Set oil price at $18 per barrel

Global Viewpoint

March 14, 1991|By Ahmed Zaki Yamani

Sheik Ahmed Zaki Yamani was Saudi Arabia's oil minister from 1962 to 1986. He currently heads the London-based Centre for Global Energy Studies.

THE FIRST item on the post-gulf war agenda is the restoration of stability in the region. The second item is avoiding global economic turmoil by stabilizing the price of oil.

In this latter regard, there are two scenarios: sharply reduced production of oil, leading to sharply higher oil prices; or increased production, leading to a low price. Sharply rising oil prices would, of course, hurt the consumer countries -- noitably the United States -- that came to the defense of Kuwait and Saudi Arabia.

On the other hand, plummeting world oil prices caused by a glut NTC would hurt the producers at a difficult time when they need new revenue quickly. Financially depleted Kuwait is borrowing $20 billion. Kuwait and Iraq -- when the embargo is lifted -- will have to figure out how to cover the costs of war and reconstruction. Saudi Arabia, already heavily in debt and in need of financing new arms purchases, will run an annual budget deficit for years.

Low prices would also make it all-but-impossible for the Arab oil states to fund new development programs to help diminish the gap between rich and poor in the Middle East.

Although consumer countries may welcome lower prices initially, the long run low prices can be detrimental because they would slow the search for new reserves to a point where demand once again outstrips capacity, driving up the price.

Unless action is taken the most likely scenario involves rising production and dropping prices. Soon we will see a large surplus oil due to a steep rise in production. As in the 1970s and 1980s, this will lead, I fear, to a cycle of sharp price decreases followed by increases.

No one can be expected to plan effectively under such volatile conditions. That is why a new mechanism must be established to find a middle path for stabilizing oil prices.

OPEC alone cannot prevent the oil-price "counter-shock" we can expect to see. Only a new arrangement between major oil consumers, major oil producers and major oil companies (who must discover reserves, pump and distribute the oil) can provide the necessary clout to set a binding, stable price for oil.

The producer-consumer cooperation that I propose would seek to define a reasonable price range for oil based on the supply-demand situation during a minimum seven-year period, not on a one-year or daily period, as is now the practice in the

market. Seven years is the minimum amount of time needed to explore for oil and exploit what is found.

Consumer countries should seek ways to regulate their oil stocks to moderate seasonal fluctuations in price. For example, when there is strong demand in the winter, they should use up their stocks; when there is weak demand in the summer, they should build up their stocks. In a complementary way, oil producers should reduce production during the summer slump and increase it during the winter peak.

Whenever there is a surplus on world markets, consumer countries should buy up the surplus for their strategic reserves.

Over time, the capacity of the oil-producing countries will shrink, and they must increase their capacity through new investment. Because the producers are assured a consumer market at a set price, which is not now the case, oil companies will have the confidence to risk capital to find and pump more oil. As a result, consumers will be assured a steady supply of energy at a stable price.

The price of oil would not be rigidly set, but would move within a certain range. Through research conducted by the Centre for Global Energy Studies, we found that $18 per barrel would be the ideal price for OPEC crude oil. The ideal price for light crude oil produced outside of OPEC would be slightly higher, around $20 per barrel.

What is important is the concept of a stable oil price, set through cooperation, and acceptable to all parties whose interests are at stake.

Certainly, a process that would prevent oil prices from falling too low would oblige richer Arab oil-producing nations to promote economic development and diminish disparities within the region. But, given the financial burdens Kuwait and Saudi Arabia now face, they are in no position to act alone.

The European Community has proposed a bank for reconstruction and development for the Middle East, to which the community would contribute along with the wealthier Arab ++ countries. Perhaps this could be combined into a single entity with the already extant Islamic Bank, established by the Saudis to help Muslim countries.

Americans should also play a role here. To some extent, they should be responsible for repairing the damage to civilian targets in Iraq, which now has no sewage systems, water or electricity.

Americans did so much for Germany and Japan after World War II, and now they are America's greatest friends and allies.

Through its military prowess in the gulf, the U.S. has shown that it is now the only superpower in the world. As such, it must live up to its other responsibility of promoting global economic stability during peacetime.

George Bush, a former Texas wildcatter, may be the only American president who has understood the oil industry. He knows that, while a low price for oil may get him re-elected to a second term, it is not good for the long-run interests of the United States or the Middle East.

I hope he will direct the same sensibility and clarity he displayed during the war toward the need for a new producer-consumer approach to stabilizing oil prices now that the armed conflict is over.

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