Awash in an Ocean of Oil

Once again, a stunning shift in the price of oil sent tremors around the globe. Yet unlike the jolts that staggered the world economy in the 1970s, last week's quake caused prices to crash rather than climb. On Tuesday oil dropped below $20 per bbl. for the first time in seven years. Said Charles Maxwell, an analyst with the Cyrus J. Lawrence brokerage house near Wall Street: "This is one of the most important days in the oil markets in a decade." Since November, the price of petroleum contracts has plunged about 40%, including an 18% drop last week. Said Peter Beutel of Rudolf Wolff Futures, a New York City investment firm: "A whole new era has begun."

Indeed, as mild, springlike weather temporarily warmed much of the U.S. and Europe, an all-out price war seemed to be getting under way. To boost their shares of the energy market, hard-pressed members of the Organization of Petroleum Exporting Countries and rival suppliers Britain, Norway and Mexico have been flooding the world with an ocean of oil. The battle reflects the aggressive new tactics of Saudi Arabia, the largest OPEC producer, which has doubled its output in recent months. "The Saudis shocked the market," said one U.S. oil expert. "It was like being hit over the head with a baseball bat."

Last week Sheik Ahmed Zaki Yamani, the Saudi oil minister, issued a stern warning. Without a new agreement to curb production, Yamani said, "there will be no limitation to the downward spiral that may bring crude prices to less than $15 per bbl., with adverse and dangerous consequences for the whole world economy." The threatening words pushed prices into a free fall. North Sea oil dropped to $17.70 per bbl. before recovering a bit to finish the week at $18.50.

Plummeting oil prices can do both grievous harm and enormous good. Less expensive oil means lower energy costs for consumers and companies, which can give a substantial boost to U.S. and worldwide growth. At the same time, however, a further fall in oil prices could deal a crippling blow to U.S. energy firms and debt-ridden oil producers, including Mexico, Nigeria and Venezuela. Their woes might then threaten banks and rock the international financial system. Says Edward Yardeni, chief economist for Prudential-Bache Securities: "The oil-price collapse suddenly woke people up to the fact that the financial crisis is still out there. We'd become so jaded that it didn't seem to worry anybody anymore."

Last week's declines stunned everyone, from commodities brokers to Texas oil barons. Panic swept the New York Mercantile Exchange, the nerve center of U.S. oil trading. "There was pure chaos on the floor," said Joel Faber, president of Faber's Futures and a governor of the exchange. As the price of crude fell, shipments of heating oil for February delivery plunged to 55.75 cents per gal., the lowest level since the late 1970s. Six blocks away, on the New York Stock Exchange, the Dow Jones industrial average dropped a total of 26 points on Tuesday and Wednesday before pulling out of its slump and finishing the week at 1529.93, down 6.77 points. Hardest hit were shares of energy firms, and banks with large loans to oil-producing countries. The stock of Chase Manhattan, for example, fell $7.125, a decline of nearly 10%, in two hectic days.