YERGIN: No, this is not the ’70s. This is a new OPEC, trying to chart a middle ground. OPEC has its heart and mind set on keeping oil prices between $22 and $28 for what’s called the OPEC barrel. That’s $3 or $4 lower than the benchmark West Texas Intermediate, currently selling at around $27. They’re worried that it will fall through the bottom of that band. They’re seeking to preserve their revenues, on which their national budgets depend.
The threat of recession in the United States, which could cast a pall over the rest of the world, including Asia. That’s the big cloud hanging over the international oil market. OPEC is still very traumatized by the collapse of oil prices after the Asian economic crisis of 1997-98. They’re haunted by the memory of $10-a-barrel oil. That’s why we’ve seen the recent discipline and cooperation among OPEC and non-OPEC oil producers. They recognize that they have to act together if they are to maintain national revenues.
Prices over $30 would hurt the economy at a difficult time. While some members disagree, I think key countries in OPEC are shooting for the middle of their price range. It’s a balancing act. OPEC is trying to anticipate what’s ahead, managing supply and demand by looking two or three months down the road. If there is no global downturn, the oil exporters will need to start increasing production again by summer, or there could be another shock.
The more severe the economic downturn, the harder it will be to keep OPEC’s members in line. Consider Asia. Slowing or negative U.S. growth would seriously hurt the region’s exports, and thus its growth. If so, demand for oil in Asia could actually decline, severely testing the new unity. That said, OPEC’s members will go to great lengths to avoid the kind of free-for-all meltdowns that have dogged the organization in the past. It costs too much.
One of the chief differences between now and the 1970s is the degree of interdependence between their economies and ours. They know they will be affected by a U.S. downturn, not only regarding demand for oil but also their chief investments: stocks and U.S. securities. Look at Mexico, not a member of OPEC but a very influential oil exporter. It derives almost 40 percent of its national income from petroleum. Yet its economy, post-NAFTA, is enormously integrated into the United States. The last thing the Mexicans want is to contribute to a further weakening of their key American partner. The same can be said for Saudi Arabia and Kuwait, though not necessarily Iran and certainly not Iraq.
Not necessarily. Some consuming nations have concluded that the lowest possible energy prices are not necessarily in their interest, because that sets the stage for sharp price spikes. As a result of the price collapse in the ’90s, investment plunged. Had that not happened, we estimate that world oil capacity would be about 7 million barrels a day more than it is, and we would have had more stable prices.
Yes, it’s one of the institutions of the international economy. Born as an instrument of confrontation, wresting control of oil from Europe and the United States, it has grown into an organization for dialogue and interconnection.
You know, I chaired a panel at the World Economic Forum in Davos this year that included key senior OPEC people. At one point I compared OPEC to a central bank, wondering whether that was a meaningful metaphor. Some would say it is, at least for now.
