How Much Will Prices Drop?

Forecasting the future of world crude-oil prices is one of the riskiest ventures in the whole realm of economic prediction. The questions involved go far beyond economics. Can the oil-producing nations continue to hold together as a cartel? How much and how quickly will they extend national ownership of the multinational oil-company affiliates pumping on their lands? Is a lasting peace likely in the Middle East, or might renewed fighting lead to a reimposition of the Arab oil embargo? Despite all these puzzlers, top U.S. economists now agree on two conclusions: barring war or other disaster, the day of panic bids as high as $17 per bbl. for oil is over, and the direction of world prices is definitely down.

In the U.S., the price of Persian Gulf crude now stands at $10.50 to $11 per bbl., nearly triple the price a year ago. Alan Greenspan, a member of TIME's Board of Economists, expects a drop of about $1 or $1.50 per bbl. by year's end. Philip Verleger Jr., an energy expert at Data Resources, Inc., would not be surprised if the price falls $2. A Nixon Administration economist looks even farther: "I calculate a $4 drop in oil from the Persian Gulf by 1976." Any of these scenarios would leave prices far enough above the pre-embargo level of about $4.65 per bbl. to cause serious difficulties for rich and poor consuming nations alike. But any drop at all would help avert what could be a world economic disaster.

The optimism about a price decline is based on the iron law of supply and demand. In the very near future, there will be more oil for sale than there are buyers for it at current prices. World production already has slightly passed last September's 47.8 million bbl. per day, and energy-conservation efforts are holding down demand. By maintaining a 55-m.p.h. speed limit and cutting back on other uses of fuel, the Federal Energy Office reports, the U.S. is saving 1 million bbl. per day. The present sky-high prices are discouraging consumption. Gasoline prices in the U.S. vary wildly according to the proportions of price-controlled domestic crude, uncontrolled U.S.-produced crude and expensive imported oil blended at different refineries. But on the average, they have risen more than 25% in the past six months to a level at which some motorists cannot afford to drive as much as they would like.

Significant savings are also being made in other countries. Their effect is now being masked because consuming countries are buying all the oil they can get to put into stockpiles. But once those reserves have been rebuilt, a global oil surplus should appear, and prices should fall.

The producing countries, of course, may try to prevent a drop. "We will produce just as much oil as we need for the development of our economy--and no more," says an Arab spokesman. The implication is that some members of the Organization of Petroleum Exporting Countries will reduce output to keep supply and demand in balance and prices high. Indeed, Venezuela, Kuwait and Libya have already decreased their production of oil; but Iran, Nigeria, Indonesia and others have stepped up theirs, more than making up the slack.

The plain political fact is that the different producers have different goals. Iran and Algeria, for example, have sizeable populations and many resources other than oil. They therefore aim to sell as much oil as possible to get funds for other kinds of development.

Only Abu Dhabi, Kuwait and Saudi Arabia have small enough populations to lower oil output without noticeably disrupting their preindustrial economies. But if they do so, argues Oil Economist Walter J. Levy in a new study, they will watch their own earnings plummet while their competitors prosper.

In fact, Saudi Arabia already has announced that it will go ahead with expansion programs that could boost output to 11.2 million bbl. per day in 1975, from 8.5 million bbl. daily last September. The Saudis do not mind if crude-oil prices decline. They sit on reserves huge enough to last long after other producers run dry and thus have what one economist calls "a longer horizon over which to maximize their profits." Further, the Saudis, like other producing countries on the Arabian Peninsula, invest much of their oil revenues in industrialized nations. If the Arabs cut production to force prices higher, they know that the move could depress the economies of the U.S., Japan and Europe and that the value of those investments could plummet.

Beyond that, says Economist Greenspan, the Saudis want to "prevent the development of significant alternate sources of energy." Such sources--oil from coal or shale, the atom or the earth's own heat, for example--are expensive to harness. But once the necessary technology has been perfected, operating costs will be low. The Saudis are therefore willing to allow oil prices to turn down in order to head off the U.S. Project Independence and equivalent programs elsewhere before they get well under way.

The poorer nations would be the greatest beneficiaries of a lower world price for crude. As it is, says Economist Levy, they "face almost insurmountable difficulties" in paying for oil and the petrochemical fertilizers that they need to grow food for their burgeoning populations. Industrialized nations would be spared some of the disruptive trade deficits and monetary turmoil from which they might suffer at present prices. If oil prices drop $4 per bbl. over the next two years, the U.S. could save $8 billion of foreign exchange just in 1975. That would probably mean more international trade and more general prosperity, even for the oil-producing countries.

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