Whatever the Plot Was, It Didn't Work

LONDON. — "No blood for oil," the protesters would chant during the recent war, implying that there was some plot to raise oil prices behind it all -- or maybe to lower them: It was never clear which. Either way, their faith in the ability of the oil experts even to predict prices, let alone to control them, was truly touching.

The experts were the people who forecast that oil would go up to between $60 and $100 a barrel when the coalition actually took the offensive in the Gulf, only to see it collapse to around $16 instead. And nearly two months after the war ended, oil still hasn't even managed to crawl back up within hailing distance of the OPEC's target price of $21 a barrel.


So if the plot was designed to raise prices and benefit the oil companies, it didn't do very well. And if it was intended to lower the price still further for the sake of the consumers, it didn't work either, since the price of oil is now just about where it was before the war started.

The truth is that the oil market is so volatile and perverse that nobody in his right mind would try to manipulate price movements by staging something as clumsy and unpredictable as an international crisis. The price could go through the roof, or through the floor; what it won't do in a crisis is provide the oil business with an environment stable enough to plan and evaluate long-range projects.


And yet in the long run, the price of oil is remarkably stable. If you correct the historic prices of oil for subsequent inflation, then the moving 30-year average price of oil has not strayed very far from $15 a barrel in the past century. And there is a good reason for this.

The oil market is almost perfectly elastic, because the supply is directly related to the price. There is a huge variety of alternative oil sources available, at almost every imaginable wellhead production cost from $1 a barrel (Saudi Arabia) to $20 a barrel (some British North Sea oil).

So as the price rises, more and more expensive sources of oil come into production, until the market is saturated and the price swings down again. We have been around this cycle quite a few times already, and no doubt we will go round it a few more times yet.

All in all, it suggests that the conspiracy theories about how and why the recent war in the Gulf started need a little more work.

And now, having demonstrated to my own satisfaction that it is pointless to try to predict what will happen in the short-term movement of oil prices, I shall try to forecast what the prices will be doing during the rest of this recession-ridden year.

Only 11 of 13 members of the Organization of Petroleum Exporting Countries are actually pumping oil at the moment. It will be close to the end of the year before Kuwait can get any meaningful amounts of oil out of the ground again, and Iraq, though its production facilities are mostly intact, remains under a U.N. embargo.

OPEC's other 11 members are pumping oil at the limit of their capacity. They could boost the price up above $20 with only modest cutbacks in production. They certainly have the incentive, since even the Saudis and their Gulf neighbors are running huge deficits and need all the money they can get.

But it won't happen for a few months yet, purely for reasons of tact. The Saudis, who as the "swing" producer would have to make the biggest cutback in production, will hold off for a while yet in order not to offend American public opinion so soon after the war.


It's also worth waiting because the Soviet oil industry is in such desperate straits that Soviet oil exports may dry up entirely this year. In that case, the supply situation might be getting tight enough toward the end of summer that the OPEC countries will not have to cut back production and accept the resulting opprobrium.

From the OPEC point of view, the ideal situation would be force oil to rise above $20 a barrel and stay there through the end of this year -- but with them still free to sell all the oil they can get out of the ground. And they may just get their wish.

UI * Gwynne Dyer is a columnist specializing in international affairs.