It may not be the greatest comeback in business history, but the re-ascendance of OPEC is certainly one of the more surprising turnarounds in recent memory. Back in March, the benchmark price of West Texas Intermediate crude oil was $13 a barrel, and it seemed to be a foregone conclusion that the ability of the world's key oil-producing nations to keep prices high had forever vanished. In an earlier incarnation of this column, in fact, I argued that the combination of new oil-discovery and oil-recovery technology with the advent of the spot futures market in oil meant that the OPEC's glory days were long gone. So why are oil prices now at $27 a barrel, with consumption actually outpacing production, and the OPEC nations holding firm?
The simplest answer--and the simplest excuse for that earlier column--is that no one ever suggested that transformations in the oil industry were going to have the effect of repealing the laws of supply and demand. Oil prices have doubled because the global economy has made a powerful recovery in the past 12 months. The U.S. economy has grown faster than it did in 1998, Europe is now humming along nicely, Japan has crawled out of recession (at least for the moment), and much of Asia is now moving again. (Some predictions call for Korea, for instance, to grow at 12 percent next year.) Since oil prices are prospective, the markets do not anticipate a global slowdown any time soon. And the more oil consumers want, the more expensive it will become.
Until, that is, more oil becomes available, either through expanded production by the leading oil-producing nations or expanded exploitation of existing reserves by the giant oil multinationals. And here's where the "foregone conclusion" looks a little less foregone, primarily because both OPEC and non-member countries, such as Mexico and Norway, have shown restraint in the face of rising prices. The history of OPEC, at least since the mid-1980s, has been one of massive cheating on the part of its members, who have regularly violated their production quotas in order to reap as much profit as possible. That, of course, has sent prices tumbling. At the same time, OPEC has had an impossible time dealing with its non-member competitors, who were prone to flood the market at any time.
Prices have also stayed high because the major oil companies, having been burned in the past, have been temperate in expanding their exploration and production budgets. Although most of the majors will do more capital spending in 2000 and 2001 than they did last year, their annual budgets for the next couple of years will probably not equal what they were as recently as 1996. That's what a few of years of $13-a-barrel prices will do for you.
Still, there's another way to look at the relatively tempered way the oil giants are expanding those budgets, and that is that they do not see prices going, as some have suggested, to $35 a barrel. In fact, the oil companies appear to be planning on prices between $20 and $25 a barrel, which would mean that while filling up your tank is going to be more expensive than it was nine months ago, any inflationary impact from oil prices will be seriously muted.
There's no guarantee that the oil companies are right. But there's an excellent chance that they are, because the structural transformations in the world oil market are real, and so too is the fact that running a cartel has not gotten any easier in the past couple of years. Price-fixing cartels can work quite well in the short term. But over the long run the incentive to cheat is simply too high, and the measures of coercion and punishment simply too weak, to keep everyone in line. At the moment, the memories of what low oil prices were like are probably strong enough to keep Venezuela, for instance, from pumping oil as fast as it can. But memories fade, and cash in the bank can sometimes look like forever.