Oil producers should bristle over the call last week in the US for withdrawal of crude oil from strategic storage. But they should not ignore it.
The recommendation came from Sen. Charles Schumer (D-NY), who wrote a letter asking President Bill Clinton to approve sale of "several hundred thousand barrels a day" of crude from the Strategic Petroleum Reserve. The President can approve the sale of SPR oil in supply emergencies.
Schumer expressed alarm about the rapid rise in crude prices since March and about the decision last month by the Organization of Petroleum Exporting Countries not to raise production immediately. The price rise threatens the US economy, he said.
Rapid rebound
The price rebound has indeed been rapid. The futures price of light, sweet crude on the New York Mercantile Exchange in the middle of last week, about $24.50/bbl, was more than twice its disastrous level of last February. Even at recent levels, however, the crude price is not historically high. The robust US economy, having benefited from 18 months of cheap petroleum products, can adjust to this swing in the value of oil, just as it adjusts to swings in the values of other commodities. It's what economies do.
What is historic is what probably most alarms Schumer: 5 months of nearly full compliance by OPEC with a production quota. Never before has the exporters' group managed so well and for so long to hold members to production limits. And in Vienna last month ministers agreed not to change the quota before next March. Whether important members stick to their quotas as demand rises and inventories drop during the Northern Hemisphere winter is a separate and very important question.
Schumer thinks that OPEC should raise production now and that the US government should coax it into doing so. He accused OPEC of "price-gouging." For the US to sell oil from the SPR, he said, would amount to self-defense in "nothing less than economic warfare."
Price-gouging? Economic warfare? With crude selling at $24/bbl? No way. There's no emergency. There's no reason to tap SPR.
Schumer's wrong. But he gives producers a useful if annoying reminder about the political resistance that oil prices encounter on any upward swing. The resistance is as much a response to rising prices as the dampening of demand now evident in developed countries. OPEC members should treat Schumer's recommendation as an early warning of political problems sure to arise if they push prices too hard with production restraint.
Politicians like Schumer, however, need to understand that production cuts this year were inevitable and occurred everywhere, not just within OPEC, and not just to push up the price of crude. That OPEC has been able to make coordinated limits work this long reflects not economic warfare but shared desperation. The plunge in oil values cost its members an estimated $51 billion in export revenues last year.
US cuts
Economic distress of the type that unified OPEC members around output limits slashed US production by 500,000 b/d from the end of 1997 to the end of 1998 after a near flattening of output in 1996-97. That was no more an effort to manipulate oil prices than OPEC's cuts were. It was a response to hardship, especially among independent producers. For the independents who survived, this year's price rebound means hope. To them, the emergency happened last year. To them, emergency oil sales by a government acting to weaken prices in what should be a recovery year would represent a serious political affront.
Schumer and the government should let the market work. Neither OPEC production restraint nor consumption will hold up under prices much higher than they are now. The price pressure will ease as the market adjusts. But the process should happen naturally, with no boost from government hoards. US producers should not have to compete with oil they helped buy for an emergency that doesn't exist.
