PURSUING CRUDE OIL PRICE STABILITY

The idea of international cooperation aimed at oil price stability gets better all the time. Envisioning a way to make it work gets more difficult.

April 22, 1991

3 min read

The idea of international cooperation aimed at oil price stability gets better all the time. Envisioning a way to make it work gets more difficult.

Last year, Venezuelan Pres. Carlos Andres Perez suggested that producing and consuming nations meet under auspices of the United Nations in an effort to stabilize prices. More recently, Indonesia's Subroto, secretary general of the Organization of Petroleum Exporting Countries, called for a "united effort among all producers and consumers to achieve market stability and enhancement." Representatives of the Centre for Global Energy Studies, founded by former Saudi Oil Minister Ahmed Zaki Yamani, are speaking in support of the concept. And Iran's foreign ministry and National Iranian Oil Co. are holding a conference in May on "prospects for cooperation."

GOOD TIMING

The timing seems right. In the past 5 years, the world has tasted both bitter extremes of crude price instability: lows that devastated producers and raised consumption as well as highs that hurt consumers and choked economies. At the very least, price stability represents a worthy topic of conversation.

What's more, consuming and producing interests are aligning nicely. To keep production capacity at the rising levels likely to be required in the next few years, OPEC members will need funds available only from major industrialized consuming countries, which in turn need OPEC oil. It sounds like raw material for cooperation.

To be meaningful, cooperation would have to involve supply and market guarantees of some sort, probably backed by security commitments. But who would the signatories be? OPEC and a coalition of consuming nation governments? OPEC and a group of oil companies? The problems are obvious.

Furthermore, as OPEC itself has shown, multilateral cooperation works better in principle than in practice. Different countries, companies, and groups have different needs and interests. Most often, "cooperating" parties embrace over generalities and fight over particulars. This fact of cooperative life is why oil price stability has been so rare in the recent past.

Models for cooperation, nevertheless, have taken shape without any multilateral effort. Key OPEC members have made refinery investments in consuming nations, securing access to markets and-just as important-acquiring economic interests in product market growth and price stability. OPEC has other reasons to care more now than it did before about price stability. It learned the hard way in the 1980s how aggressive pricing hurts markets. And, with Iraqi Pres. Saddam Hussein in irons, it can worry less about politics and more about commerce.

PROVING MODERATION

If OPEC can prove its new moderation by maintaining production discipline in the current period of low oil demand, industrialized nations should be less reluctant to at least talk with the exporter's group. They certainly shouldn't pursue international price setting agreements. But they can and should recognize the stabilizing benefits of surplus oil production capacity and the consequent requirement for some mechanism to keep production in line with demand.

Oil exporting and consuming nations share interests. That's reason enough for them to talk. Ultimately, these interests might be served best not by broad agreements between groups but by more international investments and contracts among companies, state-owned or private. Multilateral discussions can help by highlighting policies and practices that require change. When mutual interests become risks and rewards shared, price stability-whatever that is-will take care of itself.