Barely two decades ago, oil prices were closely tied to international political events. Every major crisis sent the price of a barrel of crude shooting upward, much to western consternation. No more. Oil prices have become immune to political crises. A major American television network chortled recently: ‘It seems like a flashback to the ‘70s, but it’s 1998! In many places across the country a gallon of gasoline is cheaper than a bottle of water!’ (NBC News ‘Today’, March 10, 1998).
Since December, the price of a barrel of crude has plunged from $18 to below $12. (Twenty years ago, its reached a high of some $36.) And prospects for improvement in the immediate future look bleak. Oil analysts, such as London’s Centre for Global Energy Studies headed by former Saudi oil minister Zaki Yamani, predict that ‘single-digit oil prices (are) a real possibility by the summer unless OPEC producers take decisive action to reduce their output substantially.’
This is highly unlikely. OPEC (the 11-member Organization of Petroleum Exporting Countries) pumped 28.7 million bpd (barrels per day) in February - 1.2 million barrels above its official ceiling. The postponement of OPEC’s Market Monitoring Committee (MMC) meeting from March 16 until March 30 tends to confirm the impression that the group is in disarray. The committee, made up of oil ministers from Iran, Nigeria and Kuwait, had been due to assess member compliance with new output quotas agreed at OPEC’s last full gathering in Indonesia in November.
Even reducing current output to OPEC’s official ceiling would not be enough to underpin the price. Current prices are lower in real terms than they were in 1973. This is reflected in pump prices across North America, even if Europe does not enjoy the same benefits because of high taxes imposed by their governments.
Overproduction is only one factor contributing to the decline in prices. The Asian economic crisis is perhaps even more significant. Turmoil in Southeast Asia has dampened demand for crude oil. Industrial production in Indonesia, Malaysia and Korea is sharply down with massive layoffs in the pipeline. Mild temperatures in the northern hemisphere last winter also did not help. Importers’ inventory stocks have remained high. With Iraq coming on-stream with its ‘oil-for-food’ deal and likely to undercut everyone else at $9 per barrel, a further drop in oil prices is certain.
However, the tendency of some OPEC producers cheat on their quotas also depresses the price. Major offenders include Venezuela, Qatar and Nigeria. The fact that Nigeria is on OPEC’s Market Monitoring Committee, which is supposed to prevent overproduction, suggests that little progress on this issue is likely to be achieved.
Nowhere is the dilemma more acute than in Saudi Arabia, OPEC’s biggest producer at 8.65 million bpd. For every $1 drop in price, Saudi Arabia loses $2.5 billion annually. Prior to current price falls, Saudi Arabia had projected a budget deficit of $4.8 billion based on $16 per barrel. It will have to be revised drastically. Saudi economists admit that if the price remains at this level or drops, it will be disastrous for the Saudi economy. Riyadh had projected spending at $52.2 billion. Revenues were forecast at $47.4 billion, leaving a deficit of around $4.8 billion. For the first time since the end of the oil boom in the early 1980s, Saudi Arabia recorded a surplus of around $187 million in its current account in 1996 and an almost equivalent surplus in the following year because of a surge in oil prices. This compares with a deficit of around $8.1 billion in 1995 and a record $35 billion in 1991, the year of the US’s Saudi-supported war on Iraq. These shortfalls have led the kingdom to reduce subsidies and curtail development expenditure. Numerous contractors have remained unpaid for work done years ago. With a recurrence of the large current account deficit, these contractors will have to wait much longer before they see their money. Not so the western arms merchants. Led by the Americans, they have been able to get huge contracts and extract payments through pressure exerted by their governments.
The British and French have also extracted their pound of flesh, even while ordinary Saudis have had to make do with much less. As the Caspian Sea Basin comes on-stream, the price of crude oil will decline even more. While the west’s industrial economies prosper, and their standards of living soar, the Middle East’s oil rich monarchies are liable to end up back in the desert tents whence they emerged just decades ago.
Muslimedia: April 1-15, 1998