-------- Original Message -------- Subject: [Eternera] A LOOK AT . . . The Cost of Oil Date: Thu, 04 May 2000 14:05:05 +0300 From: Eternera Mailing List <[EMAIL PROTECTED]> Reply-To: "Eternera Mailing List" <[EMAIL PROTECTED]> Organization: Eternera<http://get.to/eternera> To: "[EMAIL PROTECTED]" <[EMAIL PROTECTED]> Eternera Mailing List - http://get.to/eternera The Washington Post OPINION A LOOK AT . . . The Cost of Oil WONDERING WHY IT COSTS so much to fill your tank? One writer believes that the answer may lie close to home.; How the White House Helped Pump Up The Price By Andrew Hamilton Sunday, April 30, 2000; Page B03 The continuing high prices at our gas pumps bring to mind an intriguing comment Bill Bradley made on March 1 during his debate with Al Gore as a Democratic presidential candidate. Responding to a question from the audience about soaring energy prices, he declared, "I think the reason . . . is because we more or less asked the Organization of Petroleum Exporting Countries (OPEC) to raise oil prices in hopes of helping Russia . . . develop its economy." Unfortunately, Bradley did not address the issue to the vice president--who has played a central role in U.S. policy on Russia. Thus voters never got to hear what Gore might have said. Nevertheless, Bradley was on to something. Despite repeated statements by administration officials to the effect that "markets should set prices," there is persuasive circumstantial evidence that the Clinton administration played an important role in encouraging the OPEC cartel to reduce production, and thus raise prices, last year. That encouragement was motivated in part by an urgent need to gain Russian support for--or at least acquiescence in--the war over Kosovo and in part by the desire to expand oil-for-food exports from Iraq in the face of increasing international criticism of sanctions. This is a good example of being careful what you wish for. The higher prices have backfired against the administration both in foreign policy and in domestic politics. Let's take a step back: The low oil prices of 1998 and early 1999 were a mixed blessing. They hurt both the Russian economy (which depends heavily on its huge oil and gas reserves) and domestic oil producers. But they were good for American consumers and kept the inflation rate low. The higher prices that followed OPEC's 1999 production cuts, on the other hand, allowed Russia to pump money into its war in Chechnya, allowed Iraq to manipulate the market and push prices to new heights, blighted Asia's economic recovery, angered consumers throughout the United States and could reignite inflation here. There's some controversy over the administration's role in this change--and the part played by U.S. Energy Secretary Bill Richardson, who visited Saudi Arabia in February 1999 when prices were at their lowest. Former Saudi oil minister Sheik Ahmed Zaki Yamani told a Houston audience last fall that Richardson had "saved the oil industry," during that visit, because his "intervention" had "persuaded" the Saudis to change policy by raising prices. A Department of Energy spokesman told Oil Daily, one of the industry's major publications, that Yamani's reported remarks "do not resemble any discussion the secretary had while in Saudi Arabia or elsewhere," adding that "Secretary Richardson believes that market forces should dictate oil prices." But Energy officials have acknowledged that during his 1999 discussions with Saudi Oil Minister Ali Naimi, Richardson shared U.S. views on an oversupplied market and expressed concern about extreme price volatility. After years of relative stability, prices had tumbled in just over a year from $18 to less than $10 a barrel. The Saudis were ready to help restore prices. Soon after Richardson's visit, a Saudi official told Petroleum Intelligence Weekly, an industry newsletter, "We want a WTI (West Texas Intermediate) price of $18 to $20 as soon as possible." (WTI is the benchmark grade of crude oil used to gauge market trends.) Oil prices are sensitive to small changes. An oversupply of less than 3 percent of world demand can make prices fall, as they did in 1997-98. A small undersupply can cause prices to soar, as they have done since last fall. But such instability is unusual. For the decade leading up to their '97-98 fall, prices had exhibited remarkable stability, with the exception of a price spike during the Persian Gulf War. Several factors in the late '90s contributed to falling prices and eventual oversupply. One was strong competition between Saudi Arabia and Venezuela for market share, particularly in the United States. Another was the Asian economic crisis, which curbed demand. A third factor was the reemergence in 1997 of Iraq as a major oil exporter under the U.N. oil-for-food program promoted by the Clinton administration. By the end of 1998, Iraq was shipping more than 2 million barrels a day and oil prices had fallen to about $12 a barrel. Although low prices put a strain on the Saudi economy, that country could have afforded to let prices drift even lower, hoping to gain market share at the expense of its higher-cost rivals. But the kingdom's strategic relationship with the United States was a countervailing consideration. And Clinton had reasons for wanting high prices. Some of those were domestic. Although American consumers benefited from cheap oil, producers in California and Texas were hurting. The number of active oil and gas rigs fell during the year to their lowest levels since the 1940s. Other reasons were strategic. Cheap oil was undermining the economies and creating political instability in Venezuela and Mexico. It also frustrated administration designs for a pipeline from Baku, Azerbaijan, to Ceyhan, Turkey, that was intended to keep Caspian Sea oil from falling under Russian or Iranian control. And cheap oil was threatening to play havoc with the Russian economy, just when the White House needed Kremlin support for its Kosovo policy. Because of Russia's financial mismanagement and the suspension of international aid in 1998, the administration had few tools for helping the country. However, Russia exports more than 1 billion barrels of oil a year, and 20 percent of its foreign exchange in 1996 came from oil sales. Restoring a higher price would directly aid Russian economic recovery. As oil prices sagged during 1998, Petroleum Intelligence Weekly noted a subtle shift in the administration's public response to OPEC production curbs, from outright opposition to simple nonendorsement. President Clinton recently described prices as having been "way too low" at the time, and administration officials I have spoken with say that, although there was no formal study of these factors, there could have been a closely held decision to intervene with the Saudis. In any event, it is clear that Richardson's visit to Riyadh in February 1999 coincided with new decisiveness in Saudi thinking. At a joint news conference with the U.S. Energy secretary, Naimi said oil markets were oversupplied and promised to take steps to avoid harm to the world economy, suggesting that Saudi Arabia had decided to put price concerns ahead of market share. Meanwhile, OPEC politics were also shifting. Venezuela's new president, Hugo Chavez, dropped his nation's emphasis on expanding market share and began advocating higher prices. Soon after, Saudi Arabia agreed to cut its production below 8 million barrels a day for the first time in years, as part of a proposed overall OPEC cut of more than 2 million barrels a day, approximately matching what Iraq was shipping. The Saudis' new production target, 7.4 million barrels a day, was announced March 16, 1999--the same day Richardson convened a White House meeting with American oil industry executives to discuss ways the administration could help them. The next day, Richardson testified at a joint hearing of the Senate Foreign Relations and Energy committees that a further expansion of Iraqi oil exports "will not have any . . . significant price effect." OPEC and other key oil-producing nations agreed to new production targets on March 23. And on March 24, NATO began bombing Yugoslavia over Russia's strong objections, but without its outright opposition. The price of oil recovered steadily, reaching $14 a barrel in April, $16 in May and $18--believed to have been the administration's price target--in June, when Russia played a key role in negotiating an end to the Kosovo conflict. Meanwhile, in a move seen as a reward to Russia for advocating an end to U.N. sanctions, Iraq issued new export allocations that heavily favored Russian trading companies. Thus, Russia profited both from the rise in oil prices and from expanding Iraqi production. During the summer, Iraq perceived that oil stocks were being depleted, giving it an opening to move the world price upward. Between September and December, it reduced exports by 1.2 million barrels a day, and on Nov. 22 it sent a shock through oil markets by announcing a suspension of oil-for-food sales. The market has not yet recovered from that shock, although Iraq resumed oil-for-food exports, stepped up production to take advantage of high prices--up to $30-a-barrel oil--and expanded its oil-smuggling operation. (Smuggled-oil profits, unlike oil-for-food receipts, are available to Iraq for military investment.) The run-up in price has had other unanticipated effects. It made the Chechnya war affordable for Russia. And it is beginning to cripple the Asian recovery from the market crash of 1997-98. The administration's response to runaway oil prices seems curiously belated. There were signs as early as last September that oil prices would shoot up. But Richardson did not begin his new round of oil shuttle diplomacy until two months ago. That means high prices are probably here to stay through the summer. Oil industry sources say the OPEC target price is around $25 a barrel. This is not to say that careful U.S. intervention in oil markets cannot help. It worked for Clinton in '98 and a reported Bush intervention in 1986 is credited with stabilizing prices for much of the following decade. However, as the accompanying chart suggests, market forces, left to themselves, can produce stable prices most of the time. The drawback to intervention is that it can encourage cartel behavior that works against long-term U.S. interests. Compared with prices in effect early last year, this new price of about $25 a barrel represents the equivalent of a $100 billion tax increase for Americans. And as those consumers adjust, they should reflect on the role played by an administration that talks free markets but, apparently, walks with cartels. Andrew Hamilton, who writes about economics and policy issues, served on the National Security Council Staff from 1970-71 and was a senior fellow at the Institute for National Security Studies at the National Defense University in the late 1980s. � Copyright 2000 The Washington Post Company ______________________________________________________________________ To unsubscribe, write to [EMAIL PROTECTED] Start Your Own FREE Email List at http://www.listbot.com/links/joinlb <A HREF="http://www.ctrl.org/">www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. 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