Can OPEC survive the glut. Research Memorandum No. 112

Technical Report · Thu Oct 01 04:00:00 EDT 1981

OSTI ID:5696406

Brown, W M

The recent surplus of petroleum and its effect on world oil prices and on OPEC are discussed. A fundamental change has probably occurred in the world oil market: not only are world oil prices likely to decline during the next few years, they may even collapse. Either way, the current oil glut is hardly a temporary aberration. Whether or when a collapse might occur will depend strongly upon Saudi Arabia. In purely economic terms, it is probably in Saudi Arabia's long-term interest to force prices to drop sharply now - to around $25 a barrel. However, such a strategy is politically dangerous. The Saudis would probably prefer to maintain current output levels and permit inflation and discounting to erode real prices. The combination of relatively high Saudi exports and sluggish demand could cause enough competition for market shares among the other OPEC suppliers that virtually the same result is likely to occur, within two or three years. The scenario most likely is one in which OPEC sets a $32 to $34 unified price later this year, and subsequently raises it enough to keep up with inflation. Maintaining those prices could force Saudi Arabia to reduce its exports so sharply that, within three years, it could lose most of its markets. An ideal strategy for the Saudis is one that maintains a high production level and thereby appears to stabilize prices in nominal terms; actually this strategy would encourage widespread discounting and force even nominal prices to decline. However, the implementation of this strategy would require such deft management that it, too, is unlikely to succeed. Hence, even more than before, it is now possible to see how OPEC is likely to continue to lose its cohesion and influence during the ensuing decade. Correspondingly, the oil importing countries are likely to become less vulnerable to supply interruptions.

• Research Organization: Hudson Inst., Inc., Croton-on-Hudson, NY (USA)
• OSTI ID: 5696406
• Report Number(s): HI-3401-P; ON: DE82901164
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
020700 -- Petroleum-- Economics
Industrial
& Business Aspects
29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
292000 -- Energy Planning & Policy-- Supply
Demand & Forecasting
294002* -- Energy Planning & Policy-- Petroleum
ASIA
ECONOMIC IMPACT
ENERGY SOURCES
FORECASTING
FOSSIL FUELS
FUELS
INSTITUTIONAL FACTORS
INTERNATIONAL ORGANIZATIONS
MARKET
OIL-EXPORTING COUNTRIES
OPEC
PETROLEUM
POLITICAL ASPECTS
PRICES
SAUDI ARABIA
SUPPLY AND DEMAND