the Western world can't accept the idea that what used to be an oil shortage is now a glut. Like the prisoner, consuming nations find the transition too great: it's easier to believe that the present condition is temporary. Total freedom from the cartel's restraints would pose too many unanswered questions.
Government policy-makers concerned with the conservation of energy are downplaying the glut. The International Energy Agency in Paris, for example, has cautioned that the world must not let up in its effort to reduce imports, and to push for more efficiency. The same point is made by Daniel Yergin, co-author of the Harvard Business School report on energy, who conjures up a worrisome scenario in which the glut could disappear in a matter of months.
In principle, who can argue with the thesis that the Middle East is a tinderbox, and that the oil-delivery system is therefore accident-prone? But those who want to direct attention away from the glut are saying something beyond this legitimate warning.
The sales pitch we are getting is the assertion that the world's largest producer, Saudi Arabia, could in a single stroke bring supply back into balance. "The market [now] might actually be in rough balance were it not for a decision by Saudi Arabia to produce almost 2 million barrels a day above its 8.5 million 'ceiling' in an effort to enforce its price views on other producers," Yergin writes.
This reporter has pointed out before that the Saudis, as a matter of self-interest, are optimizing their income from oil by producing 10.3 million barrels a day at $32 a barrel -- revenues they need to support ambitious budgets at home. To boost the price beyond that (to the level of other OPEC nations' list prices) would risk the loss of long-term markets. To cut production would mean a deliberate sacrifice of income.
Yet, we are told repeatedly that the Saudis could easily change the glut into balance or a shortage by manipulating the supply. The fact is that manipulation is not all that easy in a world in which oil consumption has dropped dramatically in response to staggering price increases.
The central and overriding fact in the whole picture is that the oil glut has arisen because OPEC's excessive price increases in 1979-80 finally made alternative energy sources attractive to consuming nations, and hastened the conservation trend.
Just in the United States, oil consumption is running 3 million barrels a day less than the 1979 level. OPEC, which in 1979 was producing about 31 million barrels a day of crude oil out of a free world consumption of roughly 50 million barrels a day, is down to about 22 million barrels a day, out of a free world consumption of about 44 million barrels a day.
Part of the 6 million barrel-a-day contraction in usage can be traced to economic stagnation in many parts of the globe. But much of it is voluntary, a result of the incentive to switch from oil caused by the extraordinary boost in prices. At the same time, non-OPEC sources have boosted their output by about 3 million barrels a day.
Yet, the assumption that the Saudis have "engineered" the glut by producing more than a mystical "preferred" level is hard to shake. A recent front-page story in The Washington Post from its correspondent in Beriut says that, "The persistent glut . . . to a large degree has been manufactured by Saudi Arabia, OPEC's largest producer, which has, in effect, sided with and used the Western companies to work against its opponents within the [OPEC] organization."
The story said the companies had quit paying premiums or bribes to secure top-quality oil from Libya, Nigeria and Algeria, causing production in some countries to plummet as much as 50 percent. "Despite the risk of a blacklash," The Post story continued, "Saudi Arabia is continuing its campaign to keep the world awash in oil until OPEC bow to its long-term pricing strategy, which is designed to lower prices and preserve oil as the West's main energy source."
Such disarray in OPEC is the best certification that the glut is real. The obvious fact is that OPEC can't sell all the oil it can produce at prices it would like to change. That ball game is over: the demand has shrunk, because the rest of the world will not buy oil at any price.
As University of Virginia Prof. Fred S. Singer pointed out in a Post op-ed piece July 10, the Saudis lost their strategic control of the oil market when they went along with the excessive 1979-80 price increase. Continued insistence that the Saudis created the glut and can undo it once they force prices down in the rest of OPEC amounts to a stubborn refusal to face the changed facts of the oil market. It is doubtful that the cartel can ever again attain the dominance it had just two years ago.