In many ways, the events associated with the spectacular decline in world oil prices now taking place are as meaningful as the two OPEC oil price increase "shocks" that destabilized the world economy in the 1970s.
While world prices remain, theoretically, tied to the Saudi Arabian standard of $34 a barrel set last October, Iran has come back into the market aggressively with three successive price reductions to $30. And the real price, in the spot markets, is no more than $28. North Sea oil, which sells at a premium over Middle East oil, was slashed by $4 a barrel this week to $31, following a $1.50 reduction only a month ago. This will unquestionably accelerate price cuts among the OPEC countries.
Meanwhile, the Russians, in urgent need of cash and commodities, reportedly are meeting the Iranian price on a substantial amount of oil offered in European markets.
As the glut continues to pile up, it becomes increasingly clear that the price trend is inevitably further down. Increasingly, consumers should see it at the pump--with gasoline moving down toward $1 a gallon, and possibly lower.
Exxon chairman Clifton C. Garvin conceded the other day that the world's largest oil company hadn't foreseen the huge drop in world consumption, which represents "something more basic" than conservation alone.
Exxon analysts warn that forecasting oil prices is risky. Others are less bashful. Reports out of London say the Saudis would readily drop the benchmark price to $29--but that may not be low enough. Some conservative oil experts would not be surprised to see $25 oil, and there are credible predictions of $20 a barrel within the next year.
That stunning figure (less than half of the peak spot market price two years ago) comes from at least two sources-- Philip K. Verleger Jr. of Yale University and Booz-Allen & Hamilton; and freewheeling oil broker Harry Neustein, who is involved in the burgeoning oil barter business.
Verleger thinks the decline could be stopped by big production cuts in OPEC, but he doubts that will happen. Neustein adds up non-Communist world production potential to nearly 70 million barrels a day, and concludes that a continuing price slide is inevitable, regardless of OPEC attempts to manage supply.
Others warn that because the Middle East is a tinderbox, the glut could quickly disappear. But many oil experts believe consumption has dropped so dramatically, and new sources of oil are coming onstream so steadily, that the Middle East will never again have the controlling role that it held during the 1970s.
At present levels, declining oil prices have wiped out the attractiveness of investments in synthetic fuels, tar sands and the like, and are dealing a body blow to profitability in coal. Beyond that, the decline makes painfully clear that DuPont's $7.8 billion takeover of Conoco and U. S. Steel's $6 billion takeover of Marathon Oil may not turn out to be the brilliant corporate gambits they were advertised to be.
Both takeovers were aimed at picking up, cheaply, the highly valued oil reserves held by Conoco and Marathon. But what is the true value of reserves? Neustein, in an interview, says bluntly, "It was a bad deal for both of them (U.S. Steel and DuPont). A few years from now, it will be a millstone around their necks."
Bruce Lazier, a Paine Webber Mitchell Hutchins analyst who follows the oil industry, is less bearish than Neustein, because he thinks the acquisitions "were cheap enough," and besides, doesn't expect that the glut will last forever.
Nonetheless, Lazier agrees that the two industrial giants "aren't getting as good a bargain as they thought," especially DuPont, which will be hit hard by the declining value of the coal properties picked up in the Conoco deal. "At $25 oil, you can shut down most of Appalachia," Lazier told me. "At $20, it's finished."
There are other worldwide ramifications: Japan is sitting on an enormous --perhaps as much as 100 days' supply of oil--bought at peak prices. Verleger points out that when interest rates rise from 10 to 18 percent, the annual cost of holding a $34 barrel of oil jumps from $3.40 to $6.12 a barrel.
So far, efforts by Saudi Arabia and the rest of OPEC to get together in an effort to control production--and price --have failed. OPEC's output has fallen to 19 million barrels a day, compared to a high of 31 million barrels a day in 1977. This is the lowest level since 1969 --before the first oil-price shock.
The dramatic turn will require oil exporters who have gotten used to high incomes and huge internal budgets to change their way of life. As a result, there may be severe internal social and economic distress within OPEC. If so, it would be one more unhappy product of the irresponsible wave of price hikes that OPEC set off 10 years ago.