Fresh slide in world oil prices expected to cool inflation. Petroleum industry better prepared than in '86 sag, but producer areas shiver
Television commercials are hawking fuel additives. Americans are driving bigger cars. Fleet mileage requirements on next year's automobiles will be lower. All are signs that gasoline is cheap right now. But the biggest sign of all is the price of west Texas intermediate grade oil. In April it was $18 a barrel. Today it is under $13. That's a 28 percent decrease in just six months.
A slide toward $10 a barrel seems possible. The secretary-general of the Organization of Petroleum Exporting Countries, Dr. Subroto, has even warned that prices could fall to $5 a barrel.
OPEC is having trouble with discipline again. The United States, Western European, and East Asian economies are blessed with another happy break from inflation. But hard times are likely to get harder for the oil producers of the world, the businesses that depend on them, and the banks that lend to them.
Situation less severe than '86
The current price break is pretty much a replay of what happened two years ago, when oil prices slid below $10 a barrel. Now, as then, the world's most richly endowed oil nation, Saudi Arabia, is irked at fellow members of OPEC for cheating on their production quotas. So the Saudis have promised to flood the market until the other cartel members - especially Iran and Iraq, newly freed by their cease-fire to boost oil exports - fall in line. Saudi Arabia's August production was 700,000 barrels a day above its average production level for the first six months of the year.
There are some notable differences this time, however, that keep the price tumble from being devastating for the oil industry. For one thing, memory of the financial pain they experienced in 1986 could bring OPEC renegades back into line rather quickly. Watch for an emergency OPEC meeting in the next few weeks.
Three structural factors could also soften this price war, according to industry analysts:
First, big oil companies have diversified since 1986, insulating them against price volatility.
Second, producers and buyers are increasingly involved in mergers and joint ventures. Kuwait, Saudi Arabia, and Venezuela are leaders in downstream acquisition. Nigeria and Abu Dhabi have also shown interest. This eases price-cutting pressure, bolsters market access, and stabilizes supply. John Hall, chairman of Ashland Oil of Ashland, Ky., calls this the ``reintegration of the oil industry,'' but adds that so far its impact on the market is being felt only in a limited way.
Finally, instead of complex ``netback'' deals, which in '86 took pricing control away from the producers, this time it is clearly Saudi Arabia opening the taps. It would be easy enough for King Fahd to change his mind and close them.
But Philip Verleger of Charles River Associates, a Boston-based consulting firm, says that overproduction today is ``borrowing demand'' from next year. So even if the taps are tightened, demand will remain weak - and so will prices - into 1989. As a result, economists are already reprogramming their econometric models to reflect the oil-related benefits to the US and other industrial economies.
How the US wins
Lower oil prices mean lower inflation. Dennis Winters of Data Resources Inc. (DRI), a Lexington, Mass., consulting firm, says that for every $1 the price of oil declines, the US inflation rate falls 0.3 percent. Lower inflation means lower interest rates. This could boost the economy and help the bond and stock markets. (These benefits are true for Japan and Western Europe as well.)
Cheaper oil will eventually mean cheaper gasoline for motorists - but it will be only a few pennies a gallon unless the price collapse continues.
``Only a significant and sustained crude oil price change can be tracked to the pump,'' says Tilby Lundberg, president of the Lundberg Survey, a North Hollywood, Calif., newsletter that tracks gasoline prices. ``It must be sustained for a couple of years.''
The latest Lundberg survey, weighted for all grades of gasoline and full- and self-service outlets, puts a gallon of gas at $1.0173. That is only marginally lower than in late summer. It's not enough to change driving habits or car choices in the near term, notes Jerry Cheske of the American Automobile Association.
``When gas prices change modestly,'' he says, ``you don't see a significant change in driving habits.''
Still, lower gasoline prices and lower inflation tend to contribute to a positive economic atmosphere. In the US, this could make voters feel better on ``pocketbook'' issues as the presidential election draws near. The likely beneficiary: George Bush.
Debtor nations are hurt
But there will be losers if oil prices remain weak. Among them are the oil regions of the US, oil exporters in the third world, and banks with loans out to these two groups.
Oil-related businesses (especially drillers and small oil companies) in Texas, Oklahoma, Louisiana, Colorado, and several other states - along with banks, thrifts, and real estate - will hurt. But as Mr. Winters of DRI points out, these economies went through a big shakeout two years ago and could weather hard times somewhat better today.
Of more concern are oil-producing nations in the third world that are also international debtors - Venezuela, Mexico, Colombia, and Ecuador in particular. Lower oil prices will undoubtedly affect Venezuela's ability to service its foreign debt, Venezuela's minister of energy and mines, Julio C'esar Gil, said this week.
It's an echo of 1986 for debtors, notes William Cline of the Institute for International Economics in Washington, D.C. While lower interest rates (a result of lower inflation) could help the debtors overall, the benefits would be limited and would take some time to work their way through the system. As a group, Dr. Cline says, the third-world debtors export more oil than they import. Thus economic conditions in places like Mexico and Venezuela could be rougher in the months ahead if prices continue to fall.
