Oil price cosmetics

Dec. 20, 1999
"Right now, I believe that oil prices are too high."

"Right now, I believe that oil prices are too high."

When someone speaking from the consumer's perspective makes that statement, a follow-up test question is in order: "Have you cut the rate at which you purchase oil products?"

If the answer is no, the speaker was just venting a cosmetic judgment.

Even when the observation comes from the US Secretary of Energy.

A firestorm

By dabbling in cosmetics, Energy Sec. Bill Richardson touched off a firestorm among US producers this month. At a Center for Strategic & International Studies conference in Washington, DC, on Dec. 9, he made the statement quoted above. The questioner wanted to know whether Richardson were considering release of oil from the Strategic Petroleum Reserve, "given the current crunch in oil supplies worldwide."

Richardson could have spared himself the wrath of producers, especially independents, by first correcting the question. There is no supply crunch. There is a large correction under way from a period of surplus manifest in high inventory levels earlier this year, diminishing now. The correction involves coordinated supply restraint by some of the members of the Organization of Petroleum Exporting Countries and allied producers.

Despite the correction, supply continues to meet demand on a rising trend. This casts heavy doubt on the assertion about a supply crunch. It also invalidates Richardson's proclamation on price.

The secretary compounded the problem by trying to touch all political bases as he circled the answer he should have given to the question he should have corrected. He said a responsible energy official would "have to look at all contingencies." But he insisted that "we let the market make the correction." Still, "We would be extremely concerned if they [oil prices] went up to unacceptably high levels, and if that is the case then we have options and contingencies."

The answer he should have given to the question he should have corrected is no, the US will not use deliveries from SPR to manage the price of oil. The SPR is for emergency interruptions to supply. No such circumstance exists.

And he should have said nothing more.

Contingencies? Options? If crude prices truly get "too high," the government won't need them. Consumers will moderate their use of petroleum. And production shut in while prices were low will come back on stream. It will happen faster than any remedy the government might concoct. In fact, the production response is already evident outside OPEC. Given crude prices above $26-27/bbl and a little time, production will rise from OPEC, too.

In some political quarters, of course, no such market response can suffice on its own. From those quarters can be heard complaints about OPEC's supply management and suggestions that the government respond, perhaps by tapping SPR. The responsible energy official Richardson invoked would be busy explaining why that would be a mistake.

It must be granted, however, that OPEC's unusual adherence to deliberately lowered production quotas stirs unpleasant memories of the Arab embargo of 1973-74 and OPEC's clumsy and futile attempts to set oil prices over the following decade. This is different. Richardson should say so.

What's too low?

He could illustrate the difference by inverting his own observation on price and making it from the producer's perspective: "I believe that oil prices are too low."

Producers made that observation often last year. It should alarm no one that they have been validating the judgment this year by answering with their behavior the follow-up test question: "Have you cut the rate at which you produce crude?"

There was nothing cosmetic about last year's trouble for producers. There is nothing sinister about the coordinated dimension of this year's correction. And there is certainly no need for consuming-nation governments to bluster about unspecified contingencies.