PUMPING UP PRICES
March 23, 1998
A NewsHour with Jim Lehrer Transcript
In a move to shore up falling prices, several oil producing nations have agreed to reduce the production of crude oil. Margaret Warner talks with Daniel Yergin, President of Cambridge Energy Research Associates, about the decision and its effect on the global economy.
MARGARET WARNER: American consumers have been enjoying the lowest inflation-adjusted gasoline prices since at least the late 1950's. Today, according to government figures, Americans are paying an average of $1 a gallon for regular gas. Last August, they were paying $1.24. In some areas, drivers are finding unleaded regular at less than 80 cents a gallon.
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Cambridge Energy Research Associates
Slumping oil prices.
But this good news at the pump may be about to change. Yesterday Saudi Arabia, Venezuela, and Mexico announced they would cut their crude oil production to shore up flagging oil prices. Today, six other oil-producing countries said they would follow suit. The price of crude has dropped precipitously in recent months. Last October, it was selling for nearly $23 a barrel. Last Friday, it closed at $14.60. At the close of business today oil futures commanded $16.51 a barrel. For more on all this we're joined by Daniel Yergin, president of Cambridge Energy Research Associates. His 1991 book about the worldwide oil industry, The Prize, won the Pulitzer Prize. His latest book is Commanding Heights, about the global economy. So why are these countries doing this now?
DANIEL YERGIN: Well, basically because they got desperate. They saw not only that prices were down; they were going to head farther south, and it became no longer an issue of the oil market. It really became an issue for central bankers and finance ministers who saw their budgets going out the window.
MARGARET WARNER: You mean, so these countries were really suffering economically?
Reasons behind the falling prices.
DANIEL YERGIN: Yes. This fall had been very traumatic, and what drove it more than anything else was the Asian financial crisis, this unexpected thing. People say Asian financial crisis isn't having an impact on the rest of the world. Look at oil prices. Look at prices at the gasoline pump, because demand is down in Asia, and there's now basically a glut of oil.
MARGARET WARNER: We've also had an incredibly warm winter, I think--
DANIEL YERGIN: Yes.
MARGARET WARNER: --all over the Northern Hemisphere. Did that contribute as well?
DANIEL YERGIN: Yes. The second thing, it was certainly a warm winter. Some say it was the warmest winter on record. And, meanwhile, production was increasing for the Middle East. So that was a recipe for an oil market with a lot more oil. And, by last week, there was almost no place to put the surplus oil because the storage tanks around the world were brimming with oil, and that meant--that's what was the signal, that these prices were going to go down further.
MARGARET WARNER: So how much do these--I think there are nine countries that have signed up already--how much do they hope to cut worldwide oil production? I think their date is next week, right, April 1st?
DANIEL YERGIN: Right. Well, the big three in this are Saudi Arabia, Venezuela, and Mexico, which is playing a much more prominent role in this. Mexico, remember, is not a member of OPEC. And they're talking about cutting about 600,000 barrels among the three out of a total of about a little over 1.7 million barrels a day.
MARGARET WARNER: That they want to cut?
DANIEL YERGIN: Yes. And they want to expect--they feel they've given at the office now 600,000; they want another 1.2 million or so from other producers.
MARGARET WARNER: But when you look at how much worldwide oil production is, that seems like a drop in the bucket, no pun intended, but that seems like a small non-drop, whatever.
An issue of supply and demand.
DANIEL YERGIN: We had a market. I mean, the very simple numbers had a market in which supply was increasing, programmed to increase by about 3 million barrels a day. Demand, because of Asia and the warm winter was increasing by about half that, 1.5 million. So that's the gap. And that's what they want to remove, and basically buy time, see what happens with the Asian economies, and pray for a cold winter.
MARGARET WARNER: Now, how much--do these nine countries--let's say no one else signs on--do they control enough of the market share in oil to really affect price?
DANIEL YERGIN: Right. And there are some others who are in the wings--and, you know, the segment we just saw about Russia actually raises a very big question about the oil market because Russia's supposed to be part of this deal, and, you know, who's in charge of the store in Moscow right now is the question as of today. But if these countries get together and pull back their production and it's credible and it's believed, then you'll see some kind of stabilization in the price, but, you know, the market today closed up about $2 a barrel, as you pointed out, and that's basically the market saying, well, let's watch, see what they can do.
MARGARET WARNER: Because couldn't there be a problem of discipline, even among these nine countries really sticking with--
DANIEL YERGIN: Yes. Ultimately these agreements come undone. People start cheating or overproducing, whatever you want to call it, and, in fact, when the price gets up, then the incentive to, you know, get a little more into the market increases, but I think what you have is you have Saudi Arabia and you have Venezuela now. Basically their message is that they have enough that they can really push the price down. And if other people don't go along, then the message is it's not going to be a thimble of oil; there's a ton of oil that would be ready to flow into the market.
MARGARET WARNER: And, though, what's to keep other oil-producing countries that haven't signed on--I mean, I looked at the list--Indonesia's one--obviously they're desperate for foreign currency--what's to keep them from over-producing just to get more market share?
DANIEL YERGIN: Well, the difference between now and the famous oil price collapse of 1986 is that now you don't have a vast amount of unused production capacity, so most countries are producing pretty close to capacity, and--
MARGARET WARNER: Oh, I see.
DANIEL YERGIN: Now, another wild card out there is Iraq, which in their discussions with the U.N. is slated to increase or be allowed to increase its production, and that then starts to put even more oil into the market.
MARGARET WARNER: Okay. Now, help us understand the effect. The countries make this announcement. They hope it kicks in next week. Does the price of crude immediately go up. And, if so, how much?
DANIEL YERGIN: Well, what we've seen is it's gone up $2. It might go up another $2 if the thing continues to have credibility. And you do have these heavy hitters behind it. You know, these lower prices, of course, have brought smiles to the lips of central bankers literally in the western world, in the industrial countries, because generally it's been an antidote to problems out of Asia and good for inflation. But so now we're going to see these prices go up, but there are still going to be low prices, even before this came unstuck, American motorists were paying some of the lowest prices they've ever paid for gasoline.
MARGARET WARNER: But give us an idea of how quickly American motorists will see the higher price reflected at the gas pumps, which is where most Americans--
DANIEL YERGIN: Well, I mean, everybody judges by what happens at their local gas station and generalizes to the entire country, and in some places you'll see the price move up, you know, quickly, but in other places it will take a couple of weeks because there is a lot of oil, a lot of product in the system, and a lot of supplies trying to get to the market. But with a $2 a barrel increase, what you're looking at is like a 5 cent increase in a gallon. And, if you remember, two years ago, we almost had a revolution in the United States because the price of gasoline went up 5 cents. So you get these fluctuations, so we can see if this agreement holds another--that 5 cents plus maybe another 5 - 10 cents.
MARGARET WARNER: And that would still be less than American motorists were paying last summer.
The cheapest gasoline prices since 1947.
DANIEL YERGIN: It still would be cheaper than most any year since 1947. And today we're trying to find out what prices were like in the Great Depression, and they're actually higher--gasoline prices on average--than they are today.
MARGARET WARNER: Inflation adjusted.
DANIEL YERGIN: Inflation adjusted.
MARGARET WARNER: Absolutely. Which U.S. businesses will be the most affected?
DANIEL YERGIN: Well, the ones that are probably the happiest about the low prices in the airlines, because this goes right to the bottom line, and so that's very beneficial for them. You know, others--it kind of spreads throughout the economy, and overall in terms of helping to keep inflation down, that's where you get a lot of the great benefit.
MARGARET WARNER: If you took like trucking companies and they're paying less for gas--
DANIEL YERGIN: Oh, yes.
MARGARET WARNER: --have those prices, lower prices been passed on to consumers or have trucking companies--
DANIEL YERGIN: Well, I think we have--
MARGARET WARNER: --just increased their profits?
DANIEL YERGIN: --you know, we have this amazing American economy now that's had this growth with low inflation and certainly that's why central bankers, including central bankers in this country, have been smiling, because it's one of the things that's helped to keep these prices down, and it's been passed on because we have a much more competitive economy than we did say ten or fifteen years ago.
MARGARET WARNER: And you mean gas is such an important component in so many businesses that it just helps keep--
DANIEL YERGIN: Yes. And I mean for airlines it can be--20 to 30 percent of their operating costs can be their fuel costs.
MARGARET WARNER: And looking at consumption, how vulnerable is the U.S. today to some kind of concerted action like this, as compared to say in '73 with the first big oil embargo?
The 1973 oil crisis.
DANIEL YERGIN: Well, what happened in '73 is you had an oil market, there was no slack capacity in it, and it was set, you know, that the market was going to respond, and then you had this political crisis, the Middle East overlaid, and you had this Club of Rome thinking that we were going to run short of everything and you had this massive panic and the gas lines. Now we have a much more, I think, flexible system, and supply and demand really do adjust, with less kind of political interference both from the producing countries really and here, so here they're trying to manage the price, but they're doing it really in the context of a very active global market, where every minute the price shows up on the screen at the futures exchange. So I think this market has more flexibility. The supply system has more durability. I mean, if the Gulf War had gone in a different direction, we'd be a lot more worried, but we can adjust to these things.
MARGARET WARNER: Great. Well, thanks very much.
DANIEL YERGIN: Thank you.