the Price War Is Here

When petroleum prices were doubling and redoubling during the 1970s, oil buyers wondered whether the increases would ever hit a ceiling. Last week the problem was reversed: as global prices continued to plummet, traders despaired about the lack of a firm floor. "The market is in a careening tailspin," said one Manhattan oil-futures analyst. Warned another: "Put on your hard hat. The sky is falling." The price for next month's delivery of West Texas Intermediate, a major U.S. crude, plunged $3.39 on Monday and Tuesday to $15.44 per bbl., its lowest point since 1979 and a nearly 50% decline from just three months ago. Only toward the end of the week did the markets calm down a bit, and the price recovered part of its losses, to finish at $17.68.

The steep slide early in the week occurred when members of the Organization of Petroleum Exporting Countries confirmed that the group has in effect abandoned any effort to curb its production, thus ensuring a worsening global glut. Meeting in Vienna under dark snow clouds, a committee of oil ministers from five OPEC nations--Venezuela, Indonesia, Iraq, Kuwait and the United Arab Emirates--declined to propose any new output limit for the 13- member group. Their decision goes along with the strategy being pursued by Saudi Arabia, Kuwait and other wealthy oil producers, who are flooding the market with excess petroleum. These countries aim to push prices excruciatingly low so that non-OPEC oil countries, notably Britain and Norway, will be persuaded to help reverse the glut by cutting output.

So far, though, most oil countries have kept right on pumping. OPEC, meanwhile, is currently producing at least 17.5 million bbl. a day, even though demand for its oil is only at 15 million bbl. As a result, prices are plunging while the countries wait to see which one will be the first to blink. The standoff could bring months or even years of rock-bottom energy bills. Says Mani Said al-Oteiba, Oil Minister of the United Arab Emirates: "The price war is here." Adds Constantine Fliakos, senior petroleum analyst at Merrill Lynch: "It's a case of everyone for himself."

The energy giveaway, which could bring inflation-free economic growth to oil-consuming countries, sent spasms of optimism through the U.S. stock market. The Dow Jones industrial average rose 42.43 points and broke through the 1600 milestone for the first time, closing the week at a record 1613.42. But the rally stalled occasionally, partly because many investors were nervous about the effect that falling oil prices could have on Mexico, Nigeria and other debt-ridden oil producers and on the banks that have lent them money.

How did OPEC go from a strategy of one-for-all to a free-for-all? The cartel's disintegration began in 1981, when prices started sliding because of worldwide overproduction, partly caused by consumption cutbacks in many oil- dependent nations. To sop up the surplus, OPEC imposed output limits on its members. But that only provided a chance for such new producers as Mexico and Britain to steal business from OPEC countries, whose market share consequently dropped from 63% in 1979 to 38% currently.