Oil Prices: Always Set by Political Rules

May 18, 1986|Robert Engler | Robert Engler, author of "The Politics of Oil" and "The Brotherhood of Oil" (University of Chicago Press), teaches political science at the Graduate School of the City University of New York.

NEW YORK — The announcement last month by Vice President George Bush that he was off to Saudi Arabia to see about firming up crude oil prices finally laid to rest one of the hoariest myths of the U.S. economy--that global oil prices have been nonpolitical. President Reagan rushed to reassure all that his Administration retains its free-market loyalties; it was delighted by the dramatic decline in crude prices--some 60% since December, 1985. The U.S. consumer, after all, had been taught that oil prices are set by the laws of supply and demand. Until, of course, Arabs and other less developed people from the Organization of Petroleum Exporting Countries got their hands on the valves in 1973.

Despite the resulting tempest in the oil barrel, the pricing for the basic energy source of the United States is generally politically determined. Oil is treated as a commodity and traded for profit. Yet the flow of oil, from field to gas pump, is governed by political considerations.

The modern oil corporation, with assets greater than most countries, has functioned as a private government in its global planning and controls. It has maintained surveillance over all energy development within the United States. The illusion invoked is "technological readiness," but the clear meaning has been protection from competition.

At every stage of these operations the multinational has been supported by U.S. government intervention, through tax and tariff protection, subsidies, privileged information, "conservation" laws and favored access to sympathetic personnel in the public service. Not the least of these state-supported services are diplomacy and military actions.

In the early 1970s, after considerable difficulty in challenging the arbitrary pricing of their own resources, OPEC members finally weakened the multinationals' stranglehold over Third World oil. They gained a greater share of crude oil profits. They also raised awareness among producers of how the corporations had played one against the other. Initial responses in the West to the spiraling oil prices ranged from fright to anger. It was as if the world owed Americans and other industrial nations cheap energy.

In significant respects the energy crisis had been a bookkeeping operation. There was no real scarcity of crude oil. The demand by OPEC for greater return from the sale of crude had led the international corporations to shift their own profit expectations to the consumption end of the pipeline. Meanwhile, the OPEC prices substantially increased the worth of reserves held by the corporations. U.S. import controls, designed to protect higher-cost domestic fuel from overseas competition, were removed. Domestic prices soared to OPEC levels. Corporate profits followed. Exploration and production were stimulated in non-OPEC regions.

American officials and the press have been quick to label OPEC a cartel. This pejorative term had rarely been applied to private firms when they orchestrated global production--to insure that no more oil reached the market than was necessary for demand and thus protect artificially set prices. Yet despite their great financial leap forward and some global redistribution of wealth, the OPEC nations were still not integrated operations, profiting from all stages of the industry. They still were tangled in Western capitalism when they recycled oil dollars as deposits in Western banks. And although critical for continued control, OPEC was never able to make all its members adhere to production quotas--the key to a working cartel. This had been one of the great feats of the multinationals.

Nor had OPEC been able to persuade such "production maximizers" as Mexico and the North Sea producers to cut production in response to lower demand. It increasingly found itself serving as swing supplier. This left OPEC, as the bulletin of the Organization of Arab Petroleum Exporting Countries put it recently, "adjusting their output in order to stabilize the price."

Saudi Arabia, the dominant partner, had cut production sharply to keep up prices. But "leakage" from the system continued, with oil from OPEC as well as non-OPEC nations reaching the cheaper spot market. In frustration, the Saudis switched tactics and sought to keep production up, to regain their market share while convincing other nations--in the resulting price fall--of the profitability of maintaining production levels.

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