Oil price dips below level of 1970s: Harvey Morris analyses the underlying causes of the unusual mid-winter slump in the market
Friday 18 February 1994
The short-term factors that explain the unusual mid-winter slump include a sudden thaw in the United States which has depressed heating- oil prices after a bitterly cold January. There is also a general belief that when Opec meets in Geneva next month to discuss output quotas, it is unlikely that member states, Saudi Arabia in particular, will do much to trim output, which currently stands at a combined 24.7 million barrels a day - some 1 million barrels above actual demand.
But the underlying causes of the current decline in the price of crude, which was nudging dollars 50 a barrel at the outbreak of the Iran-Iraq war in 1980, have more to do with geopolitics and international finance than with the end of the American cold snap.
The economics of the oil market remain as they have been for the past two decades: the big consumers - North America, Western Europe and Japan - rely on their own resources together with imports from non-Opec countries such as Russia to meet as much as possible of their needs. Any extra demand is then met by production from Opec, which thereby plays a determining swing role in setting the world price. Within Opec, Saudi Arabia, as the biggest producer, has traditionally played the swing role: if the Saudis cut their production, the price goes up; if they increase it, the price goes down.
At the moment Saudi Arabia is pumping out crude at the rate of 8 million barrels a day compared with only 2 million barrels at a historical low point in the summer of 1985. At the moment the Saudis show no inclination to trim their output in order to boost the price. Oil analysts believe Riyadh is determined to protect its huge market share - equal to one- third of the entire Opec output - even if this pushes the price down. The Saudis are particularly concerned to protect their position in the event that Iraq, presently banned from selling oil by UN sanctions, should one day return to the market.
In the past, the Saudis have been prepared to cut back output under pressure from their chief ally and customer, the United States, in order to prop up the price in favour of US domestic producers. George Bush won a respite for the Texan oil industry when he went to Saudi Arabia as vice- president in 1986 to persuade the Saudis to reduce production.
In the intervening years the situation has changed. The United States' economic recovery is presently benefiting from lower oil prices and Washington has no interest is seeing them artificially increased.
In the meantime, the high cost of exploiting non-traditional resources such as the North Sea has dramatically dropped as the benefits of investment come on stream. North Sea fields which were once barely profitable at a crude price of dollars 16-dollars 18 are now making money at dollars 13.
- 2 Kim Kardashian on Bruce Jenner's 'story': 'We support him no matter what, and I think when the time is right, he'll talk'
- 3 Russian girl takes her own life after parents find pornography on her computer
- 4 Ball pool for adults opens in London
- 5 Amal Clooney gives excellent response to fashion question at European Court of Human Rights
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
Kim Kardashian on Bruce Jenner's 'story': 'We support him no matter what, and I think when the time is right, he'll talk'
Michelle Obama highlights harsh restrictions faced by Saudi women after meeting King Salman without wearing a headscarf
Russian girl takes her own life after parents find pornography on her computer
Ball pool for adults opens in London
9 reasons Greece's experiment with the radical left is doomed to failure
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
£40000 per annum: Ashdown Group: A reputable organisation within the leisure i...
£90 - £140 per day: Tradewind Recruitment: I am currently working in partnersh...
£96000 - £200000 per annum: Recruitment Genius: Looking for a better earning p...
£32000 - £36000 per annum: Recruitment Genius: A rapidly expanding company in ...