BusinessWeek: August 13, 1984
“that most important of economic barometers, fuel prices, has been plunging. Crude oil prices are falling around the world.” Since OPEC’s last meeting in mid-july the spot crude market has dropped as much as $2 per bbl. Even though petroleum demand in the industrialized nations is rumming well ahead of 1983 levels, there are no signs that the downward price trend will reverse itself. A number of factors may contribute. While Persian Gulf producers serve up discounts, the Soviet Union slyly cuts export prices $1.50 per bbl. Also, Saudi Arabia has been confounding the oil trade. They radically increased output and unloaded nearly $1 billion worth of oil on the spot market in exchange for 10 Boeing 747’s. Pressure on OPEC and other oil producers, including companies in the U.S. to slash long-term contract prices have risen.
While many debtor nations have plenty of reason to fear another price break, even a reduction of $3 per bbl hould have a salutary effect on the industrial world. A $3 per bbl decrease in OPEC prices would reduce the inflation rate in the U.S and other OECD nations by .6 percentage points.
Often at Odds
The problem now is that “OPEC has slipped of course”. OPEC members were pumping more crude than consumers could possibly use, up to 1 million bbl over its self-imposed ceiling. Oil inventories in the OECD countries grew from 500,000 to 700,000 bbl a day in the second quarter, now standing at 97 days of consumption, the highest level in three years. “The problem is that OPEC overproduction during the first half of the year allowed the build up of stocks, which now can be used to put pressure on prices.” Pressure is not coming from demand but from supply. “This war for market share has destroyed any kind of market dictated by supply and demand”.
Game of Chicken
“Far more puzzling is Saudi Arabia’s behavior”. Estimates of Saudi oil output in recent days range from 5 millino to 6 million bbl a day, far more than the market can use. It doesn’t seem like the Saudis are out to deliberately destroy the OPEC pricing sysem they have worked so hard to defend, but it does seem that “they are on the verge of playing a dangerous game of chicken”. The Saudis went to several Japanese trading houses in July, just as the market was turning dramatically weaker, to handle a one time only disposition of a good part of their overproduction. 34 million bbl worth went to pay for their new fleet of Boeing jets. Even though the Saudis have since cut back their production, “there’s a six to eight week lag between the time you start closing the taps and the time you start seeing an effect on the spot market”.