politics will. Workable controls demonstrably in place could
enhance the U.S. ability to commit itself credibly in advance to
prompt action, in accordance with international agreements.
THE
PRICE OF OIL
There is
dispute and uncertainty about the intentions and capabilities of
the OPEC countries, individually and together, to affect or to
determine the price of oil. There is dispute and uncertainty about
the extent to which, in the long run, market forces determine the
out-come, so that OPEC reflects opportunities and constraints
rather than deciding historical trends. But there should be no
dispute that unforeseen events have played an important role in
prices during recent decades; and future prices will probably
display the impetuous quality of the past.
The price of
petroleum rose following the Suez War of 1956; prices were then
steady or gradually declining until the early 1970s. In 1971, three
"unforeseen" or unappreciated events enabled OPEC nations to raise
prices. The Suez Canal was closed, as a result of the 1967 war. The
major oil companies underestimated demand in Europe. And a Syrian
bulldozer broke the Trans-Arabian Pipeline so that Libyan crude,
close to Europe, became more valuable. This event enabled Libya to
obtain higher prices. This move was possible because many
independents were heavily dependent on Libyan oil. In contrast, the
major companies had widely diversified sources. Further, King
Idris, the ruler before Qaddafi, had been thrifty and had put
several years' oil revenue in the bank, enabling Qaddafi to be
aggressive when the time came. (And of course a fourth event, the
replacement of Idris by Qaddafi, was part of the situation.)
Between 1971
and 1973, prices rose gradually with the gradual decline of spare
capacity in the world. Effective market prices actually rose above
"posted prices," encouraging OPEC nations to raise prices to recoup
profits rather than let them go to the oil companies.
In 1973, the
October War caused the Arab OPEC members to cut production by 5
million barrels daily, triggering the mammoth price rise of January
1, 1974. Just what happened to prices is not easily described;
markets were disorderly, and different prices were charged to
different customers. But the overall effect after several months
was the greatest boost in any commodity price of recent times.
From then
until the end of 1978, as world inflation raised the nominal prices
of the goods and services that OPEC countries purchased with their
oil proceeds, there was a gradual erosion of oil