As allied forces relentlessly pushed Iraq from Kuwait, Western leaders spoke about carving a new world political order out of the desert sands. But the remarkable calm that saw crude prices barely flicker as smoke plumes rose from oil-well fires across Kuwait was a sign that a revolution isn't in the offing for oil markets.
True, the Persian Gulf war has wrought changes. Iraq, the OPEC price hawk, has been grounded. The moderate Saudis, nestled in the protective arbor of America's guns, are resuming a leadership role in the cartel--indicating a rein on future prices. And there may be new impetus for innovative plans to decrease market volatility.
BARREL POWER. Market forces in place before the war remain, however. The world faces growing demand for crude and declining production in such non-OPEC nations as the U. S. and the Soviet Union. That means greater reliance on the gulf region. The difference with the Saudis on top, says Michael C. Lynch of the Washington International Energy Group: "Power now comes from a barrel of oil, not the barrel of a gun."
And what power it is. The desert kingdom has made up 75% of the 4 million barrels a day in lost Kuwaiti and Iraqi exports. Some fear it will keep churning out crude, driving prices down. But many experts believe the kingdom will try to stabilize prices near $20 to maximize revenues. "The Saudis are not price hawks, but they are businessmen," says Peter Bogin, of Cambridge Energy Research Associates in Paris.
This means the price crash many envision as war ends may be shorter-lived than the price spike that followed Iraq's invasion. With world inventories strong, Saudi officials say that they are likelyto cut 1 million of their 8 million barrel-a-day output after OPEC meets on Mar. 11. Sources also say 1.5 million barrels may be allocated to Kuwait. And Saudi Oil Minister Hisham Nazer says his country will honor its quota of around 5.5 million barrels a day when Kuwait and Iraq are ready to come back.That will take some time, though. Kuwait, which pumped 1.5 million barrels a day before August, is in ruins. "It now looks more like two or three years before they could get back to full production," says Ken Miller, of OPEC Listener, an electronic oil-analysis service. Iraq, and its 2.5 million barrels in daily exports, is a puzzle: The war damage is unknown, and it is possible that sanctions will continue.
Other factors will also sop up Saudi crude. Sales from strategic reserves in the U. S. and other developed countries are sure to be halted. Soviet exports could fall from 2.2 to 1.3 million barrels daily this year, reports the newsletter Petroleum Intelligence Weekly. And the U. S. Energy Information Administration says if oil averages $20 a barrel this year, demand outside centrally planned economies will grow 1.1%, from 53.1 million to 53.9 million barrels daily.
Not everyone envisions a cooperative OPEC. Capacity expansions have accelerated, easing the upward pressure on oil prices for at least a few years--and possibly fueling new OPEC quota wars. But the cartel will likely do what it takes to survive. Whenever the West thinks OPEC is dead, says James H. Ross, president of BP America Inc., "it gets its act together." However, he adds, "it never keeps its act together."
The volatility of OPEC and the gulf is one reason consumers and producers are looking for ways to minimize future disruptions. Congress has approved expanding the strategic reserve from 750 million to 1 billion barrels. Leasing this oil rather than buying it could enhance security, not just for the U. S. but also for producers. "If Kuwait had had 100 million barrels here, or even 50 million, it would have been a lot better off," says John H. Lichtblau, chairman of the Petroleum Industry Research Foundation in New York.
NEW SCHEMES. Gabriele Cagliari, chairman of Italian state oil company ENI, advocates selling oil in the ground, before it is produced. This would give exporters a new way to meet urgent financial needs and still control basic national mineral rights. At the same time, consumers would find a secure source of proven, affordable supplies.
No one expects such novel ideas to find an immediate place in oil markets. But many hope that a new urgency for such moves will smooth the path of crude markets. After all, the Middle East war has reminded the world of its vulnerability to the next oil crisis.