Summary

OPEC’s pricing structure has come close to collapsing a number of times. The British government “chimed” in for the first time openly asking companies in the North Sea to help “prop up prices”. July’s near collapse exposed a new factor of undermining the “orthodoxy” that oil should not be subject to the normal supply and demand rules of commodity pricing. “The oil trade is increasingly looking to the burgeoning oil futures markets for the price signals they once took unquestioningly from Riyadh. But in shifting their focus from the price of Arab light crude to unpredictable quotes on the vast quantities of “paper barrels” traded in New York and London, the oil industry could be setting itself up for a lot more of the same volatility that has marked much of 1984.”

Saudis Squeezed

Before the rise of OPEC, control over world oil prices lay with the Texas Railroad Commission, which could control the market by regulating that state’s flow of crude. By the 1960’s the Commissions influence was replaced by Saudi Arabia and the Arab light became the world’s most widely traded crude. By 1980, with Saudi production of 10 million bbl a day accounting for 25% of the non-communist world’s oil, Riyadh was the unchallenged focal point for oil pricing.

As the world demand for oil dropped, competing crude’s that yield better profits have largely “squeezed” Saudi oil out of European and U.S. refineries. Oil business has turned to a pair of nearly identical crude’s, a U.S. grade called West Texas Intermediate, and Britain’s Brent, the North Sea most plentiful variety. It can be argued that the growing influence of futures trading reflects a weakening of the Saudis’ power as their share of the market falls. The good side is that a system controlled neither by the Saudis nor by OPEC increasingly sets prices. In contrast to the Texas Railroad Commission and the Saudi Oil Ministry, this new system has no political or economic goals. It offers a clearly visible price dictated my market forces without regard to any consequences.