The News Behind The News
April 10, 2000
Oil Prices Dive
by Paul Michael Wihbey, IASPS Strategic FellowTen short days after OPEC announced on March 28 that it would raise oil production, the commodity has lost 25% of its market value. From a March 8 high of $34 to its current price of $23, the dramatic decline strongly implies that oil's overvalued market levels of the last several months were driven by political considerations that by late March of this year had played themselves out.
The decision by the US Administration to leverage OPEC prices downward met little resistance, suggesting that it is the U.S. and its non-OPEC allies like Mexico, Canada, Angola and Norway that will determine the course of oil pricing in the future. For the big Persian Gulf producers like Iran, which loses $1 billion in revenue for every $1 drop per barrel, and Saudi Arabia which loses $2.5 billion in revenue for every $1 drop per barrel, the need to maintain high oil prices is the overarching imperative of the regime.
With OPEC having been reduced to a shell of its former self, and the balance of power in the global oil market having shifted to the consumers and their producing allies, Gulf producers may very well be tempted to engineer false crises to spike prices, however temporary.
This may be the thinking behind Iran's April 1 seizure of an Iraqi coastal tanker smuggling Iraqi crude via Iranian waters. The strategy, in this context, would be that such a seizure would initiate a market reaction stemming the downward spiral of commodity pricing for oil. But it seems the market has not paid heed, as it responds to unanticipated supplies. A recent Reuters dispatch reported that "American Petroleum Institute weekly data released on Tuesday reported US crude stocks in the week ending March 31 higher by 4.6 million barrels after the market predicted stocks would rise by just 1.4 million barrels." (April 5, 2000)
The probability that the US will encourage lower gasoline prices for domestic political goals combined with abundant global supplies may tempt Gulf producers like Iran to escalate the Gulf crisis-option for the sake of badly needed revenues.
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