Prices and other surprises

Surprise.

The year just past was full of it. Here's hoping that 1999 is full of surprise, too.

It was not a surprise that crude oil lost roughly 40% of its annual average value in 1998. The were reasons for that to happen, reasons clear to everyone.

It was the principal reason for the price plunge that surprised nearly everyone: the end of Asia's economic boom.

Asia was supposed to be the core growth area for petroleum demand into the next century. Surprise! Important Asian currencies collapsed in 1997. Despite a few hopeful economics signs in 1998, the Asian slump came to look like more than a cyclic adjustment. Malaysia now has a political crisis. Indonesia has a social crisis because its political system has crumbled. Japan has an economic crisis and a political system that seems unable to deal with it.

Surprise atop surprise

So first the Asian downturn surprised energy planners. Now depth and duration show the downturn to be worse than expected. Contracts for next-month delivery of light sweet crude traded in the middle of December at just above $11/bbl on the New York Mercantile Exchange. There has been talk about $8/bbl oil. Some pessimists whisper about $5/bbl oil.

Happy new year, oil and gas business.

Some observers profess surprise over failure of the Organization of Petroleum Exporting Countries to coerce members into cutting more production than they have done so far. Actually, OPEC has performed with more discipline than usual, at least until the past couple of months. And it will probably cut production again unless members feel reason to act according to something other than their economic interests.

What's most surprising about OPEC is that its most important members have watched oil and gas production start and grow around the world yet continue to act allergic to international capital. Production heavyweights like Saudi Arabia, Kuwait, and until recently Venezuela spent a couple of decades deflecting international capital to their competition. Now they're paying for their economic xenophobia. To no one's surprise, they're beginning to loosen up. Also to no one's surprise, they're moving too slow.

OPEC won't be what rescues oil producers everywhere from their sorrows, anyway. Demand will have to do the job.

If producers don't learn anything else from this surprise crunch, they must at least stagger away from it with renewed appreciation for the consumption side of their business. Producing oil and gas for a growing market is a lot better than doing so for the other kind.

Low oil prices will no doubt crimp production here and there-some of it within OPEC, some of it not. But production limits are games of chicken that hurt everyone. The more constructive competition would be not over production in a surfeit market but rather over capital for the production investments that make most sense in a global context. That competition hasn't yet begun.

Meanwhile, demand. What will it do?

No one now expects an early recovery of market growth to rates anticipated before Asia slumped. Markets do swing, however. Low prices do stimulate consumption. Malaysians and Indonesians haven't suspended their aspirations for progress and quality of life.

Turn-around: when?

So no one sees a turn-around in Asian economies in 1999. And no one will see a turn-around until one actually begins, which is not to say it can't happen this year.

The oil and gas business is always wrong when it bases forecasts on projections of current trends. The good news is that the depressing trends by which the oil and gas industry begins 1999 can't last forever. May the next surprise happen as quickly as possible.