Yesterday, the price of the benchmark North Sea Brent fell through the pyschological barrier of dollars 15 a barrel to trade at between dollars 14.25 and dollars 14.35. The previous lows were dollars 10-dollars 11 a barrel at the end of 1988 and dollars 8.50 a barrel in mid-1986. In real terms, taking account of inflation, prices are scarcely higher than they were at the time of the 1973 Arab oil embargo, which put the Organisation of Petroleum Exporting Countries (Opec) on the map.
The tumbling prices are further signs of how far Opec has fallen from its pedestal as the key arbiter of oil prices. The 1973 oil price rises were the greatest and most dramatic of the oil shocks to hit Western industries and motorists grown used to cheap energy. The Arab oil producers -and other non-Arab Opec members -were able, in effect, to hold an oil-dependent world to ransom. But the rise in prices also sowed the seeds of Opec's eventual demise. It made economical the exploitation of oil fields that had, until then, been too expensive - not least in the North Sea. Once these other sources came on stream, Opec's primacy was challenged.
In recent years, two other factors have also weakened Opec's bargaining strength: the collapse of the Soviet Union, and the keenness of ex- Soviet republics to sell their oil; and the lack of discipline of Opec members, who have exceeded their agreed quotas.
The lower prices will squeeze the economies of the oil states, already stretched by falling incomes. Some, such as Kuwait, have long since derived more income from investment than oil revenues. Others, such as Iran, are almost entirely dependent on exports of oil.
Over time, the world will become, once more, increasingly dependent on the Gulf for its oil requirements. The Gulf contains two- thirds of the world's proven oil reserves, nearly 98 per cent of which are in five countries: Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates.
Opec ministers meeting in Vienna on Tuesday and Wednesday were unable to make even a token cut in production quotas. Because of continuing recession in the industrialised world, demand is low, forcing prices down. Oil prices are down about 20 per cent on the year, as non-Opec producers, such as Norway and Britain, have been pumping oil at unprecedented levels. Prices are expected to fall further for a few days as US traders are inactive because of Thanksgiving. However, the decision not to cut production appears a calculated gamble that demand will pick up as winter sets in. Oil analysts did not expect prices to enter a freefall. 'It'll recover,' said Leo Drollas, chief economist at the Centre for Global Energy Studies.
Saudi Arabia, the largest producer with a quota of 8 million barrels a day, was keen to maintain a steady line. Iran, the second largest supplier, with 3.6 million barrels a day, has always been unhappy with the arrangements. Iran is having difficulty paying for imports and needs to increase income rapidly.
The ministers decided to do nothing because they were uncertain a trim in oil production would do much to help prices. Gholamreza Aqazadeh, Iran's Oil Minister, said the Opec countries would have had to cut by a minimum of 1 million barrels a day to have a substantial impact. But he said such a deep cut would not be 'easy to divide among the countries'.
Once again, Opec called on non- members to steady the market. Opec's communique at the end of its session stated: 'The Conference does not consider that Opec alone should continue to bear the burden of balancing supply and demand.'
The market fears a glut if Iraq is allowed by the United Nations to resume sales of oil, restricted as part of the Gulf war ceasefire resolutions. However, Western diplomats doubt if those restrictions will be eased in the near future.
Business, page 34
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