COMPETING OIL-VALUE CLAIMS ON FULL DISPLAY

This year's price lurch has added stress to competing claims by governments on petroleum values.

Sep 29th, 2000

This year's price lurch has added stress to competing claims by governments on petroleum values.

The most visible stress points are the confiscatory taxes that European governments impose on consumers of petroleum products. The taxes have come under protest from consumers as well as members of the Organization of Petroleum Exporting Countries.

The OPEC protests won't win much sympathy in Europe. Since the early 1970s, the important OPEC members have founded national treasuries on their oil fields and subsidized the welfare of whole populations with petroleum earnings. As long as OPEC members use oil revenue to fund general health care, for example, European governments will ask whey they shouldn't, too.

Each side naturally parries the other's arguments with claims of sovereignty. So do governments of the oil-producing countries in Asia and Latin America that skim oil values by subsidizing internal prices of vehicle fuel.

That practice is in decline worldwide because it's unsustainable-as countries like Ecuador and Venezuela are learning the hard way.

Subsidized nationhood is equally unsustainable, although the evidence seems to have escaped widespread notice. A year ago, members of Saudi Arabia's royal family began making public statements to the effect that Saudis should expect to pay for products and services that the government had been providing free.

This was a significant response to real fiscal distress. And it occurred while the Saudi government was negotiating with private companies over investment in Saudi business projects not involving oil production.

In its own measured way, Saudi Arabia thus moves toward the type of economic liberalization that has stimulated economies in Asia and parts of Latin America. Similar developments are under way in Kuwait and Iran.

The oil-consuming world should welcome the incremental denationalization of oil central to this trend. It further elevates commercial considerations in OPEC's decisions about production, which will dampen crude values over time. For high-cost oil producers now benefiting from OPEC willingness to shut in low-cost production in defense of price, on the other hand, it provides reason to worry.

Against the backdrop of such an evolution, it is easy to understand the growing impatience of OPEC nations with Europe's aggressive taxation of oil products. High taxes weaken demand, which OPEC's heavyweights no longer take for granted.

So a large question growing out of current market turbulence is whether European governments will loosen up on taxation. The answer depends partly on politics and partly on economics.

The recent protests have clearly focused on taxes, of which European consumers finally and apparently have had their fill. Tax resistance might subside along with oil prices sometime next year. But it might set political limits on future efforts to raise fuel levies.

The economic pressure against heavy fuel taxation won't dissipate so readily when prices decline. Heavy tax loads make Europe and its constituent countries less competitive internationally than they otherwise would be, whatever the oil price.

This explains why European leaders so eagerly embrace questionable reasons-global warming leaps to mind-for other countries to raise their taxes.

And it is why countries that resist the urge, especially countries that not only maintain a light touch with taxes but also leave commodities like oil free to act like commodities, will conquer the global economy.

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