The History of Oil Price Swings (or "What else is new?")

A well-oiled machine

Oil prices, like other commodities, are a product of a free market

04/03/2000 By Jim Landers / The Dallas Morning News

http://dallasnews.com/business/59128_worldview_03bu.html

WASHINGTON - Faith in economic markets is fickle.

OPEC ministers got rock star treatment again last week, something they hadn't seen from the media in many years.

Energy Secretary Bill Richardson cajoled and pleaded with the ministers by telephone to emphasize the political importance of lowering gasoline prices.

Congress weighed suggestions to repeal or suspend oil taxes, block aid to nations manipulating oil prices, sell oil from the Strategic Petroleum Reserve and haul OPEC into court for price fixing.

Only a few oil analysts repeated what had become a mantra during the Reagan years: Oil is just another commodity. Its price will regain some stability as suppliers and buyers respond to market signals. There was little faith that markets would solve the oil shocks of 1973 and 1979. The federal government used price controls, windfall profits taxes, vast energy management plans and defense doctrines to cope with oil price and supply. Under former President Ronald Reagan, defending the Persian Gulf remained a priority, but the punitive taxes, price controls and management plans were scrapped. Markets were supreme. Without price controls, retail prices started falling. High crude prices brought many new sources of oil into production around the world. Commodity markets took over, with futures trading becoming more interesting than spot or posted prices. The price of leaded gasoline in 1975 averaged 57 cents a gallon. In 1979, a gallon of unleaded regular was 90 cents. It peaked in 1981 at $1.38, then fell back to 93 cents in 1986. Prices recovered over the next decade to $1.23 cents by 1996. The great interruption in markets during that period was the Persian Gulf War. Saddam Hussein was the West's nemesis in that conflict because of a perceived power grab for Persian Gulf oil supplies. Once Iraq was routed, prices sagged again. Oil markets were boring. OPEC meetings were noted briefly inside newspapers' business pages. Two of OPEC's members quit. Then, in 1997, a steeper price decline began. By this time last year, gasoline was once again selling for less than $1 a gallon. Independent oil producers shut in marginal wells and raised the alarm about Iraq, which was ramping up production in a glutted market. Other oil analysts looked to Asia, where a steep economic slump was depressing oil demand. Dan Yergin of Cambridge Energy Research Associates talked of the overbuilt skyline of Bangkok leading oil prices down. ARCO chairman Mike Bowlin, in a speech about the environmental consequences of fossil fuels, talked about "the last days of the age of oil." There were guesses that oil prices could fall as low as $5 a barrel. Oil companies made massive changes in their investments, leaving countries, shelving expensive projects, laying off thousands of workers, merging with others to save money and for efficiency's sake. And then two things happened. Governments that depend heavily on oil revenues, both within OPEC and among outsiders such as Mexico and Norway, agreed to limit production. And Asia's economies got back to work. Demand climbed, production fell, and prices jumped. The U.S. Energy Information Administration estimates that demand was 1 million barrels a day greater than oil production last year. Oil inventories dropped by 400 million barrels. Lucian Pugliaresi, a former National Security Council staffer in the Reagan administration who is now president of the firm LPI Consulting, Inc., says jokingly that the current oil price spike is the first brought on by gloomy consultants. According to this theory, a consensus that oil was down for the count meant there were no alternative sources of oil available when OPEC finally got its act together enough to slash production and raise prices. So was it all price fixing? Red Cavaney, president of the American Petroleum Institute, warned last week that the United States is now "much more susceptible to the OPEC pricing cartel" than it was at the time of the Gulf War or the 1973 Arab oil embargo. "Clearly they started working more closely together, and they were able to stick to their [oil production] quotas more than anybody thought possible," he said. "People thought that wasn't going to happen, that they'd abandon their quotas and we'd be awash in oil." Bob Ebel of the Center for Strategic and International Studies and Vahan Zanoyan of Petroleum Finance Company both say oil is selling at a market price and has all along. "Not much has changed. We have just forgotten," Mr. Zanoyan said. "Ten dollars a barrel is a free market price. $30 a barrel is also a free market price. If you want a free market price for oil, you should be willing to live with $5 as well as $50." Staff writer Jim Landers covers international economic affairs from the Washington bureau of The Dallas Morning News.

-- cpr (buytexas@swbell.net), April 03, 2000

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-- Anita (notgiving@anymore.thingee), April 03, 2000.