--
OXFORD
INSTlTUTE
FOR
ENERGY
STUDIES
Who Makes the Oil Price?
An Analysis of Oil Price Movements
I978 - 1982
Steve Roberts
Oxford Institute for Energy Studies
WPM 4
1984
The contents o f t h i s paper are f o r t h e
p u r p o s e s o f s t u d y and d i s c u s s i o n and d o n o t
r e p r e s e n t t h e v i e w s of t h e Oxford I n s t i t u t e
for Energy S t u d i e s or any of i t s members.
Copyright 0 1984
Oxford I n s t i t u t e for Energy S t u d i e s
I S B N 0 948061 0 3 0
CONTENTS
Page
Introduction
1
I
Some T h e o r e t i c a l C o n s i d e r a t i o n s
4
I1
The Second Oil Price E x p l o s i o n
8
111
The P r i c e U n i f i c a t i o n of 1981
29
IV
The S l a c k Market of 1982
37
V
Conclusions
46
Annex 1
51
Annex 2
53
FIGURES
Page
S p o t P r i c e s of S e l e c t e d Crudes and P r o d u c t s ,
Fig. 1
A p r i l 1978
-
10
March 1979
2
E a r l y 1979 Q f f i C i a l P r i c e I n c r e a s e s
14
3
Spot Crude and P r o d u c t P r i c e s , 1979-1982
17
4
Egypt and Ecuador's
O f f i c i a l Crude P r i c e s ,
1979-1 982
23
5
E a r l y 1981 O f f i c i a l P r i c e Cuts
31
6
1982 O f f i c i a l P r i c e Changes
41
TABLES
Table 1
Official P r i c e I n d i c e s f o r OPEC P r o d u c e r s ,
December 1978
2
December 1980
O f f i c i a l Price I n d i c e s for non-OPEC
December 1978
3
-
Official
-
20
Producers,
December 1980
21
P r i c e D i f f e r e n t i a l s : September 1978,
December 1981 a n d November 1982
34
1
Who Makes The Oil P r i c e ? 1978-82
A s t u d y of o i l developments d u r i n g '1978-82 may p r o v i d e some
i m p o r t a n t i n s i g h t s i n t o the o p e r a t i o n of the p r i c i n g mechanism for
petroleum i n i n t e r n a t i o n a l t r a d e .
F i r s t of a l l , t h i s period e n a b l e s u s
t o s t u d y t h e b e h a v i o u r of oil p r o d u c e r s i n both a r i s i n g and a f a l l i n g
market. I n 1979/80 e x c e s s demand pushed prices u p more than t h r e e f o l d .
Two y e a r s l a t e r the p o s i t i o n changed t o one of u n p r e c e d e n t e d e x c e s s
s u p p l y , with OPEC p r o d u c i n g a t less t h a n 55 per c e n t of c a p a c i t y . As w e
s h a l l see the e v i d e n c e s u g g e s t s marked asymmetries i n b e h a v i o u r
a c c o r d i n g t o market c o n d i t i o n s .
Secondly, 1978-82 is a period d u r i n g which s e v e r a l non4PEC
c o u n t r i e s emerged as s i g n i f i c a n t exporters and began t o p l a y a major
r o l e i n t h e w o r l d market. W e would s u g g e s t t h a t too o f t e n non-OPEC
p r o d u c e r s have been g i v e n l i t t l e o r no a t t e n t i o n , b e i n g r e g a r d e d merely
as p a s s i v e a g e n t s i n a market i n which t h e p r i c i n g d e c i s i o n i s s a i d t o
be beyond t h e i r c o n t r o l . The e v i d e n c e of the post-1978 p e r i o d p a i n t s a
very d i f f e r e n t p i c t u r e .
T h i r d l y , a n d f o r t h e very r e a s o n s mentioned above, the p e r i o d
1978-82 p r o v i d e s a good t e s t i n g ground f o r t h e i s s u e of p r i c e
l e a d e r s h i p . Who l e d t h e o i l price r i s e of 1979-80? How w e r e prices
d e t e r m i n e d i n 1981 -82 when excess s u p p l i e s should n o r m a l l y have induced
a r a p i d price c o l l a p s e ? As we o u t l i n e i n S e c t i o n I, a number of
c h a r a c t e r i z a t i o n s of t h e o i l p r i c i n g system c a n be d e v e l o p e d , most of
which p o s t u l a t e some form of l e a d e r s h i p - e i t h e r by OPEC o r a s u b s e t of
OPEC member c o u n t r i e s a c t i n g as a ' c a r t e l ' , o r by a s i g n i f i c a n t
p r o d u c e r (Saudi A r a b i a ) p r o v i d i n g a f r e e b u f f e r s t o c k t o a n i n f o r m a l
commodity s t a b i l i z a t i o n scheme.
T h e o r i s t s have found it a t t r a c t i v e t o a p p l y to the o i l market
a n e q u i l i b r i u m c o n c e p t due t o von S t a c k e l b e r g l I which d i s t i n g u i s h e s a
dominant p r o d u c e r (OPEC or S a u d i A r a b i a ) and a c o m p e t i t i v e f r i n g e . The
former makes t h e price, t a k i n g i n t o a c c o u n t t h e e f f e c t of h i s a c t i o n s
1 H. von S t a c k e l b e r g , The Theory of the Market Economyl Oxford
U n i v e r s i t y P r e s s , 1952.
2
on t h e s u p p l y d e c i s i o n s of f r i n g e p r o d u c e r s . The l a t t e r have no
i n f l u e n c e on the market and j u s t t a k e t h e price as g i v e n by t h e
dominant group.
E q u i l i b r i u m c o n c e p t s may p r o v i d e u s e f u l norms. B u t the o i l
market h a s e v i d e n t l y been i n a s t a t e of d i s e q u i l i b r i u m i n t h e period
c o n s i d e r e d h e r e . A n o t i o n , f i r s t developed by Kenneth Arrow2, and n o t
p r e v i o u s l y a p p l i e d t o the o i l market, may be r e l e v a n t . The i d e a i s t h a t
i n d i s e q u i l i b r i u m e v e r y p r o d u c e r f a c e s a downwards s l o p i n g demand c u r v e
and t h u s has some d i s c r e t i o n o v e r h i s p r i c e . If everybody i s a price
maker h a t i s t h e n t h e r o l e of t h e l e a d e r ?
O i l e x p e r t s w i t h i n t h e i n d u s t r y have t e n d e d t o look a t the
problem d i f f e r e n t l y . T h e i r i n t e r e s t f o c u s e s on the r o l e p l a y e d by S a u d i
A r a b i a as the l i n c h p i n of the p r i c i n g system, and on the i n t e r a c t i o n
between this c o u n t r y and o t h e r O P E p r o d u c e r s . A c o n v e n t i o n a l wisdom
h a s developed i n the i n d u s t r y ; i t d e f i n e s Saudi Arabia as the 'swing
supplier
I
which s t a b i l i z e s prices by a b s o r b i n g f l u c t u a t i o n s i n t h e
demand for OPEC o i l . Of c o u r s e the 'swing s u p p l i e r ' c a n n o t i n c r e a s e h i s
p r o d u c t i o n beyond i n s t a l l e d c a p a c i t y ; and he is u n l i k e l y to remain
i n d i f f e r e n t i f o u t p u t d e c l i n e s below a c e r t a i n limit. On t h i s view
Saudi Arabia's a b i l i t y to s t a b i l i z e prices, though s i g n i f i c a n t ,
is
nevertheless constrained.
We s h a l l see that the e v i d e n c e s u p p o r t s the Arrow n o t i o n as
w e l l as t h e i d e a of c o n s t r a i n e d Saudi l e a d e r s h i p .
Again, whether this
c o r r e s p o n d s to any view of price l e a d e r s h i p as d e f i n e d by the standard
economic l i t e r a t u r e i s q u e s t i o n a b l e .
W e a t t e m p t i n t h e c o n c l u d i n g part
of the paper ( S e c t i o n V ) t o s u g g e s t d i f f e r e n t theoretical
c h a r a c t e r i z a t i o n s of t h e oil pricing mechanism a c c o r d i n g t o
demand/supply c o n d i t i o n s p r e v a i l i n g i n the m a r k e t .
But t h e r e is a
l i m i t to t h e e x t e n t to which the b e h a v i o u r of the o i l p r o d u c e r s c a n be
e x p l a i n e d i n s t r i c t l y economic terms.
P o l i t i c s are a f a c t o r of major
importance, and economists f o r g e t t h i s a t t h e i r peril.
Kenneth T. Arrow, ' T o w a r d s a Theory of P r i c e A d j u s t m e n t ' , i n
M. Abramowi t z ( e d ) , The A l l o c a t i o n of Economic Resources, S t a n f o r d
U n i v e r s i t y P r e s s , 1959.
.
3
This paper i s s t r u c t u r e d around three d i s t i n c t s u b - p e r i o d s :
( i )The p e r i o d of r i s i n g p r i c e s from September 1978 t o December
1980;
( i i1 The price u n i f i c a t i o n of 1981 ;
Iiii) The slack market of 1 9 8 2 .
I n e a c h w e s e e k f i r s t ta describe t h e o u t p u t and price changes which
o c c u r r e d , h i g h l i g h t i n g t h e d i f f e r e n t i a l s i z e and t i m i n g of changes i n
official prices by each p r o d u c e r , and comparing these i n t u r n w i t h
movements i n spot crude and p r o d u c t p r i c e s .
W e seek t h r o u g h o u t to draw
o u t the i m p l i c a t i o n s of our f i n d i n g s for the oil p r i c i n g system, and
t h e s e are b r o u g h t t o g e t h e r i n t h e c o n c l u d i n g s e c t i o n .
4
I
Some T h e o r e t i c a l C o n s i d e r a t i o n s
As s u g g e s t e d above, this paper s e e k s n o t merely to p r e s e n t a
h i s t o r i c a l s u r v e y of the movements i n c r u d e o i l prices s i n c e 1978, b u t
a l s o to examine t h e e x t e n t t o which the f a c t s l e n d s u p p o r t t o s o m e
widely h e l d views on t h e o p e r a t i o n of t h e world p e t r o l e u m market and i n
p a r t i c u l a r of t h e p r i c i n g system. It may be u s e f u l a t t h e outset t o
o u t l i n e some p o s s i b l e t h e o r e t i c a l c h a r a c t e r i z a t i o n s of t h e p r i c i n g
mechanism i n t h e o i l m a r k e t . We s h a l l c o n s i d e r s p e c i f i c a l l y t h r e e s u c h
a p p r o a c h e s : f i r s t that which views the market as c o m p r i s i n g a dominant,
price-making c a r t e l and a c o m p e t i t i v e , p r i c e - t a k i n g f r i n g e ; s e c o n d l y
t h a t which c o n c e n t r a t e s on more s t a n d a r d p r i c e - l e a d e r s h i p
models ; and
t h i r d l y t h a t which views a l l p r d u c e r s , l a r g e and small, as
price-makers when t h e market i s i n d i s e q u i l i b r i u m .
i . C a r t e l and F r i n g e
Much r e c e n t work on t h e p r i c i n g mechanism i n the world p e t r o l e u m market
h a s f o c u s e d on the n o t i o n of t h e e x i s t e n c e of a dominant p r o d u c e r group
OK
c a r t e l which f i x e s p r i c e s to clear the m a r k e t , c u r r e n t l y and Over
all f u t u r e p e r i o d s , t a k i n g i n t o a c c o u n t t h e o p t i m a l s u p p l y r e s p o n s e s of
a number of small, p r i c e - t a k i n g
p r o d u c e r s . S e e , f o r example t h e work
of S a l a n t 3 , Ulph4, and Dasgupta a n d H e a l 5 .
Thus, Stephen S a l a n t has
d e v e l o p e d a computerized N a s h q o u r n o t model of the world o i l m a r k e t
which e x p l i c i t l y u s e s a p r i c e - f i x i n g p r o d u c e r and a c o m p e t i t i v e
f r i n g e . The l a t t e r s e e k s to maximize i t s p r o f i t s a t the p r i c e l e v e l
d i c t a t e d t o i t by t h e dominant s u p p l i e r . Such work has come to the f o r e
S t e p h e n W. S a l a n t , I m p e r f e c t C o m p e t i t i o n i n the World O i l Market,
L e x i n g t o n Books, 1982.
A - Ulph and G . F ~ l i e , ' E x h a u s t i b l e R e s o u r c e s and C a r t e l s :
An Intertemporal Hash-Cmrnot Model', Canadian J o u r n a l of Economics, 1980.
'
P. Dasgupta and G. H e a l , Economic Theory and E x h a u s t i b l e R e s o u r c e s ,
Cambridge Handbook, Cambridge U n i v e r s i t y P r e s s , 1979.
5
i n t h e mid-1970s w i t h t h e emergence of a number of l a r g e p r o d u c e r s
o u t s i d e OPEC. The b a s i c n o t i o n and hence t h e e x p l a n a t i o n of t h e p r i c e
mechanism is v e r y s t r a i g h t f o r w a r d . As s u g g e s t e d by Newbery6, this c a n
be c o n s t r u e d as a n e q u i l i b r i u m c o n c e p t or, f o l l o w i n g Pindyck7 d e f e n d e d
as a f i r s t a p p r o x i m a t i o n to the o i l m a r k e t . W e s h a l l s e e k i n this paper
t o examine t h e e x t e n t of t h e a p p r o x i m a t i o n
-
a n e x e r c i s e which
s u r p r i s i n g l y h a s n o t y e t been done.
ii
. P r i c e Leadership
C l o s e l y r e l a t e d t o t h e c a r t e l / f r i n g e c h a r a c t e r i z a t i o n of t h e world
p e t r o l e u m market, one may attempt t o f i t the p r i c i n g system to the
t e x t b o o k d e s c r i p t i o n s of price l e a d e r s h i p . The l i t e r a t u r e on o l i g o p o l y
g i v e s u s , among o t h e r s , the f o l l o w i n g two models.
'Dominant f i r m '
l e a d e r s h i p is p e r h a p s t h e most f a m i l i a r . It e n v i s a g e s a l a r g e [ u s u a l l y
low c o s t ) p r o d u c e r which s e t s the i n d u s t r y price, t a k i n g i n t o a c c o u n t
so as t o maximize
t h e r e a c t i o n of t h e smaller p r o d u c e r s t o t h a t price,
i t s p r o f i t s . Such a l e a d e r would e n s u r e t h a t a l l o t h e r p r o d u c e r s f o l l o w
h i s price d e c i s i o n s by t h r e a t e n i n g t o u s e a g g r e s s i v e p r i c i n g and
p r o d u c t i o n p o l i c i e s to d r i v e t h e m out of the market i f t h e y do n o t
conf om.
The price leader i s n o t n e c e s s a r i l y the p r o d u c e r which changes
i t s p r i c e f i r s t ; i n the real world, any of the small p r o d u c e r s may
a l t e r its price c h r o n o l o g i c a l l y b e f o r e t h e others
-
p e r h a p s d r i v e n by
s h o r t - t e r m revenue r e q u i r e m e n t s . A t r u e price-leader,
i n t h i s model,
n o t only i n i t i a t e s the price change b u t i s a b l e t o e n f o r c e i t i n the
l o n g r u n and have a d i r e c t i n f l u e n c e on t h e d e c i s i o n s of o t h e r
producers.
The second m o d e l of price l e a d e r s h i p (due to Markham8) is
'Barometric L e a d e r s h i p ' , i n which a l l firms a g r e e [ f o r m a l l y or
D.M.G.
Mewbery, ' O i l P r i c e s , C a r t e l s and the Problem of Dynamic
Incons is t e ncy ' , The Economic J o u r n a l , 97, September 1 9 8 1
.
R.S. Pindyck, ' G a i n s t o Producers from C a r t e l i z a t i o n of E x h a u s t i b l e
R e s o u r c e s ' , R e v i e w of Economics and S t a t i s t i c s , 60, 1978.
J.W. Markham, 'The Nature and S i g n i f i c a n c e of P r i c e L e a d e r s h i p ' ,
American Economic Review, 41, 1951.
6
i n f o r m a l l y ) t o follow the price changes of a f i r m which they c o n s i d e r
t o have a good knowledge of the p r e v a i l i n g m a r k e t c o n d i t i o n s , and which
has a good r e p u t a t i o n f o r f o r e c a s t i n g f u t u r e market developments.
This
f i r m thus becomes t h e barometer of t h e i n d u s t r y , and t o q u o t e S t i g l e r
'I..
. commands adherence of
r i v a l s t o his p r i c e o n l y b e c a u s e , and t o the
e x t e n t t h a t , h i s price r e f l e c t s market c o n d i t i o n s with t o l e r a b l e
promptness '1I.
The l i t e r a t u r e outlines two f u r t h e r f e a t u r e s of
b a r o m e t r i c l e a d e r s h i p which may be i m p o r t a n t .
may change from t i m e t o t i m e
-
F i r s t of a l l , t h e l e a d e r
though o n l y i f and when the r e p u t a t i o n
of a f i r m improves s u f f i c i e n t l y to win t h e c o n f i d e n c e of t h e rest of
the industry.
frequently.
Changes are t h e r e f o r e u n l i k e l y to o c c u r v e r y
Secondly, it i s r e c o g n i z e d t h a t whilst upward price
movements w i l l almost i n v a r i a b l y be l e d c h r o n o l o g i c a l l y by the
b a r o m e t r i c leader, price c u t s may be i n i t i a t e d by o t h e r f i r m s i n the
form of u n o f f i c i a l d i s c o u n t s e t c , w i t h the b a r o m e t r i c f i r m u l t i m a t e l y
r e d u c i n g o f f i c i a l prices i n l i n e .
The r e c e n t l i t e r a t u r e on p e t r o l e u m economics o f t e n s i n g l e s o u t
S a u d i A r a b i a as the p r i c e Leader w i t h i n OPEC.
c h a r a c t e r i z e d i n many d i f f e r e n t ways.
(which, p a r a d o x i c a l l y ,
T h i s r o l e h a s been
A p u r e l y 'economic' view,
i s o f t e n propounded i n the US for t r a n s p a r e n t
p o l i t i c a l r e a s o n s ] is t h a t Saudi Arabia seeks t o maximize its economic
i n t e r e s t s i n t h e long r u n by p u r s u i n g a moderate p r i c i n g p o l i c y .
The
argument i s t h a t Saudi Arabia has huge hydrocarbon r e s e r v e s and a v e r y
l o n g t i m e h o r i z o n for economic development.
I t s main o b j e c t i v e i s t o
p r o t e c t a s h a r e of t h e world e n e r g y market f o r its own oil by e r e c t i n g
moderate p r i c i n g barriers a g a i n s t e n t r y by s u b s t i t u t e f u e l s .
As Saudi Arabia i s unique i n
i t s a b i l i t y to v a r y the rate of
e x t r a c t i o n w i t h r e l a t i v e ease o v e r a wide range, i t has the power t o
e x e r c i z e l e a d e r s h i p w i t h i n the c o u n c i l s of OPEC.
This p o w e r i s u s e d t o
h o l d t h e a g r e e d price l i n e when excess s u p p l i e s exert downward
p r e s s u r e s and t o dampen p r i c e rises when e x c e s s demand l e a d s t o p r i c e
explosion.
I n one s i t u a t i o n Saudi Arabia d e f e n d s a price which is
o f t e n c l o s e t o i t s own p r e f e r e n c e s even i f f o r m a l l y d e f i n e d by OPEC.
I n t h e o t h e r s i t u a t i o n i t s e e k s t o p r o t e c t t h e long-term o b j e c t i v e
mentioned above.
G.J.
S t i g l e r , 'The Kinky Demand Curve and R i g i d P r i c e s ' , J o u r n a l of
P o l i t i c a l Economy, October 1947.
7
iii. Arrow's Model of D i s e q u i l i b r i u m P r i c i n g
Kenneth Arrow f i r s t developed t h e n o t i o n t h a t , i n a n y market i n
d i s e q u i l i b r i u m i n which t h e r e are a number of s e l l e r s , e a c h one f a c e s a
s l o p i n g demand c u r v e .
Indeed Arrow a r g u e d t h a t i n s u c h a s i t u a t i o n ,
and even i n the case of p e r f e c t c o m p e t i t i o n , e a c h s m a l l p r o d u c e r would
. i n a c c o r d a n c e with t h e p r o f i t - m a x i m i s i n g t a c t i c s of
monopolist.
* Hence, u n l i k e the c o m p e t i t i v e f r i n g e of t h e
price
'I..
a
.'I
S a l a n t - t y p m o d e l which t a k e s p r i c e as g i v e n , i n d i s e q u i l i b r i u m t h e
Arrow approach sees e v e r y p r o d u c e r as a p r i c e maker.
Each producer
t h u s h a s t h e i n c e n t i v e t o change i t s price u n i l a t e r a l l y .
When t h e
d i s e q u i l i b r i u m i s one of excess s u p p l y , t h e demand c u r v e f a c i n g e a c h
p r o d u c e r is less t h a n p e r f e c t l y e l a s t i c and hence he c a n lower h i s
p r i c e and i n c r e a s e s a l e s and r e v e n u e s .
When t h e r e is excess demand i n
t h e market, t h e p r o d u c e r w i l l f a c e a demand c u r v e which i s s h i f t i n g t o
the r i g h t .
He c a n thus e f f e c t i v e l y s e l l a t h i s s u p p l y p r i c e and
o p e r a t e a l o n g his s u p p l y c u r v e , r a i s i n g price u n t i l t h e excess demand
is e l i m i n a t e d .
Such an a p p r o a c h h a s not, as y e t , been a p p l i e d d i r e c t l y to t h e
o i l market, a l t h o u g h it i s our b e l i e f
t h a t i t may h e l p t o s h e d some
l i g h t on the p r i c i n g b e h a v i o u r of p r o d u c e r s f o r a t l e a s t some of the
post-1978 period. To d i s c o v e r t h e r e l e v a n c e of a l l three models to the
oil market, w e must t u r n t o examine the h i s t o r y of t h e 1978-1982
period.
l o K.T.
Arrow, op.cit.,
p.46.
8
I1
The Second O i l P r i c e E x p l o s i o n
We have chosen September 1978 as the s t a r t i n g p i n t f o r
a n a l y s i s as i t marks t h e end of a period of r e l a t i v e price s t a b i l i t y
(of some two y e a r s s i n c e the 4 t h quarter of 1 9 7 6 ) . W e s h a l l assume that
t h i s period of r e l a t i v e s t a b i l i t y i n prices and i n market s h a r e s i n a
m a r g i n a l l y s l a c k market produced, by September 1978, a s t r u c t u r e of
price d i f f e r e n t i a l s which w a s b r o a d l y i n e q u i l i b r i u m . This m e a n s that
t h e s u p p l y p r i c e of e a c h c r u d e i n t h e world m a r k e t more-or-less
r e f l e c t e d t h e b u y e r ' s v a l u a t i o n of t h e d i f f e r e n c e s i n t h e i r q u a l i t y ,
s u c h t h a t he would be i n d i f f e r e n t between any two c r u d e s of the same
price.
(This assumption is e x p l o r e d i n more d e t a i l i n Annex 2 . )
We need f i r s t to o u t l i n e the main changes i n c r u d e oil o u t p u t
o v e r the whole p e r i o d of September 1978 t o December 1980, as it is o n l y
a g a i n s t s u c h a backdrop t h a t price movements c a n be understood f u l l y .
Throughout t h e f i r s t t h r e e q u a r t e r s of 1978, world o u t p u t w a s
f a i r l y s t e a d y i n t h e 6 0 mbd r a n g e , of which OPEC a c c o u n t e d f o r 2 8 t o 30
mbd. September s a w t h e u s u a l i n c r e a s e i n o u t p u t as Western i n v e n t o r i e s
were r e p l e n i s h e d b e f o r e the w i n t e r .
The customary p a t t e r n o v e r the
p r e v i o u s few y e a r s had been f o r o u t p u t t o c o n t i n u e to rise o v e r the
l a s t quarter
-
p e r h a p s to a December peak some 2.5 mbd (World) o r 1 . 5
mbd ( O P E ) h i g h e r t h a n September. This p a t t e r n w a s d i s r u p t e d i n 1978 by
the a n t i - S h a h s t r i k e s i n the I r a n i a n oil f i e l d s , which pushed I r a n i a n
o u t p u t down from a peak of 6 mbd i n September t o 3.5 mbd i n November
and 2 . 4 mbd i n December. Despite a compensating i n c r e a s e i n Saudi
Arabian o u t p u t of 2 mbd o v e r t h e t h r e e months,
t o t a l OPEC p r o d u c t i o n i n
December was some 4.7% l o w e r t h a n i t s September l e v e l .I
World o u t p u t w a s s o m e 1 . 1 % l o w e r .
1977 had s e e n rises o v e r these
months of 4.2% (OPEC) a n d 3.8% ( W o r l d ) .
9
The I r a n i a n p o s i t i o n worsened a t the s t a r t of 1979; o u t p u t
f e l l t o 500-700 thousand b/d i n January and February and e x p o r t s w e r e
s u s p e n d e d . They were n o t resumed until e a r l y March, soon a f t e r
A y a t o l l a h Khomeini’s r e t u r n , when p r o d u c t i o n p i c k e d up t o 2.3 mbd
(March) and 3.6 mbd ( A p r i l ) . It remained i n the 3 t o 4 mbd r a n g e f o r
t h e rest of 1979. T o t a l OPEC o u t p u t f o l l o w e d v e r y much this p a t t e r n ,
w i t h low p o i n t s of a r o u n d 2 8 . 5 mbd i n J a n u a r y and F e b r u a r y , p i c k i n g up
t h e r e a f t e r t o 30 to 31 mbd f o r t h e r e s t of t h e y e a r .
What, t h e n , of t h e price movements which these o u t p u t c h a n g e s
invoked?
I n many ways, the most r e v e a l i n g f e a t u r e s of the 1978-80 p r i c e
i n c r e a s e s c a n be drawn from t h e i n i t i a l movements b e f o r e t h e O P E
m e e t i n g s of December 1978 i n Abu Dhabi and March 1979 i n Geneva. W e
s h a l l consider separately, therefore,
t h r e e sub-periods:
September 1978
t o December 1978; December 1978 t o March 1979; and the b u l k of t h e
p e r i o d from March 1979 t o December 1980.
( a ) The S p o t Price Movements t o December 1978
The f i r s t price i n c r e a s e s came i n t h e s p o t p r o d u c t market. S p o t p r i c e s
of a number of l i g h t p r o d u c t s were t h e f i r s t to show any marked
i n c r e a s e , b e g i n n i n g as e a r l y as August 1978. Naphtha, and Premium a n d
R e g u l a r G a s o l i n e p r i c e s r o s e by 8-10% from J u l y t o August on t h e
Rotterdam market a n d s u c h i n c r e a s e s w e r e m i r r o r e d i n t h e o t h e r main
w o r l d spot p r o d u c t m a r k e t s . These e a r l y movements i n l i g h t p r o d u c t s
s u g g e s t some t i g h t e n i n g of t h e market b e f o r e t h e I r a n i a n s u p p l y
p r o b l e m s . They came three months b e f o r e a n y s u b s t a n t i a l i n c r e a s e i n the
price of the l a r g e s t t r a d e d p r o d u c t
-
h i g h s u l p h u r ( 3 . 5 % ) f u e l oil
-
which began i n November 1978. The f i r s t i n c r e a s e s i n s p o t c r u d e prices
came between t h e s e two p h a s e s of p r o d u c t price rises, b e g i n n i n g i n
October 1978 a f t e r a p r o l o n g e d p e r i o d i n the $ 1 2 t o $ 1 4 r a n g e
( d e p e n d i n g on the q u a l i t y of the c r u d e ) . As with spot p r o d u c t p r i c e s ,
November 1978 w i t n e s s e d a p a r t i c u l a r l y s h a r p spot c r u d e price i n c r e a s e ,
as t h e e f f e c t s of t h e f i r s t p r o d u c t i o n c u t s by I r a n began t o be f e l t .
S u p p l i e s to the s p o t m a r k e t f e l l as most oil companies withdrew,
k e e p i n g t h e i r oil f o r c o n t r a c t c u s t o m e r s . This, coupled with the
Figure 1
SPOT P R I C E S O F SELECTED C R U D E S AND PRODUCTS
-
I:
April 1978 to March 1979
-
$Ib
F
38
I'
I
\
I
36
'
I
/
', Premium
Gasoline
\
\
I
I
34
I
I
I
I
32
I
I
I
I
1
30
I
I
I
28
I
I
I
N o r t h Sea441
Crude
'(Ekofisk
/
26
/
,+--'
I
/
I
/
24
/
/
/
/ {-Arabfan
/
22
/
f
Light Crude
20
18
Heauv Fuel Oil 3.596s
I6
Official Marker Price
14
..
12
-
10
A
I M
Jn'
J I '
A u ' S
1978
'
O
h
1
D
J
'
F I
1979
M '
11
i n c r e a s i n g unease i n t h e oil market a s a whole o v e r t h e I r a n i a n
s i t u a t i o n , pushed a l l spot p r i c e s up markedly i n mid-Novemeber 1978.
F i g u r e 1 g r a p h s t h e i n i t i a l movements i n two s p o t c r u d e p r i c e s
a l o n g w i t h t h e two p r o d u c t p r i c e s d i s c u s s e d , - a n d h i g h l i g h t s t h e v e r y
s h a r p and s u b s t a n t i a l n a t u r e of t h e i n c r e a s e s .
These s p o t p r i c e rises p r o v i d e u s w i t h a backdrop a g a i n s t which
t o a s s e s s t h e v e r y f i r s t o f f i c i a l p r i c e i n c r e a s e s , which were announced
by OPEC a t t h e end of December 1978 a t i t s Abu Dhabi meeting.
By
December, spot l i g h t p r o d u c t p r i c e s had r i s e n by some 40%, s p o t c r u d e
p r i c e s by 18% and s p o t heavy p r o d u c t p r i c e s by some 9 % . The o f f i c i a l
c r u d e p r i c e s a g r e e d a t t h e OPEC m e e t i n g e f f e c t e d i n c r e a s e s of between
2% and 6 % , w i t h t h e m a j o r i t y o f c r u d e s , i n c l u d i n g t h e Marker, r i s i n g by
5% ( i . e . some 60-70 c e n t s / b )
I
T h i s w a s v e r y much less t h a n r e q u i r e d t o
match t h e s p o t p r i c e i n c r e a s e s , and i n d e e d it i s n o t c l e a r t h e e x t e n t
t o which t h e movements on t h e s p o t market a f f e c t e d t h e OPEC d e c i s i o n .
All j u s t i € i c a t i o n s of t h e p r i c e r i s e a t t h e t i m e were made i n terms o f
t h e e f f e c t of i n f l a t i o n on r e a l p r i c e s and t h e impact of d o l l a r
exchange r a t e movements on OPEC r e v e n u e , and it was even r e p o r t e d t h a t
S a u d i O i l M i n i s t e r Y a m m i was " n o t happy" w i t h t h e outcome.
Petroleum I n t e l l i g e n c e Weekly 12
I1
....market
To q u o t e
f o r c e s , a p p a r e n t l y headed
by t h e I r a n i a n supply s h o r t f a l l , made it d i f f i c u l t t o hold o u t € o r a
smaller r i s e . "
Some e v i d e n c e , t h e n , of t h e movements i n s p o t p r i c e s
a f f e c t i n g t h e o f f i c i a l p r i c e d e c i s i o n , b u t l i t t l e e v i d e n c e of OPEC
a c h i e v i n g , o r even a t t e m p t i n g an o f f i c i a l p r i c e r i s e o f a n y t h i n g l i k e
t h e s i z e needed t o match spot price movements.
l 2 P e t r o l e u m I n t e l l i g e n c e Weekly , December 25 , 1978 , p -2.
12
( b ) December 1 9 7 8 t o March 1979
This period between the OPEC m e e t i n g s of Abu Dhabi and Geneva w i t n e s s e d
very d r a m a t i c rises i n both s p o t and o f f i c i a l p r i c e s , and is also a
p e r i o d which r e v e a l s some i n t e r e s t i n g f a c t o r s r e l e v a n t to t h e
p r i c e - l e a d e r s h i p q u e s t i o n . In o r d e r to u n d e r s t a n d the price movements
o v e r t h o s e f o u r months it is worth r e v i e w i n g , b r i e f l y ,
the sequence of
e f f e c t s which the I r a n i a n p r o d u c t i o n c u t s had on t h e world m a r k e t .
A s w e have s e e n , October 1978 t o March 1979 s a w some
s u b s t a n t i a l c u t s i n o u t p u t by I r a n , which had a f f e c t e d t o t a l world and
OPEC o u t p u t . The I r a n i a n loss amounted t o some 5 mbd, compensated i n
part by a 2 mbd i n c r e a s e by Saudi Arabia. Whilst a n e t p r o d u c t i o n c u t
of 3 mbd i s s u b s t a n t i a l , it i s a t f i r s t s i g h t s u r p r i s i n g t h a t a 5 % f a l l
i n world o u t p u t c o u l d c a u s e , u l t i m a t e l y , a t h r e e f o l d price i n c r e a s e . To
u n d e r s t a n d this we must examine e x a c t l y how the I r a n i a n c u t s a f f e c t e d
t h e o i l market.
The fall i n I r a n i a n p r o d u c t i o n had a p a r t i c u l a r l y l a r g e e f f e c t
on BP ( a n e s t i m a t e d loss of 1 . 4 mbd), Exxon (loss of 400,000 b d ) , and
S o c a l (loss of 300,000 b d ) , a l l of whom had to d e c l a r e "force majeure"
c u t s on a number of t h e i r c o n t r a c t c u s t o m e r s . BP, the most heavily
a f f e c t e d , began t h e c u t s as e a r l y as t h e second week of January 1979
w i t h a huge 35% r e d u c t i o n . This w a s i n c r e a s e d t o 45% (1.4 mbd) i n midFebruary, a t which t i m e t h e r e w e r e a spate of o t h e r f o r c e - m a j e u r e
o f f i c i a l supply c u t s announced
-
Exxon's 10% (400,000 b d ) b e i n g the
second l a r g e s t . This t i g h t e n i n g of s u p p l i e s t o a few major companies
caused a f u r t h e r s h r i n k a g e of s u p p l y t o the spot m a r k e t , and a s h a r p
r e d u c t i o n i n t h e f l o w of c r u d e t o t h e Third P a r t y Market, of which BP
and Exxon had been the c h i e f s u p p l i e r s . The ' T h i r d P a r t y M a r k e t ' w a s
t h e means by which major o i l c o r p o r a t i o n s f e d c r u d e o i l t o t h o s e
companies which d i d n o t deal d i r e c t l y w i t h a n OPEC o r a non-OPEC
p r o d u c e r . J a p a n w a s by f a r t h e largest s u c h c o u n t r y , and i n d e e d i t w a s
J a p a n who was m o s t h i t by BP and EXxon's c u t s .
The J a p a n e s e n a t u r a l l y responded t o this new s i t u a t i o n by
t u r n i n g d i r e c t l y to the p r o d u c i n g n a t i o n s , which,
i n t u r n , prompted
p r o d u c e r s both t o i n c r e a s e t h e i r prices i n the l i g h t of the p e r c e i v e d
i n c r e a s e d demand for t h e i r crude a n d f u r t h e r to r e s t r i c t s u p p l i e s t o
t h e majors, thus a c c e n t u a t i n g t h e problem. Indeed by the middle of
13
1979, many of t h e " f o r c e majeure" c u t s had t u r n e d i n t o l o n g term
r e d u c t i o n s i n t h e o f f i c i a l commitments o f most m a j o r s on t h e T h i r d
P a r t y Market.
T h i s c h a i n of e v e n t s r e s u l t i n g from t h e I r a n i n a n supply c u t s ,
i n f l u e n c e d b o t h spot and o f f i c i a l p r i c e movements i n t h e e a r l y months
of 1979.
(i) All s p o t p r i c e s - c r u d e and p r o d u c t s a l i k e
-
increased very
s h a r p l y i n F e b r u a r y 1979, as t h e m a j o r s and t h e o i l p r o d u c e r s c u r t a i l e d
s u p p l i e s of c r u d e t o t h e s p o t m a r k e t s .
Light product p r i c e s r o s e t o
o v e r $38/b, heavy p r o d u c t s t o o v e r $ 1 7 / b and t h e Marker crude spot
p r i c e t o $22.5/b
(monthly a v e r a g e f i g u r e s ) , r e f l e c t i n g i n c r e a s e s o f
o v e r 40% between t h e monthly a v e r a g e s o f J a n u a r y and February 1979 ( s e e
F i g u r e 1)
.
(ii)Following t h e s e e a r l y movements i n s p o t p r i c e s , i n both
1978 and e a r l y 1979, t h e r e began a s e r i e s of o f f i c i a l p r i c e i n c r e a s e s ,
encouraged by t h e p e r c e i v e d i n c r e a s e i n demand from T h i r d P a r t y Market
customers.
F i g u r e 2 g r a p h s t h e chronology of t h e e a r l y o f f i c i a l p r i c e
i n c r e a s e s and s e v e r a l i m p o r t a n t p o i n t s emerge:
-
The f i r s t c o u n t r i e s t o r a i s e o f f i c i a l p r i c e s s u b s t a n t i a l l y
were t h e UK ( $ 1 , 5 0 / b o r 11%)and Norway ( $ 1 . 6 5 / b or 12%) on 1 5 t h
J a n u a r y 1979.
This was a f t e r t h e OPEC meeting of l a t e December 1978
which had a g r e e d s l i g h t upward a d j u s t m e n t s t o OPEC p r i c e s ( i n t h e
r e g i o n of 50-80 c e n t s o r 5 % ) , b u t f u l l y t e n weeks b e f o r e t h e m e e t i n g o f
l a t e March which i n t r o d u c e d t h e f i r s t l a r g e g e n e r a l p r i c e rise.
Thus
t h e f i r s t p r i c e i n c r e a s e was i n i t i a t e d by two non-OPEC p r o d u c e r s
-
i n d e e d two OECD c o u n t r i e s .
-
There t h e n f o l l o w e d a number o f s l i g h t l y s m a l l e r o f f i c i a l
p r i c e i n c r e a s e s by i n d i v i d u a l OPEC members.
Ecuador was f i r s t t o movs
in e a r l y F e b r u a r y , f o l l o w e d s o m e t w o weeks l a t e r by b o t h Abu Dhabi and
Qatar, with i n c r e a s e s o f 7 . 2 % and 6.8% r e s p e c t i v e l y .
T h i s e a r l y move by
two c o u n t r i e s commonly r e g a r d e d a s ' m o d e r a t e s ' came on 1 5 t h F e b r u a r y ,
two weeks b e f o r e s i m i l a r i n c r e a s e s by Kuwait and I r a q , and n e a r l y s i x
weeks b e f o r e t h e March OPEC meeting.
Further moves i n February/March by
ae
m
hl
e
al
01
Q
L
m
>
m
ae
v)
I
C
.-
I
ae
m
F
15
Libya ( a l o n g w i t h S h a r j a h and Dubai) l 3 add t o t h e l i s t of u n i l a t e r a l
a c t i o n s which t o g e t h e r b e l i e any d e s c r i p t i o n of OPEC as a u n i f i e d
p r i c i n g c a r t e l over t h i s period.
- Much t h e l a r g e s t i n c r e a s e s i n t h e f i r s t t h r e e months o f 1979
came f r o m t w o non-OPEC p r o d u c e r s , S y r i a ($3.11/b i n c r e a s e s on 2 1 s t
F e b r u a r y , g i v i n g a c u m u l a t i v e i n c r e a s e t o t h a t d a t e of o v e r 31%) and
Egypt ($3.05/b i n c r e a s e on 2 5 t h March); and from t h e s m a l l e s t OPEC
p r o d u c e r , Ecuador ($4.60/b on 1 s t March).
N o . s i g n h e r e of t h e l a r g e
producers d i c t a t i n g p r i c i n g p o l i c y t o t h e s m a l l producers.
'leaders'
Whilst t h e m a j o r i t y of t h e non-OPEC p r o d u c e r s lagged t h e OPEC
(Qatar, UAE,
Iraq, Kuwait, Ecuador) i n t h e i r f i r s t l a r g e
p r i c e i n c r e a s e , they had a l l ( w i t h t h e e x c e p t i o n of USSR, China and
Mexico) i n t r o d u c e d a s u b s t a n t i a l p r i c e rise ( i . e . of $1.50 o r m o r e )
b e f o r e t h e March OPEC meeting.
They a l l , t h e r e f o r e , p r e c e d e d a c t i o n by
t h e m a j o r i t y of OPEC.
OPEC m e m b e r s e n t e r e d t h e i r March 1979 Geneva c o n f e r e n c e w i t h
widely d i f f e r i n g v i e u s on p r i c e s , and a r e c o n c i l i a t i o n of those views
w a s t o prove impossible.
S a u d i Arabia's a t t e m p t s t o u r g e m o d e r a t i o n
were l a r g e l y i g n o r e d , and it u l t i m a t e l y a g r e e d t o a Marker c r u d e p r i c e
i n c r e a s e o f j u s t over $ l / b t o $14.456/b.
O t h e r members, however, were
l e f t t o add whatever p r e m i a or s u r c h a r g e s t h e y wished t o t h i s 'minimum'
marker p r i c e
-
t h e r e s u l t b e i n g a wide r a n g e of price i n c r e a s e s from
S a u d i ' s $ l / b t o up t o $ 3 . 7 5 / b by t h e A f r i c a n p r o d u c e r s ( A l g e r i a , L i b y a
and N i g e r i a ) .
Even Gulf p r o d u c e r s such as Abu Dhabi, Qatar, I r a n and
K u w a i t set t h e s u r c h a r g e a t $1.80/b.
The f i r s t OPEC c o n f e r e n c e a t which
l a r g e p r i c e r i s e s were i n t r o d u c e d , t h e r e f o r e , w a s one of d i s u n i t y o f
a i m s and outcomes.
Its e f f e c t w a s simply t o k e e p pace w i t h t h e l a r g e
i n c r e a s e s i n s p o t and non-OPEC o f f i c i a l p r i c e s which had a l r e a d y
occured.
F i n a l l y , note t h a t a l l t h e s e p r i c e i n c r e a s e s still l e f t
o f f i c i a l p r i c e s s u b s t a n t i a l l y below s p o t c r u d e p r i c e s
-
by an a v e r a g e
of a b o u t $6/b a t t h e end o f March 1979.
l 3 Sharjah and D u b a i a r e both members of OPEC t h r o u g h t h e i r membership
of t h e U n i t e d Arab E m i r a t e s , a l t h o u g h t h e y do not act i n u n i s o n w i t h
Abu Dhabi, t h e c h i e f o i l - p r o d u c e r and OPEC member i n t h e UAE.
16
( c ) March 1979 t o December 1980
The bulk of 1979 a n d 1980 w a s a c o n f u s e d p e r i o d of r a p i d , a d g e n e r a l l y
u n c o o r d i n a t e d , p r i c e increases, from which it is d i f f i c u l t t o d i s c e r n
any c l e a r p a t t e r n o r any e v i d e n c e of p r i c e - l e a d e r s h i p on t h e p a r t of a
s i n g l e group of p r o d u c e r s . !The main developments were as f o l l o w s :
S p o t c r u d e prices (see F i g u r e 3 ) i n c r e a s e d v e r y r a p i d l y i n 1979,
p a r t i c u l a r l y i n April-June
( A r a b i a n L i g h t spot price i n c r e a s e d from
$28/b t o $ 3 S / b ) and i n September-November
(from $35 t o a peak of $41 1.
This was both a much f a s t e r and g r e a t e r a b s o l u t e increase than was
d i s p l a y e d i n any o f f i c i a l c o n t r a c t p r i c e i n 1979.
A t t h e peak of
November 1979, t h e Arabian L i g h t s p o t price was f u l l y $23/b above i t s
o f f i c i a l p r i c e . The f a c t o r s b e h i n d t h e s e two s p u r t s are a g a i n both of
i n t e r e s t and importance. As n o t e d above, March 1979 s a w the resumption
of I r a n i a n e x p o r t s , and by April s p o t prices began to weaken. S a u d i
Arabia t h e r e f o r e d e c i d e d t h a t it w a s a g a i n s a f e t o r e t u r n t o i t s
t r a d i t i o n a l o u t p u t of 8.5 mbd, which i t had raised t o 9 . 5 mbd t o
c o u n t e r t h e I r a n i a n c u t s . The e f f e c t of this c u t , e x a g g e r a t e d f u r t h e r
by N i g e r i a n c u t s of up t o 100,OO bd t o BP who i n a d v e r t e n t l y broke
N i g e r i a ' s b o y c o t t of South A f r i c a i n May 1979, w a s to send crude-hungry
majors h e a v i l y i n t o the s p o t market, d r i v i n g prices up towards $35/b by
mid-May
.
I t is d i f f i c u l t t o know t h e motives b e h i n d t h e Saudi c u t .
Some,
n o t a b l y Adelman14 have i n t e r p r e t e d i t as a d e l i b e r a t e attempt t o push
prices s t i l l h i g h e r , w h i l s t o t h e r s 1 5 have s e e n i t as a n o n - a g g r e s s i v e
r e s p o n s e t o the r e t u r n of I r a n i a n exports t o t h e w o r l d m a r k e t . As we
s h a l l see, Saudi attempts t o h o l d down t h e p r i c e t h r o u g h o u t t h e rest of
1979 and 1980 would a p p e a r a t odds w i t h Adelman's i n t e r p r e t a t i o n .
Indeed, t h e 1 mbd c u t c o r r e s p o n d e d to a n i n c r e a s e i n I r a n i a n o u t p u t of
some 3 mbd by A p r i l ,
l e a v i n g t o t a l OPEC o u t p u t 2 mbd h i g h e r t h a n i n
March. With spot prices weakening by March, it i s p e r h a p s not
u n r e a s o n a b l e € o r Saudi Arabia t o have f e l t j u s t i f i e d i n r e t u r n i n g to
l 4 Morris Adelman, 'OPEC as a Cartel I , i n James M. Griffin and David
J. Teece ( e d s .) , OPEC Behaviour and World O i l Prices, George Allen Ei
Unwin, 1982, pp. 47-49.
l 5 I a n Seymour, OPEC
pp. 183-184.
-
I n s t r u m e n t of Change, Macmillan P r e s s ,
1980,
0
cv
18
i t s lower o u t p u t l e v e l t o make way f o r I r a n ' s resumption of e x p o r t s .
Whatever t h e motives of t h e Saudi c u t , and d e s p i t e the a g g r e g a t e
i n c r e a s e i n OPEC o u t p u t , the e f f e c t w a s a g a i n t o c a u s e unease i n the
world market and a f u r t h e r d r a m a t i c s p u r t i n t h e c r u d e s p o t price.
The second spot price spurt of November 1979 i s , a t f i r s t
s i g h t , something of a p a r a d o x , w i t h seemingly a d e q u a t e o u t p u t t o meet
c u r r e n t demand. There was, however, s u b s t a n t i a l s t o c k b u i l d i n g i n t h e
l a s t t w o quarters of 1979 as t h e majors s o u g h t b o t h t o r e p l e n i s h
d e p l e t e d s t o c k s and t o guard a g a i n s t p o s s i b l e f u t u r e p o l i t i c a l problems
in I r a n . T b q u o t e Seymourt6, " F e a r rather t h a n s h o r t a g e w a s , t h e r e f o r e ,
t h e dominant f o r c e b e h i n d t h e buoyant market i n t h e second h a l f of
1 9 79
.
"
F o l l o w i n g t h e peak a t the end of 1979, spot c r u d e prices
proceeded to f a l l d u r i n g t h e f i r s t e i g h t months of 1980 ( A r a b i a n L i g h t
f e l l from $41/b to $32/b by August 1980) b e f o r e t h e o n s e t of the
I r a n / I r a q War pushed them to a second peak ( A r a b i a n Light $41/b a g a i n )
i n November 1980. This second peak w a s above the l e v e l
a c h i e v e d by a n y official prices i n 1980, b u t s e v e r a l p r o d u c e r s had
i n c r e a s e d their o f f i c i a l prices s u f f i c i e n t l y by mid-1 980 t o have
r e g a i n e d p a r i t y with s p o t c r u d e prices before t h e second s p o t price
jump-
Some u n d e r s t a n d i n g of t h e o u t p u t movements behind t h e s p o t
p r i c e s p u r t of l a t e 1980 would a g a i n be u s e f u l . I r a n i a n p r o d u c t i o n ,
having r e c o v e r e d t o 4 rnbd i n September 1979, f e l l s t e a d i l y o v e r the
n e x t y e a r to just o v e r 1.1 mbd i n September 1980 a t the o u t b r e a k of the
I r a n / I r a q War. & s p i t e t h i s , t h e y e a r had s e e n no major a g g r e g a t e
supply s h o r t a g e s
-
i n d e e d t h e r e was t h e u s u a l p a t t e r n of i n v e n t o r y
run-down i n the f i r s t quarter of 1980 (less than u s u a l i f a n y t h i n g ) and
s u b s t a n t i a l b u i l d - u p i n t h e third q u a r t e r . This r e f l e c t e d s h a r p l y
f a l l i n g demand worldwide, as w e l l as compensating i n c r e a s e s i n o u t p u t
by Saudi Arabia (back a t a r o u n d 10 mbd) and n o n 4 P E C p r o d u c t i o n some
1.5 mbd above 1978 l e v e l s . Iraq's o u t p u t was s t e a d y a t around 3 . 4 t o
3.5 mbd. The w a r saw t h e combined o u t p u t of I r a n and Iraq f a l l from 4.5
mbd t o u n d e r 1 mbd i n O c t o b e r and November 1980. S a u d i Arabia
l 6 I . Seymour, o p . c i t . ,
p.189.
19
immediately sought t o s o f t e n the impact o f t h i s c u t b a c k by i n c r e a s i n g
o u t p u t t o o v e r 10.5 mbd b u t t o t a l OPEC output s t i l l f e l l by some 2 mbd.
W h i l s t t h i s c u t f o r c e d spot c r u d e p r i c e s back up t o $41/b, it
d i d n o t have t h e same effect as t h e s i m i l a r c u t i n 1978/9, which was
followed by a t h r e e f o l d r i s e i n s p o t p r i c e s i n j u s t e l e v e n months.
The
r e a s o n s f o r t h i s a r e w e l l documented by Badger and B e l g r a v e 1 7 and need
n o t concern u s unduly h e r e .
W e would perh:aps p l a c e less emphasis t h a n
do Badger and B e l g r a v e on the speedy and a p p r o p r i a t e a c t i o n by t h e I E A
and S a u d i A r a b i a , and p o i n t m o r e t o t h e f u n d a m e n t a l l y d i f f e r e n t market
c o n d i t i o n s i n which t h e two p r o d u c t i o n c u t s o c c u r r e d .
I n September 1980
t h e i n d u s t r y knew t h a t world o i l consumption had b e e n on a d e c l i n i n g
t r e n d f o r almost two y e a r s
i n 1979.
-
a p e r c e p t i o n which, n a t u r a l l y , nobody had
Moreover i n v e n t o r y l e v e l s were very h i g h , p r o v i d i n g a s e c u r e
c u s h i o n t o b o t h companies and governments.
A s s u g g e s t e d above, t h e p e r i o d s a w a g e n e r a l melee of
Official Prices.
o f f i c i a l p r i c e i n c r e a s e s , w i t h p r o d u c e r s l e a p f r o g g i n g o v e r each o t h e r s '
p r i c e rises.
OPEC members, w i t h o u t e x c e p t i o n , r e g u l a r l y i n c r e a s e d
p r i c e s o u t s i d e OPEC meetings, and indeed a c t e d i n no d i f f e r e n t manner
t o t h e non-OPEC p r o d u c e r s ( w i t h t h e s o l e e x c e p t i o n o f S a u d i A r a b i a , as
discussed below).
A t t h e extreme, Ecuador a p p e a r e d t o abandon any
c o n c e p t of a f i x e d o f f i c i a l p r i c e f o r i t s c r u d e , and v a r i e d its pkiee
w i t h 'market c o n d i t i o n s ' a l m o s t on a cargo-by-cargo
c o u n t r y took a c o n s i s t e n t ' l e a d '
i n t h e period
-
basis.
No single
i n t e r m s of
c o n s i s t e n t l y i n c r e a s i n g p r i c e s e a r l i e r t h a n and/or by a g r e a t e r margin
than t h e r e s t .
T a b l e s 1 and 2 show a v a r i e t y of c o u n t r i e s t o have
i n c r e a s e d p r i c e s more r a p i d l y t h a n t h e r e s t a t o n e t i m e or a n o t h e r .
S e v e r a l c o u n t r i e s d i d emerge t o w a r d s t h e t o p of the p r i c e l e a g u e
-
n o t a b l y I r a n , Libya and Ecuador w i t h i n OPEC, and Egypt and S y r i a
o u t s i d e OPEC
-
b u t t h e r e i s no c l e a r e v i d e n c e of p r o d u c e r s f o l l o w i n g
any one c o u n t r y ' s p r i c e movements c l o s e l y t h r o u g h o u t t h e p e r i o d .
17Daniel Badger and R o b e r t B e l g r a v e , O i l Supply and P r i c e : What Went
R i g h t i n 1980, B r i t i s h I n s t i t u t e ' s J o i n t Energy Programme, Energy Paper
No. 2 , 1982.
20
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22
The manner i n which o f f i c i a l prices followed spot c r u d e prices
v a r i e d f o m c o u n t r y t o c o u n t r y . A t one extreme, Ecuador ( w i t h i n OPEC)
and Egypt (non-OPEC 1 f o l l o w e d s p o t movements quite c l o s e l y
-
p a r t i c u l a r l y i n t h e r a p i d rise of t h e f i r s t h a l f of 1979 ( s e e F i g u r e
4).
A t t h e o t h e r e x t r e m e , Saudi Arabia lagged behind a l l o t h e r
official price rises t h r o u g h o u t t h e period and i t s o f f i c i a l prices b o r e
l i t t l e o r no r e l a t i o n s h i p t o movements i n the s p o t price t h r o u g h o u t
1979 a n d 1980.
The v e r y v o l a t i l e p r i c i n g of
Ecuador and Egypt,
among o t h e r s ,
and t h e i r rapid r e s p o n s e t o s p o t p r i c e movements are
i n t e r e s t i n g f e a t u r e s of t h e 1979/80 price e x p l o s i o n . One may a s k whether
t h e i r p o l i c i e s p r o v i d e d some k i n d of l e a d e r s h i p ? W e would s u g g e s t n o t .
Ecuador and Egypt most c e r t a i n l y were n o t dominant p r o d u c e r s , a b l e t o
d i c t a t e p r i c i n g p o l i c y to t h e rest of t h e w o r l d ' s p r o d u c e r s . Nor indeed
were t h e y always able t o s u s t a i n price changes i n the f a c e of a
r e l u c t a n c e by o t h e r s to f o l l o w . (This was p a r t i c u l a r l y so f o r Ecuador,
whose p r i c i n g w a s e s p e c i a l l y v o l a t i l e . 1 E q u a l l y , t h e y w e r e n o t t h e
well-respected
p r o d u c e r s of t h e ' b a r o m e t r i c l e a d e r s h i p '
model,
i n s p i r i n g t h e c o n f i d e n c e of o t h e r s i n t h e i r judgements and f o r e c a s t s
.
Such was t h e c l o s e n e s s of t h e i r p r i c i n g t o the spot p r i c e t h a t t h e y
gave o t h e r p r o d u c e r s no more i n f o r m a t i o n t h a n t h e y w e r e a l r e a d y
r e c e i v i n g from the spot market. The p r i c i n g a c t i v i t y of s u c h s m a l l
c o u n t r i e s is p e r h a p s more simply e x p l a i n e d by t h e i r r e l a t i v e l a c k of
commitment to long-term supply c o n t r a c t s , a l l o w i n g t h e m e f f e c t i v e l y t o
t r a d e on the spot.
Whilst t h e a c t i o n of Ecuador and Egypt does n o t g i v e e v i d e n c e
of p r i c e - l e a d e r s h i p on t h e i r p a r t , however, i t is i m p o r t a n t i n c a s t i n g
doubt on t h e notion of t h e r e h a v i n g been any l e a d e r o v e r the p e r i o d .
J u s t as ECuador, E g y p t and t h e l i k e w e r e n o t ' l e a d e r s ' ,
nor were t h e y
f o l l o w e r s of some more dominant p r o d u c e r .
The r o l e of Saudi Arabia, much t h e l a r g e s t p r o d u c e r i n OPEC,
is
worthy of p a r t i c u l a r a t t e n t i o n . As the i n d i c e s of l k b l e s 1 and 2 show,
Saudi Arabian prices lagged w e l l b e h i n d t h o s e of a l l o t h e r O P E and
non-OPEC p r o d u c e r s , such that by the end of April 1981 t h e S a u d i Marker
price of $26/b w a s up t o $9 below those of comparable l i g h t c r u d e s . It
a p p e a r s t o have been a price f o l l o w e r t h r o u g h o u t t h e two y e a r s of p r i c e
i n c r e a s e s , with much smaller price rises t h a n o t h e r s u p t o A p r i l 1980.
0
m
a!
Y
C
.-W
L
0
I
d
c1
Q
c
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N
------!:
24
The h i s t o r y book shows Saudi Arabia to have been a v o i c e of
moderation t h r o u g h o u t much of 1979 a n d 1980. As w e have seen, it w a s
u n e a s y about the March 1979 i n c r e a s e s when i t o n l y raised the marker
price by $ l / b ! This w a s t h e b e g i n n i n g of two y e a r s of ' m u l t i - t i e r e d '
p r i c i n g w i t h i n OPEC, with the S a u d i s k e e p i n g A r a b i a n L i g h t p r i c e
i n c r e a s e s to a minimum, and much of t h e rest of OPEC o p e r a t i n g to a
much h i g h e r de f a c t o ' m a r k e r ' p r i c e . 1 8
Indeed the S a u d i m o t i v a t i o n t h r o u g h o u t the p e r i o d appears
tohave b e e n t o p r e v e n t wide d i v e r g e n c e of prices w i t h i n OPEC
-
its
p r i c e i n c r e a s e s , when t h e y came, a t t e m p t i n g always to r e e s t a b l i s h
p a r i t y r a t h e r t h a n push t h e whole s y s t e m f u r t h e r up. The chronology of
December 1979/January 1980 i l l u s t r a t e s this p o i n t :
-
1 4 December 1979
S a u d i Arabia (along with the UAE,
Venezuela) i n c r e a s e s i t s marker price by $6/b,
$5.5/b
@ t a r and
i n o r d e r t o close the
gap which has a p p e a r e d between i t and I r a n i a n l i g h t , and t o
attempt to " c l i p t h e wings of t h e price hawks"19.
-
16 D e c e m b e r 1979
increase
.
3 J a n u a r y 1980
-
2 8 J a n u a r y 1980
Iran re-establishes
t h e d i f f e r e n t i a l w i t h a $5/b
I r a n f u r t h e r i n c r e a s e s t h e d i f f e r e n t i a l by $2/b.
- Saudi
Arabia a g a i n tries to c l o s e the gap w i t h i t s
own $2/b i n c r e a s e .
1 F e b r u a r y 1980
-
Iran again re-establishes
t h e d i f f e r e n t i a l with a
f u r t h e r $2/b i n c r e a s e .
-
l 8 As e a r l y a s the June 1979 Geneva meeting this p a t t e r n became clear
w i t h t h e Saudi marker price a t $18/b, b u t with the rest of t h e Gulf
working to a n e f f e c t i v e marker of $20/b, and I r a n employing i t s own $ 2 2
marker.
P r i c e s w e r e n o t to r e g r o u p around t h e o f f i c i a l marker u n t i l
October 1981, d e s p i t e f r e q u e n t attempts by the S a u d i s to a c h i e v e such
unity
.
Dr.
H u m b e r t o Calderon-Berti,
Venezuelan O i l M i n i s t e r .
I
25
S a u d i A r a b i a ' s attempts to r e u n i f y OPEC prices t h r o u g h o u t the
p e r i d s e r v e d o n l y t o allow f u r t h e r i n c r e a s e s by t h e r e s t of OPEC.
T h e r e would a p p e a r t o be no e v i d e n c e of c o n v e n t i o n a l p r i c e - l e a d e r s h i p
by t h e dominant p r o d u c e r i n the t w o y e a r s of r i s i n g prices.
None-the-less,
a number of OPEC members d i d s t i c k c l o s e l y t o
t h e p r i c i n g p a t t e r n of Saudi A r a b i a . I n d o n e s i a and Venezuela i n c r e a s e d
o f f i c i a l prices o n l y s l i g h t l y f a s t e r i n 7979 and t h e n remained i n step,
as d i d the UAE,
Iraq, Qatar and K u w a i t a f t e r t h e i r i n i t i a l l a r g e
i n c r e a s e s i n e a r l y 1979. D i f f e r e n t i a l s had n o t been restored i n any of
t h e s e cases by the end of 1980, however. The motives of t h i s group of
r e l a t i v e 'moderates' are f a r from clear. They w e r e r e l u c t a n t to make
f u l l use of the headroom i n prices created by the s p o t m a r k e t and the
more a g g r e s i v e p r o d u c e r s a n l y e t t h e i r p e r i o d i c l a r g e price i n c r e a s e s ,
n o t a b l y in early 1979, d o n o t s u g g e s t any o v e r - r i d i n g l o y a l t y to the
OPIE price-fixing
machinery. There is, i n d e e d , much e v i d e n c e t h a t t h e s e
c o u n t r i e s i n p a r t i c u l a r added l a r g e u n o f f i c i a l premia on top of
o f f i c i a l prices for long-term c o n t r a c t s w i t h companies who were
d e s p e r a t e f o r o i l . This e f f e c t i v e l y i n c r e a s e d prices to n e a r e r t h e s p o t
price w i t h o u t a f f e c t i n g the " o f f i c i a l " p r i c e .
The e f f e c t of p r o d u c e r s
'
widely d i f f e r i n g p r i c i n g p o l i c i e s w a s
t o widen price d i f f e r e n t i a l s s u b s t a n t i a l l y (both w i t h i n and o u t s i d e
OPE).
T a b l e 1 p r e s e n t s simple S t a n d a r d D e v i a t i o n s f o r t h e i n d e x
numbers a t e a c h date shown, They show a v e r y clear and marked widening
of d i f f e r e n t i a l s w i t h i n OPEC t o a peak i n A p r i l 1980. The remainder of
1980 s a w some l i m i t e d narrowing of d i f f e r e n t i a l s , b u t the two y e a r
p e r i o d of r i s i n g prices s t i l l ended w i t h v e r y s u b s t a n t i a l d i v e r g e n c e s
of o f f i c i a l prices from the d i f f e r e n t i a l s t r u c t u r e of September 1978.
( d ) T h e o r e t i c a l I m p l i c a t i o n s of t h e 1979/80 P r i c e R i s e s
What i m p l i c a t i o n s , t h e n , d o e s the e v i d e n c e of the 1979-80 p r i c e
i n c r e a s e s have f o r t h e t h e o r e t i c a l c h a r a c t e r i z a t i o n of the world o i l
i n d u s t r y i n a t i g h t market? F i r s t of all, we would s u g g e s t that there
is l i t t l e or no e v i d e n c e of OPEC a c t i n g as a u n i f i e d c a r t e l . W e have
described t w o y e a r s of widespread u n i l a t e r a l price s e t t i n g by OPEC
members, with t h e m a j o r i t y of p r i c i n g d e c i s i o n s b e i n g t a k e n o u t s i d e
o f f i c i a l OPEC m e e t i n g s . The p e r i o d was a l s o one i n which there w a s no
26
a g r e e m e n t on p r o d u c t i o n w i t h i n t h e O r g a n i s a t i o n . W e would s u g g e s t t h a t
a g r o u p of p r o d u c e r s who i n d i v i d u a l l y d e c i d e on both t h e i r o u t p u t and
prices do n o t c o n s t i t u t e a c a r t e l i n any e c o n o m i c a l l y m e a n i n g f u l s e n s e .
Secondly, we d o n o t b e l i e v e t h a t t h e e v i d e n c e of the
t i g h t d e m a n d / s u p p l y c o n d i t i o n s of 1979/80 l e n d s s u p p o r t to t h e n o t i o n
t h a t the o i l market c o m p r i s e s a dominant p r o d u c e r group which sets
p r i c e s and a competitive f r i n g e of p r i c e - t a k e r s .
As we have s e e n , t h e r e
h a s been no group of p r o d u c e r s which h a s c o n s i s t e n t l y d i c t a t e d prices
to t h e r e s t of the i n d u s t r y , o r i n d e e d one which has c o n s i s t e n t l y
a d o p t e d t h e prices s e t by the o t h e r s . P r i c e changes have been i n i t i a t e d
by a l m o s t e v e r y p r o d u c e r a t some ,point o v e r the t w o y e a r s
-
t h e smaller
producers o f t e n r e a c t i n g more s w i f t l y to spot p r i c e movements. There
h a s c e r t a i n l y been no l a r g e p r o d u c e r which h a s e n f o r c e d i t s price
changes
-
as i n the "dominant-firm p r i c e l e a d e r s h i p " model.
c o u n t r y which c o u l d c o n c e i v a b l y do so,
me
one
Saudi Arabia, has l a g g e d b e h i n d
a l l o t h e r price movements t h r o u g h o u t , and i t s attempts to s e t OPEC
prices were u n s u c c e s f u l . Q u a l l y , t h e r e has been no s i n g l e
" w e l l - r e s p e c t e d " p r o d u c e r which h a s acted a s
d
"barometer" to t h e
i d u s t r y . The c h r o n o l o g i c a l leader changed t o o f r e q u e n t l y f o r any
c r e d e n c e t o be placed on such a n o t i o n , and e q u a l l y , e a r l y p r i c e moves
w e r e n o t always f o l l o w e d by t h e rest of t h e i n d u s t r y .
It has been s u g g e s t e d t h a t , w h i l s t t h e dominant price s e t t e r
m a y n o t d i c t a t e a l l p r i c e movements, it does d e c i d e b r o a d l y the l e v e l
a r o u n d which prices w i l l f l u c t u a t e . Hence,
t h e dominant p r d u c e r sets
its p r i c e a t , s a y , $30/b and a l l o w s the rest of t h e i n d u s t r y t o compete
a r o u n d t h a t l e v e l . Again, we would s u g g e s t t h a t t h i s does n o t
c o n s i s t e n t l y f i t t h e f a c t s i n a t i g h t m a r k e t . There i s no e v i d e n c e of
any c o u n t r y / g r o u p of c o u n t r i e s d e t e r m i n i n g the l e v e l t o which the p r i c e
was t o r i s e o v e r the two y e a r s .
The p a t t e r n of p r i c e movements i n 1979/80 d o e s n o t t h e r e f o r e
conform to t h e n o t i o n of a p r i c e - t a k i n g f r i n g e i n t h e o i l market.
Rather,
the p r i c i n g a c t i v i t y of the p e r i o d s u g g e s t s t h a t even the
s m a l l e s t p r o d u c e r i n t h e market had a n i n c e n t i v e to change prices
-
i .e. e v e r y p r o d u c e r i n the market, i n t i m e s of e x c e s s demand, appears
t o f a c e a s l o p i n q demand c u r v e and n o t t h e h o r i z o n t a l demand c u r v e
P o s t u l a t e d i n models w i t h a p r i c e - t a k i n g
this case, is a price-maker.
f r i n g e . Every producer, i n
I n a s i t u a t i o n of e x c e s s demand, t o q u o t e
27
Arrow:
'I...
any i n d i v i d u a l e n t r e p r e n e u r knows t h a t he c a n raise the
price, even i f h i s c o m p e t i t o r s do n o t raise t h e i r s , because t h e y c a n n o t
s a t i s f y any more of the demand t h a n t h e y d o a l r e a d y . The e n t r e p r e n e u r
is f a c e d w i t h a s l o p i n g demand c u r v e and r a i s e s h i s price i n a c c o r d a n c e
with the p r o f i t - m a x i m i z i n g t a c t i c s of a m o n o p o l i s t . .
'I..
.'I
and i n d e e d
.it is e q u a l l y to the p r o f i t of a l l o t h e r e n t r e p r e n e u r s t o raise
t h e i r p r i c e s also.
.
.I'
2o
I n fact, i n s u c h a s i t u a t i o n of excess demand, e a c h producer
f i n d s the demand c u r v e to be s h i f t i n g to t h e r i g h t , such t h a t he c a n
e f f e c t i v e l y o p e r a t e a l o n g h i s own supply c u r v e . Such an e x p l a n a t i o n
would appear t o f i t c l o s e l y t h e pricing b e h a v i o u r i n t h e o i l market of
1979/80.
S m a l l p r o d u c e r s , both w i t h i n and o u t s i d e OPEC, had
d
rational
economic i n c e n t i v e t o raise t h e i r prices.
But p r o d u c e r s d i d n o t always (and some n e v e r d i d ) raise t h e i r
p r i c e s as h i g h as demand might have a l l o w e d .
were p r o b a b l y a t work
-
A v a r i e t y of i n h i b i t i o n s
f e a r of l o s i n g c u s t o m e r s ' g o o d w i l l s h o u l d
It a l s o seems t h a t S a u d i
c i r c u m s t a n c e s change, p o l i t i c a l c a u t i o n , etc.
Arabia e x e r c i s e d a n i n f l u e n c e on p r i c i n g b e h a v i o u r .
The r o l e of Saudi Arabia d u r i n g this period is d i f f i c u l t t o
d e f i n e i n terms of u s u a l l e a d e r s h i p m o d e l s .
As mentioned e a r l i e r ,
attempts by Saudi Arabia to s e t t h e price a t i t s p r e f e r r e d l e v e l w e r e
not successful.
leader.
I n this s e n s e , i t w a s n o t a c o n v e n t i o n a l price
Its c o n t r i b u t i o n w a s rather d i f f e r e n t .
Saudi A r a b i a ' s
b e h a v i o u r h e l p e d OPEC r e t a i n a n i d e n t i t y and s e n s e of p u r p o s e .
By
h o l d i n g i t s prices down, w e l l below market l e v e l s and i n d e f i a n c e of
a l l market i n d i c a t o r s , i t defended the n o t i o n that the r e f e r e n c e price
of o i l s h o u l d remain a n a d m i n i s t e r e d p r i c e .
By so d o i n g it h e l p e d
p r e v e n t OPEC from a b d i c a t i n g i t s f u n c t i o n s e n t i r e l y to the market.
During this p e r i o d , OPEC member c o u n t r i e s found themselves
moving between two p o l e s : t h e s p o t market a t one extreme and Saudi
A r a b i a a t the o t h e r .
T h e i r i n d i v i d u a l p r i c i n g b e h a v i o u r s r e f l e c t the
r e l a t i v e a t t r a c t i o n of t h e s e two p o l e s , a t d i f f e r e n t p o i n t s i n t i m e ,
e a c h member c o u n t r y .
20 K.T.
Arrow,
op-cit.,
A s we have s e e n , Ecuador moved towards one pole
p.46.
to
28
and a l l o w e d i t s p r i c e s t o f o l l o w the market, i n i t s ups and i n i t s
i n e v i t a b l e downs.
O t h e r s , though s t r o n g l y tempted t o f o l l o w such a n
e x t r e m e c o u r s e , found t h e m s e l v e s more or less r e s t r a i n e d by a
commitment to p r i c e a d m i n i s t r a t i o n .
They were n o t p r e p a r e d to g i v e up
OPEC ( t h e i n s t i t u t i o n a l form of this commitment) e n t i r e l y .
A r a b i a ' s p r i c i n g b e h a v i o u r was a c o n s t a n t reminder of
a d m i n i s t e r prices.
Saudi
the need t o
It a l s o p r o v i d e d a n a n c h o r a g e to p r i c e s , a n
a n c h o r a g e which d i d not s t o p them from r i s i n g b u t c e r t a i n l y i n c r e a s e d
t h e drag.
I n short Saudi A r a b i a did n o t lead OPEC a l o n g a p r i c e path of
its c h o i c e .
Arrow.
Every o i l p r o d u c e r w a s a t t i m e s a 'price maker' h l a
Without Saudi Arabia each would have t a k e n full a d v a n t a g e of
t h e slope i n i t s demand c u r v e .
I n t h e end, however, w i t h the m a r k e t
r e a c h i n g e q u i l i b r i u m e v e r y p r o d u c e r would have become a price t a k e r
-
n o t of a price set by a dominant s u p p l i e r , b u t of a price d e t e r m i n e d by
t h e i n t e r s e c t i o n of t o t a l demand and t h e a g g r e g a t e s u p p l y c u r v e .
Y e t , b e c a u s e of Saudi A r a b i a ' s p r i c i n g p o l i c y , the outcome was
different.
Most O P E producers f o l l o w e d a d i f f e r e n t price p a t h to t h a t
traced by the market.
they r a r e l y coincided.
The two paths went up i n the same d i r e c t i o n , b u t
C u r i o u s l y t h e y i n t e r s e c t e d a t a p o i n t where
m a r k e t prices were b e g i n n i n g t o f a l l ( h a v i n g r e a c h e d a peak which
official
t o rise.
prices never a t t a i n e d 1, while official prices w e r e c o n t i n u i n g
The i m p o r t a n t p o i n t i s t h a t a d i s t i n c t i o n was p r e s e r v e d
between OPEC's and the m a r k e t ' s price b e h a v i o u r when v e r y p o w e r f u l
f o r c e s were a t t e m p t i n g to a b o l i s h t h i s d i s t i n c t i o n .
29
The P r i c e U n i f i c a t i o n of 1981
(a) 1981 O u t p u t
Again, a review of the o u t p u t changes o v e r 1981 i s an i m p o r t a n t
p r e r e q u i s i t e to u n d e r s t a n d i n g the p r i c e movements Over the y e a r . As we
noted e a r l i e r , Saudi Arabia i n c r e a s e d its p r o d u c t i o n to a r o u n d 10.5 mbd
i n O c t o b e r 1980 i n response to t h e I r a n / I r a q war, It m a i n t a i n e d t h i s
h i g h e r o u t p u t c e i l i n g ( t r a d i t i o n a l l y f i x e d a t 8.5 mbd) u n t i l the end of
August 1981
-
a p o l i c y which had v e r y i m p o r t a n t i m p l i c a t i o n s f o r the
whole of t h e o i l market i n t h e f i r s t t h r e e q u a r t e r s of t h e y e a r . By t h e
end of 1980, Saudi Arabian p r i c e s w e r e s o m e $8/b below the rest of OPEC
a n d t h e d e c i s i o n t o r e t a i n such a h i g h " a l l o w a b l e o u t p u t " i m p o s e d v e r y
marked c u t s i n s a l e s on many o t h e r OPEC p r o d u c e r s . Despite t h e f a c t
t h a t I r a n and Iraq's combined o u t p u t o n l y r e c o v e r e d t o some 2.4 mbd,
the market s l a c k e n e d s u f f i c i e n t l y f o r Libya and K u w a i t t o l o s e 1 mbd;
N i g e r i a some 1.3 mbd; Venezuela 0.5
mbd; a n d Qatar, A l g e r i a and the UAE
some 200,000 bd i n the e i g h t months to August 1981
. As
w e s h a l l see,
t h e p r e s s u r e which such l o s s e s of o u t p u t p u t on price d i f f e r e n t i a l s
w i t h i n OPEC w e r e to p r o v e s u f f i c i e n t t o p u l l most p r i c e s down t o the
Saudi l e v e l . More f l e x i b l e p r i c i n g i n t h e f i r s t h a l f of 1981 e n a b l e d
m o s t non-OPEC p r o d u c e r s to m a i n t a i n their o u t p u t i n the f a c e of Saudi
A r a b i a ' s ' f l o o d i n g ' of the market.
( b ) 1981 Spot P r i c e s
This emergence of a n excess s u p p l y of o i l was r e f l e c t e d most
i m m e d i a t e l y i n the s p o t m a r k e t s . Having peaked i n November 1980 ( a t
$41/b for Arabian L i g h t ) , spot c r u d e prices f e l l by some $8 t o $10 by
mid-1981
t o the t h e n p r e v a i l i n g o f f i c i a l marker p r i c e of $32/b. S p o t
p r o d u c t prices a l s o began t o d e c l i n e i n December 1980 ( t h i s t i m e
i n c l u d i n g 3.5% S f u e l o i l ) and s t a b i l i s e d by June/July a t prices n o t
i n c o m p a t i b l e w i t h t h e $32 Marker. The d e c l i n e i n p r o d u c t prices i n the
f i r s t h a l f of 1981 was less t h a n i n spot c r u d e prices, t h e y having
a c h i e v e d a r a t h e r lower peak i n 1980. A l l of t h i s , c o u p l e d
w i t h the d r o p i n s a l e s o u t l i n e d a b o v e , p r o v i d e d p r o d u c e r s w i t h a c l e a r
s i g n a l of t h e s l a c k e n i n g of t h e m a r k e t
-
a s l a c k n e s s which c o n t i n u e d
30
t h r o u g h o u t 1981, w i t h only a weak r e c o v e r y i n spot prices i n the w i n t e r
quarter. Spot price movements o v e r 1981 are g r a p h e d on F i g u r e 3.
(c) O f f i c i a l P r i c e s
Unlike t h e spot price d e c l i n e i n t h e f i r s t h a l f of 1980, this t i m e
o f f i c i a l p r i c e s f o l l o w e d the s p o t p r i c e down. F i g u r e 5 i l l u s t r a t e s the
price cuts which took place b e f o r e the OPEC m e e t i n g of l a t e O c t o b e r
1981. S e v e r a l i n t e r e s t i n g f e a t u r e s emerge:
Almost w i t h o u t e x c e p t i o n , non-OPEC producers c u t t h e i r prices
s u b s t a n t i a l l y between A p r i l and August 1981
- before
any moves by the
v a s t m a j o r i t y of OPEC. As we s u g g e s t e d above, t h e s e c u t s were i n
r e s p o n s e to t h e a g g r e s s i v e Saudi Arabian p o l i c y of selling 10.5 mbd a t
i t s r e l a t i v e l y l o w p r i c e of $32/b. The non-OPEC p r o d u c e r s ' c u t s i n
prices b r o u g h t them a l l back t o around t h e Saudi l e v e l ( t h e r e s u l t a n t
d i f f e r e n t i a l s are examined i n I d ) below), e n a b l i n g them t o compete and
p u s h i n g s t i l l more of t h e burden of o u t p u t a d j u s t m e n t o n t o t h e
h i g h - p r i c e d OPEC p r o d u c e r s . Whilst s t i l l l a g g i n g spot p r i c e movements
by a r o u n d s i x months,
t h e o f f i c i a l price c h r o n o l o g y shown i n F i g . 5
a g a i n s u g g e s t s a g r e a t e r f l e x i b i l i t y and s e n s i t i v i t y t o spot price
changes on t h e p a r t of non-OPEC p r o d u c e r s t h a n OPEC c o u n t r i e s .
The f i r s t t h r e e q u a r t e r s of 1981 s a w a p r o l o n g e d series of
d i s a g r e e m e n t s w i t h i n OPEC. As noted e a r l i e r , 1979/80 had s e e n t h e
emergence of a t w o - t i e r e d p r i c i n g system, with t h e o f f i c i a l Marker a t
$32/b and a d e f a c t o Marker p r i c e of $36/b, a r o u n d which much of OPEC
w a s c l u s t e r e d . The Saudi p o l i c y of m a i n t a i n i n g a v e r y h i g h o u t p u t
d e s p i t e the weakening demand, and t h e r e b y i n f l i c t i n g v e r y l a r g e c u t s in
sales on the rest of OPEC, w a s pursued with t h e s o l e a i m of p u l l i n g t h e
rest of OPEC back down t o around i t s o f f i c i a l Marker p r i c e . It w a s a
c l e a r attempt by Saudi Arabia t o reassert i t s p o s i t i o n i n t h e
O r g a n i s a t i o n and i n d e e d i n the whole world o i l m a r k e t .
EARLY 1981 O F F I C I A L PRICE CUTS
- Price arts by all oil producers before the OPECrneeting of
By April
-
l
China
7 May
M alayria
14 M a y
Brunei
USA
18 M a y
Egypt
Mexim
USA
U.K.
Brunei
1 July
Mexico
Libya
Syria
10 July
Malaysia
17 Julv
Egypt
1 Aug
Syria
26 Aug
Nigeria
om
USSR
29 Oct
OPEC
1
%
Figure 5
I
I
-:.$
-3%
-10%
I
-3%l
Malaysia
USSR
1 5 June
1-
7
-6%
1 May
10 June
-
Ecuador
1 5 April
1 June
October 1981
-2%
-ll%c
-?l%r
-8%,
1
-3%J
-7%
-5%
China
-8%’
’
4%,
Mexico
I
-10%
-3%
-7%
-
32
The OPEC meeting i n late May 1981 b r o u g h t the c o n f l i c t w i t h i n
OPEC i n t o t h e open. Saudi Arabian attempts t o p u l l the rest of t h e
members' p r i c e s down from t h e i r $36/b "marker" were r e s i s t e d and i n d e e d
t h e o t h e r t w e l v e a g r e e d p r d u c t i o n c u t s (of some 1 . 2 5 mbd) i n a n
attempt to d e f e n d t h e i r h i g h e r r e f e r e n c e p r i c e . Much of t h e summer was
t h e n s p e n t t r y i n g to u r g e p r o d u c t i o n c u t s on Saudi Arabia, as spot
prices and o u t p u t c o n t i n u e d t o tumble. A f u r t h e r meeting of OPEC i n
mid-August 1981 a g a i n f a i l e d t o a g r e e on a r e u n i f i e d p r i c e s t r u c t u r e ,
a n d by this t i m e , as we have s e e n , a l m o s t e v e r y non-OPEC p r o d u c e r had
c u t p r i c e s t o t h e Saudi Arabian l e v e l , e x e r t i n g s t i l l more p r e s s u r e on
t h e bulk of OPEC.
The f a i l u r e of t h e August OPEC meeting was s w i f t l y followed by
one of
the few u n i l a t e r a l price c u t s by a n OPEC m e m b e r i n 1981
-
N i g e r i a c u t t i n g from $40/b t o $36/b a t the end of t h a t month. As F i g . 5
shows, the o n l y p r e v i o u s c u t s had been by Ecuador who c o n t i n u e d to be a
l a w u n t o i t s e l f , and a small ($1.10/b)
cut by Libya i n July.
The b a t t l e by Saudi Arabia t o re-impose i t s e l f as the ' l e a d e r '
w i t h i n OPEC, and to r e - e s t a b l i s h Arabian L i g h t as " t h e " OPEC marker
c r u d e , w a s thus a long a n d d i f f i c u l t one. It w a s a b a t t l e which i t
b
f i n a l l y won i n l a t e October 1981, when, a t t h e m e e t i n g i n Geneva, a new
s i n g l e Marker p r i c e of $34/b was f i n a l l y agreed upon. A l l OPEC p r i c e s
thus f e l l s h a r p l y t o new l e v e l s around the $34/b Marker, w h i l e Saudi
A r a b i a a l o n e i n c r e a s e d prices by $2/b t o complete the r e u n i f i c a t i o n .
( F u r t h e r s l i g h t a d j u s t m e n t s to prices were made a t t h e D e c e m b e r OPEC
m e e t i n g . ) I t would t h u s a p p e a r t h a t Saudi Arabia had r i d d e n t h e s t o r m
of t h e p r e v i o u s few y e a r s , and had once a g a i n a s s e r t e d i t s e l f a s t h e
l e a d e r of OPEC. That it had done this i n a s l a c k e n i n g market i s of
significance
-
a p o i n t which we p u r s u e f u r t h e r i n ( e ) below.
( d l How Good Was the R e u n i f i c a t i o n of P r i c e s ?
As we p o i n t e d o u t i n S e c t i o n I 1 above, t h e price movements of 1979/80
had t h e e f f e c t of d r a m a t i c a l l y widening price d i f f e r e n t i a l s between
crudes of d i f f e r e n t q u a l i t y and f r m d i f f e r e n t c o u n t r i e s . The price
c h a n g e s of 1981 need to be viewed i n a v e r y d i f f e r e n t l i g h t
-
their
e f f e c t , w i t h o u t e x c e p t i o n , b e i n g to b r i n g prices back t o g e t h e r a g a i n .
I t is of i n t e r e s t to know how c l o s e l y this was a c h i e v e d . As we
s u g g e s t e d earlier, t h e d i f f e r e n t i a l s of September 1978 had evolved over
33
two y e a r s of r e l a t i v e l y weak p r i c e s , and are t h e r e f o r e a good benchmark
a g a i n s t which to assess t h e price r e a l i g n m e n t of 1981. (See also Annex
2.) T a b l e 3 compares t h e d i f f e r e n t i a l s t r u c t u r e a t the end of 1981 w i t h
t h a t of 1978, on both a p e r c e n t a g e and a b s o l u t e b a s i s .
For most crudes, t h e p e r c e n t a g e d i f f e r e n t i a l o v e r Arabian L i g h t
a t t h e end of 1981 d i f f e r e d o n l y m a r g i n a l l y from that which had
p r e v a i l e d i n 1978. Hence one g e t s a n i m p r e s s i o n of a remarkably c l o s e
r e t u r n to the d i f f e r e n t i a l s t r u c t u r e of 1978, f o l l o w i n g the r e l a t i v e
c h a o s of 1979/80.
This w a s b r o u g h t a b o u t by what, on t h e s u r f a c e ,
a p p e a r e d t o be a f a i r l y a r b i t r a r y a l i g n m e n t w i t h i n OPEC, and a n
unplanned and u n c o o r d i n a t e d s e r i e s of p r i c e cuts o u t s i d e OPEC. Three
i m p o r t a n t q u a l i f i c a t i o n s must be made t o t h i s p i c t u r e , however. F i r s t
of a l l , as we n o t e d e a r l i e r , a c o r r e c t d i f f e r e n t i a l i s one wich makes
t h e b u y e r i n d i f f e r e n t between two c r u d e s . It s h o u l d t h e r e f o r e r e f l e c t
d i f f e r e n c e s i n t r a n s p o r t c o s t s , r e f i n i n g c o s t s , p r o d u c t p r i c e s , etc.,
a n d need n o t n e c e s s a r i l y be a set p e r c e n t a g e of the c r u d e p r i c e , If a l l
c o s t s , p r o d u c t y i e l d s and prices remained c o n s t a n t w h i l s t c r u d e prices
rose, t h e n the e q u i l i b r i u m d i f f e r e n t i a l would remain c o n s t a n t i n
a b s o l u t e terms, and f a l l as a p e r c e n t a g e of t h e crude price. An
a s s e s s m e n t of t h e 1981 r e u n i f i c a t i o n based p u r e l y on p e r c e n t a g e
d i f f e r e n t i a l s may n o t t e l l t h e whole s t o r y , t h e r e f o r e .
Secondly, it is i m p o r t a n t to n o t e t h a t , on a p e r c e n t a g e b a s i s ,
w h i l e the d i f f e r e n c e s w i t h the September 1978 p o s i t i o n s are small, t h e y
are a l m o s t all i n t h e same d i r e c t i o n . There i s a s l i g h t tendency t o
u n d e r c u t Arabian L i g h t which, g i v e n the p r e v i o u s r e l u c t a n c e of m o s t
producers t o lower t h e i r prices, may appear r a t h e r s u r p r i s i n g . This i s ,
however, the p e r f e c t l y r a t i o n a l b e h a v i o u r of a n y p r o d u c e r i n a s l a c k
m a r k e t . The i n c e n t i v e i s t o p r i c e j u s t below t h e major p r o d u c e r and
t a k e a l a r g e r s h a r e of t h e market.
producers
-
T n i s r e v e r s a l of p o l i c y by most
which, as we s h a l l see, c o n t i n u e d i n t o 1982
-
suggests that
t h e earlier r e f u s a l to lower prices had l i t t l e to do w i t h s h o r t r u n
p r o f i t maximization, and much m o r e to do with the p o l i t i c a l d e s i r e t o
d e f e n d a n i n d e p e n d e n t marker p r i c e . Once the h i g h e r marker had been
d e s t r o y e d , most p r o d u c e r s r e t u r n e d to revenue maximizing b e h a v i o u r i n
the s l a c k e n i n g market
.
34
T a b l e 3 : -Official.P r i c e Differentials
a g a i n s t Saudi A r a b i a n Light 34 crude
I
I
I
1I
DOLLARS
30.9.781
1
31.12.81
II
30.1 1.82
tl
30.9.78
Iran
Iraq
Abu Dhabi
Qatar
Kuwait
Gabon
Libya
Algeria
Nigeria
S h a rj a h
Dubai
Venezuela
Ecuador
Indonesia
+0.106
-0.124
+O .556
+O .296
-0.434
0
+O .974
+I .396
+1.416
+O. 586
-0.064
+O .836
-0 339
+O. 846
+0.20
-0.54
+1.50
+1 .30
-1 -70
0
j2.50
+3.00
M.52
+1 .56
-0.14
+O .58
-1.40
+ I .oo
-2.80
-0.54
+O .56
to. 30
-1.70
0
+1 .15
+1 .50
+1 .52
+0.59
-0.14
+O 58
-2.10
+0.53
+10.99
+11 .I5
+4.61
-0.50
+6.58
-2.67
+6 66
UK
Norway
USSR
+l. 296
+I. 496
+O .456
+O. 396
+O. 356
-1.069
+0.106
+O .496
+1 .596
+1 .446
+2.50
+3.25
+1 .35
+I .oo
+1 .06
-2.50
0
+o .90
+3.90
+2.10
-0.50
+0.25
-1 .SO
-1.50
+O .06
-4.00
-2.25
+O. 50
+3.30
+1.10
+10.20
+11 .78
+3.59
+3.12
+2.80
-8 41
+O. 83
+3.90
+12.56
+ I 1.38
Mexico
Oman
Syria
Egypt
China
Malaysia
Brunei
.
I
PERCENTAGE
+O. 83
-0.98
+4.38
+2.33
-3.42
0
+7.m
.
II
I
31 .12.81
30.11.82
+O .59
-1.59
+4.41
+3.82
-5.00
0
+7.35
+8.82
+1.53
+4.59
-0.41
+ I .71
-4.12
+2.94
-8.24
-1.59
+1 .65
+0.88
-5 00
0
+3.38
+4.41
+4*47
+1 .74
-0.41
+1 .71
-6.18
+1 .56
+7.35
+9.56
+3 97
+2.94
+3.12
-7.35
0
+2 65
+11.47
-1.47
+O. 74
-5.29
-4 -41
+O. 18
-1 1.76
-6.62
+1.47
+9.71
+3.24
.
+6.18
I
.
I
35
T h i r d l y , and p e r h a p s most i m p o r t a n t l y , f o r t h e n e x t y e a r o r so
t h e r e were a number of e x c e p t i o n s to t h e g e n e r a l l y accurate r e t u r n t o
t h e 1978 d i f f e r e n t i a l s t r u c t u r e . Outside OPEC, B r u n e i , the UK and
Norway were e f f e c t i v e l y u n d e r c u t t i n g the OPEC marker and, more
s i g n i f i c a n t l y , there were a number of problems w i t h i n OPEC. N i g e r i a and
t o some e x t e n t I n d o n e s i a , A l g e r i a a n d Venezuela e n d e d 1981 w i t h more
f a v o u r a b l e d i f f e r e n t i a l s a g a i n s t Arabian L i g h t t h a n t h e y had had i n
1978, and, as we s h a l l see below,
t h e s e d i f f e r e n t i a l s w e r e t o cause
problems w i t h i n OPEC t h r o u g h o u t 1982.
I t is worth n o t i n g ,
f i n a l l y , t h a t the Arabian L i g h t spot price
f o r December 1981 was $34.26/b
-
o n l y 26 c e n t s above t h e o f f i c i a l
marker p r i c e . 1981 t h u s ended w i t h spot and c o n t r a c t p r i c e s i n
remarkable harmony
-
w i t h one or two i m p o r t a n t e x c e p t i o n s .
( e l L e a d e r s h i p i n t h e R e u n i f i c a t i o n of 1981
The q u e s t i o n arises, whether Arrow's c h a r a c t e r i z a t i o n of a market i n
d i s e q u i l i b r i u m , i n which a l l p r o d u c e r s f a c e d s l o p i n g demand c u r v e s and
hence were price-makers,
h e l d € o r t h e o i l market i n t i m e s of e x c e s s
s u p p l y a s well as i t appears t o i n t i m e s of excess demand. 1981 c a n
p e r h a p s be termed a ' h i n g e ' y e a r between t h e t i g h t m a r k e t of 1979/80
and t h e s l a c k m a r k e t of 1982. I t w a s a year of i n i t i a l l y m a r g i n a l b u t
e v e r i n c r e a s i n g excess s u p p l y . W e would s u g g e s t t h a t a l t h o u g h t h e r e i s
e v i d e n c e (as a l w a y s i n d i s e q u i l i b r i u m c o n d i t i o n s 1 of Arrow-type
behaviour,
the most s i g n i f i c a n t f e a t u r e of o i l developments i n 1981 i s
S a u d i Arabia s e e k i n g s u c c e s s f u l l y to r e - e s t a b l i s h
i t s e l f as the
l i n c h p i n of t h e world o i l market.
The Saudi t a c t i c s w e r e c l e a r
-
t o a l l o w b u y e r s to l i f t as much
o i l as p o s s i b l e a t i t s low p r i c e i n o r d e r t o b r i n g the whole of t h e
rest of t h e s y s t e m t o its l e v e l . It w a s , of course, a i d e d by t h e
g e n e r a l weakening of the market i n 1981 which meant t h a t i t w a s s e e k i n g
t o p u l l t h e s y s t e m i n t h e same d i r e c t i o n as the m a r k e t . Equally, t h e
S a u d i s w e r e n o t d i c t a t e d to by t h e m a r k e t . They m a i n t a i n e d prices w e l l
above any c o m p e t i t i v e l e v e l , whilst a c h i e v i n g a s t r e n g t h e n i n g of t h e i r
own p o s i t i o n i n the system. In this respect, the Saudi A r a b i a n p o l i c i e s
of 1981 f i t w e l l i n t o a p u r e 'dominant p r o d u c e r ' l e a d e r s h i p model. By
v i r t u e of its p o s i t i o n as the l a r g e s t s u p p l i e r , it w a s able t o e n f o r c e
i t s chosen price regime on t h e rest of t h e s y s t e m . The f i n a l agreement
36
on t h e $34/b marker p r i c e w a s something of
d
p o l i t i c a l compromise by
Saudi Arabia, its desire b e i n g as always to h o l d OPEC t o g e t h e r . It had,
however, made i t clear from e a r l y 1981 t h a t it would be happy t o see
t h e r e u n i f i c a t i o n a t $34/b and hence u l t i m a t e l y a c h i e v e d its aim. It is
significant that i t c o u l d d o so when market c o n d i t i o n s s u p p o r t e d i t s
p o l i c i e s , u n l i k e d u r i n g t h e p r e v i o u s t w o y e a r s when its attempts t o
resist market p r e s s u r e s w e r e n o t v e r y s u c c e s s f u l .
The policies of S a u d i Arabia were t h u s r e l a t i v e l y s t r a i g h t -
f o r w a r d d u r i n g 1981. What, t h e n , of t h e r o l e of t h e r e s t of t h e
p r o d u c e r s i n t h a t y e a r ? !Ihe non-OPEC p r o d u c e r s c o n t i n u e d t o act i n a
revenue maximizing manner, g i v e n t h e p o l i c i e s of o t h e r agents.
Having
f o l l o w e d the market to i t s peak i n November 1980, t h e y s o u g h t to keep
prices h i g h f o r t h e f i r s t q u a r t e r of 1981 and so enjoy the enhanced
r e v e n u e . When by t h e s e c o n d quarter, the e f f e c t s of the S a u d i p o l i c y
began t o be f e l t on t h e i r o u t p u t l e v e l s ,
t h e y q u i c k l y f o l l o w e d the spot
price down t o l e v e l s close t o S a u d i Arabia's p r i c e s , and t h u s were able
t o m a i n t a i n t h e i r o u t p u t a t t h e expense of t h e rest of OPEC. The
non-OPEC p r o d u c e r s w e r e thus d i c t a t e d t o by Saudi Arabian p r o d u c t i o n
p o l i c i e s and t h e s l a c k e n i n g market, and w e r e q u i c k t o respond.
The b e h a v i o u r of t h e bulk of OPEC i s much more d i f f i c u l t t o
e x p l a i n . As we have s e e n , t h e i r a t t e m p t t o d e f e n d t h e i r h i g h e r 'marker'
p r i c e cost them d e a r l y i n terms of l o s t o u t p u t and revenue, and y e t
t h e y r e s i s t e d the p r e s s u r e s to c u t prices f o r f u l l y t e n months. This
c l e a r l y does not t i e i n w i t h their 1979/80 p o l i c i e s e x c e p t i n so f a r as
t h e y wished t o see high prices. Nor, i n d e e d
I V below
- does
-
as w e examine i n S e c t i o n
it t i e i n w i t h t h e i r b e h a v i o u r i n 1982, when a g a i n they
a p p e a r e d t o s e e k to maximize t h e i r s h o r t term r e v e n u e . One c a n o n l y
c o n c l u d e t h a t t h e i r motives were p o l i t i c a l .
That t h e y r e s i s t e d so
long, and a t such a h i g h c o s t , i n d i c a t e s t h e s t r e n g t h of these
non-economic
factors.
That they u l t i m a t e l y had to concede
d e m o n s t r a t e s the v e r y s i g n i f i c a n t power of t h e dominant p r o d u c e r s i n
t i m e s of m a r g i n a l l y s l a c k markets.
37
IV
The S l a c k Market of 1982
( a ) 1982 O u t p u t C u t s
The p r i c i n g a c t i v i t y of 1982 c a n n o t be understood w i t h o u t f i r s t
r e c o g n i s i n g t h e v e r y s u b s t a n t i a l excess s u p p l y which developed i n the
o i l market. The s i t u a t i o n of i n c r e a s i n g s l a c k n e s s i n the market i n 1981
t u r n e d , i n 1982, to one of major g l u t
major problems which, i n
IIEITIY ways,
-
p r e s e n t i n g producers with very
w e r e of a t o t a l l y d i f f e r e n t k i n d t o
those of the first h a l f of 1981. The change was n o t m e r e l y one of
degree.
A t i t s p e a k i n 1979, world oil p r o d u c t i o n w a s o v e r 65.7
mbd.
This f e l l t o a l o w p o i n t of j u s t o v e r 53 mbd i n A p r i l 1982 and l a t e s t
estimates, f o r October 1982, w e r e j u s t 56 mbd
-
f u l l y 1 5 % lower t h a n
-
t h e 1979 peak. OPEC p r o d u c t i o n had f a l l e n by a much l a r g e r p e r c e n t a g e
39%, from 31.8 mbd i n J u l y 1979 t o 19.3 mbd i n November 1 9 8 2 . Again,
hit a l o w p o i n t i n April 1982 of 16.7 mbd
capacity.21
-
it
j u s t 53% of O P E C ' s
I n r a t h e r s t a r k c o n t r a s t , non-OPEC o u t p u t i n October 1982
stood a t 38 mbd ( i n c l u d i n g C e n t r a l l y Planned Economies 1,
having grown
s t e a d i l y t h r o u g h o u t t h e e i g h t e e n months s i n c e mid-1 981. W h i l s t OPEX: w a s
o p e r a t i n g a t o n l y h a l f c a p a c i t y , non-OPEC p r o d u c e r s w e r e a t r e c o r d
l e v e l s of o u t p u t , d e s p i t e t h e very s u b s t a n t i a l downturn i n t o t a l world
demand.
( b ) 1982 S p o t Prices
This s l a c k n e s s w a s r e f l e c t e d i n the spot market, where prices showed a
f a i r l y c o n s i s t e n t downward t r e n d f o l l o w i n g t h e modest r e c o v e r y i n t h e
w i n t e r of 1981 /82
(see Figure 3 I .
Low p o i n t s (of around $28/b f o r
Arabian L i g h t ) were' r e a c h e d i n Piarch and a g a i n i n November 1982. Indeed
spot c r u d e p r i c e s r e m a i n e d markedly below o f f i c i a l c o n t r a c t prices
t h r o u g h o u t t h e y e a r . S p o t prices of e x p e n s i v e p r o d u c t s a g a i n matched
21 P e t r o l e u m I n t e l l i g e n c e Weekly, May 3 r d , 1982, p.1 I , e s t i m a t e d t o t a l
OPEC c a p a c i t y a t 31,185 thousand b/d.
38
t h e s p o t c r u d e p a t t e r n very c l o s e l y , w i t h low p o i n t s i n m r c h and
November. The main p r o d u c t , 3.5% S f u e l o i l , w a s r a t h e r more s t a b l e ,
f l u c t u a t i n g between $24/b and $25.5/b
t h r o u g h o u t the y e a r , e x c e p t f o r a
l o w p o i n t i n August of $23.3/b.
( c 1 O f f i c i a l Price U n d e r c u t t i n g
Such a s i t u a t i o n of e x c e s s c a p a c i t y and low spot prices places downward
p r e s s u r e o n official p r i c e s which may m a n i f e s t i t s e l f i n two ways.
F i r s t l y , t h e r e is an i n c e n t i v e f o r a g e n e r a l , a g r e e d , r e d u c t i o n i n a l l
official prices i n a n attempt to s t i m u l a t e worldwide demand and allow a
r e t u r n n e a r e r to c a p a c i t y p r o d u c t i o n for a l l p r o d u c e r s ( t h e e f f i c a c y
of s u c h a policy c l e a r l y depends on t h e p r i c e e l a s t i c i t y of demand €or
o i l , t h e t i m e l a g s i n v o l v e d , e t c ) . Secondly, t h e r e is i n c e n t i v e f o r a n
i n d i v i d u a l p r o d u c e r t o attempt t o u n d e r c u t h i s c o m p e t i t o r s '
official
prices, t h e reward b e i n g a l a r g e r s h a r e of t h e market and hence t h e
p o t e n t i a l f o r m a i n t a i n i n g h i s p r o d u c t i o n d e s p i t e t h e c o n t r a c t i o n of
worldwide p r o d u c t i o n . He e f f e c t i v e l y c a n pass on t h e p r o d u c t i o n cuts t o
h i s competitors.
F i r s t of a l l , it s h o u l d be e s t a b l i s h e d t h a t the p r e s s u r e for a
g e n e r a l r e d u c t i o n i n a l l official prices was r e s i s t e d t h r o u g h o u t 1 9 8 2 ,
and f o r t h i s a t t e n t i o n must a g a i n f o c u s on S a u d i A r a b i a . Having
succeeded, f i n a l l y , i n drawing down a l l of t h e r e s t of t h e w o r l d ' s
p r o d u c e r s to a $34 r e f e r e n c e p r i c e by l a t e 1981, Saudi A r a b i a c h o s e t o
d e f e n d t h e newly a g r e e d marker p r i c e i n 1982 despite t h e s h a r p l y
c o n t r a c t i n g demand. Possible e x p l a n a t i o n s of the S a u d i a c t i o n are
many. F i r s t of a l l , it may be a simple consequence of its long-term
d e s i r e to smooth o u t f l u c t u a t i o n s , both upward and downward, i n t h e
price of oil.
Saudi Arabia may have f e l t t h a t t h e long-term b e n e f i t s ,
both economic and p o l i t i c a l , of such a p o l i c y outweigh the s h o r t - t e r m
c o s t s of a l o s s i n o u t p u t . Such a n e x p l a n a t i o n would of c o u r s e a l s o t i e
i n w i t h the S a u d i p r i c i n g b e h a v i o u r of the p r e c e d i n g three y e a r s .
To quote D r Abdulhady Hassan T a h e r , Governor of P e t r o m i n and
Saudi M i n i s t e r of S t a t e i n November 1 9 8 2 : "Saudi Arabia remains
committed to i t s long-term goals of t r y i n g to m a i n t a i n a r e a s o n a b l e
e q u i l i b r i u m i n t h e i n t e r n a t i o n a l o i l market for t h e mutual b e n e f i t of
both p r o d u c e r s and consumers and f o r t h e common good of the w o r l d
39
economy as a whole. m 2 2 Moreover, as D r Taher went on t o argue, the
S a u d i s s a w t h e downturn i n W e s t e r n economic a c t i v i t y as a s h o r t run
problem, r e c o v e r y b r i n g i n g a b o u t a renewed t i g h t e n i n g of t h e market:
".... we
b e l i e v e t h a t t h e o i l market w i l l r e t u r n to a b e t t e r b a l a n c e i n
a b o u t s i x months from now (Nov 1982)
."
Long-term s t a b i l i t y i n o i l
prices was c l e a r l y c o n s i d e r e d t o be worth any c o s t i n t e r m s of l o s t
s h o r t - r u n revenue.
It is worth n o t i n g t h a t i t is u n l i k e l y t h a t Saudi Arabia's
attempts to h o l d prices h i g h i n 1982 w i l l have won t h e m many f r i e n d s i n
the W e s t
-
i n d e e d s t a t e m e n t s coming out of t h e USA i n t h e e a r l y months
of 1983 s u g g e s t e d t h a t t h e West would have p r e f e r r e d p r i c e s t o f a l l ,
a l b e i t i n a r e a s o n a b l y c o n t r o l l e d manner.
Some may e q u a l l y a r g u e t h a t Saudi Arabia did n o t even view i t
a s i n t h e i r short-term
i n t e r e s t s t o l o w e r prices.
There m s a r a t i o n a l
economic i n c e n t i v e t o lower prices o n l y if Saudi Arabia f e l t t h a t i t
f a c e d a p o s i t i v e m a r g i n a l revenue o v e r some f u t u r e p e r i o d of t i m e .
M a r g i n a l revenue is g i v e n by:
where p is price, d i s t h e c o u n t r y ' s m a r k e t s h a r e , and z t h e e l a s t i c i t y
of world demand for o i l .
T w factors may s u g g e s t t h a t Saudi Arabia f e l t i t s e l f t o b e
f a c i n g a n e g a t i v e m a r g i n a l revenue i n 1982.
F i r s t l y , it h o l d s a l a r g e
s h a r e of t h e m a r k e t ( 4 0 % of OPE€ and 2 0 % of k e e World o u t p u t i n
J a n u a r y 19821, i.e. i t s I d ' i s l a r g e .
S e c o n d l y , Saudi Arabia may w e l l
have p e r c e i v e d t h a t it f a c e d a v e r y i n e l a s t i c demand c u r v e ( i . e . a v e r y
low z ) , e x p e c t i n g any c u t i n i t s prices t o be f o l l o w e d v e r y q u i c k l y by
other p r o d u c e r s , and so r e s u l t i n g in l i t t l e or no i n c r e a s e i n Saudi
sales.
22 D r .
Chamberlin23 developed the notion of an o l i g o p o l i s t i c f i r m
Abdulhady Ifassan T a h e r , The I n t e r n a t i o n a l O i l Market: Anarchy or
Order?, a paper t o t h e Oxford Energy P o l i c y C l u b ,
November 27, 1982.
.
23 E.H. Chamberlin, The Theory of M o n o p o l i s t i c C o m p e t i t i o n , ch 3,
Harvard U n i v e r s i t y P r e s s , 1 93 3.
40
f a c i n g two demand c u r v e s
-
one assuming no r e a c t i o n by r i v a l s to a
price change ( " s u b j e c t i v e " demand c u r v e ) and one assuming h i s r i v a l s do
r e a c t ( " o b j e c t i v e " demand c u r v e ) . Rapid r e a c t i o n to a Saudi p r i c e c u t
by o t h e r p r o d u c e r s would imply t h a t Saudi Arabia would s l i d e down t h e
more i n e l a s t i c ' o b j e c t i v e '
demand c u r v e and n o t a l o n g i t s own
' s u b j e c t i v e ' curve.
If o t h e r p r o d u c e r s set prices a l w a y s t o u n d e r c u t s l i g h t l y t h e
S a u d i marker, a s many d i d i n 1982, price c u t s by Saudi Arabia which are
f o l l o w e d by everyone e l s e may not have any impact on Saudi sales u n t i l
a l l o t h e r p r o d u c e r s are p r o d u c i n g to c a p a c i t y . The Saudi d e c i s i o n t o
h o l d prices i n 1982 could t h e n be related t o a p e r c e p t i o n of n e g a t i v e
m a r g i n a l revenue, as l i t t l e o u t p u t growth would have been g a i n e d from a
p r i c e c u t . (If t h i s were true, i t would s u g g e s t a revenue maximizing
b e h a v i o u r by Saudi Arabia which w a s c l e a r l y a b s e n t d u r i n g 1979/80.)
There would thus appear to be p o l i t i c a l , a n d s h o r t and long run
economic r e a s o n s why S a u d i Arabia may have resisted t h e p r e s s u r e to c u t
i t s prices i n 1982.
By r e s i s t i n g t h e p r e s s u r e t o c u t its o f f i c i a l prices i n 1982,
S a u d i Arabia e f f e c t i v e l y d e c i d e d t h e l e v e l a t which the " p r i c i n g game"
w a s t o be p l a y e d . As w e mentioned e a r l i e r , a s l a c k market i n v o l v e s
t e m p t a t i o n s f o r i n d i v i d u a l p r o d u c e r s t o u n d e r c u t the f o r m a l price
s t r u c t u r e . 1982 d i d see s e v e r a l such moves.
But c o m p e t i t i o n took place
just below t h e $34 r e f e r e n c e l e v e l f i x e d by Saudi Arabia.
Competition
may have o c c u r r e d i n t h e same way a t a l o w e r price l e v e l had S a u d i
A r a b i a u n i l a t e r a l l y cut the Marker p r i c e .
The price r e d u c t i o n s of 1982 w e r e v e r y d i f f e r e n t i n n a t u r e to
t h o s e o f 1981, which w e r e aimed a t a r e u n i f i c a t i o n of c o n t r a c t prices,
a c h i e v e d i n October of t h a t y e a r .
I n 1982 t h e name of t h e game was
c o m p e t i t i o n , and one r e s u l t of u n i l a t e r a l p r i c e c u t s w a s t o d i s t u r b the
u n i f i e d d i f f e r e n t i a l price s t r u c t u r e .
F i g u r e 6 graphs the chronology of the o f f i c i a l price
c h a n g e s i n 1 9 8 2 . It is p e r h a p s b e s t t o c o n s i d e r the a c t i o n s of OPEC and
non-OPEC p r o d u c e r s s e p a r a t e l y .
29 ocr
1 Nov
OPEC
pun#,oman
U.K.. F l o n v a ~
kxim
Figure 6
1 Dec
USSR
7 Dec
OPEC
20 Dec
Oman
1 4 Jan
Syria
7 F-
9 Fen
USA
U.K. Norway
Fe4
i19
. 12.
21 Feb
Ewdt
Egypt
1982 OFFICIAL PRICE CHANGES
-3%
I ran
China
E w P i . USA
U.K.
USSR
Mexim
M
Mar
1 Aor
OPEC
USA
USSR
-17%
-12%r-;.-i
Range 4 t . 3 +3%
-3%
r
-3%
1
I
-
+1
+4%
+5%
-196-
I
June
-g-r
25 June
t3%
1 July
1 *U9
1 sepr
Emador
USSR
1 ccl
USSR
Ecuador
USA
I No“
Indonesia
1 Oec
-3%
_1
+7 x
42
Non-OPEC p r o d u c e r s f o l l o w e d t h e 1981 r e u n i f i c a i o n w i t h a series
of r e d u c t i o n s i n o f f i c i a l prices i n the f i r s t q u a r t e r of 1982
which u n d e r c u t OPEC o f f i c i a l prices, b y s u b s t a n t i a l amounts i n many
cases. For example, t h e U K price-cut i n e a r l y March p u t its F o r t i e s
c r u d e $3.5/b below comparable N i g e r i a n Bonny; M e x i c o ' s p r i c e - c u t
in
March p u t i t s Isthmus c r u d e $2.5/b below A r a b i a n L i g h t ; t h e S o v i e t
Union's huge 17% c u t i n e a r l y March p u t i t s E x p o r t Blend fully $5/b
below the Saudi Marker a n d successive c uts by Egypt p u t its Suez Blend
$3/b b e l o w by mid-March.
Non-OPEC p r i c e c h a n g e s s i n c e the OPEC m e e t i n g of l a t e March
1 9 8 2 have been r e l a t i v e l y f e w , w i t h most c o u n t r i e s s t i c k i n g t h r o u g h o u t
the y e a r to prices j u s t u n d e r t h e OPEC prices which t h e y s e c u r e d i n the
f i r s t t h r e e months. There have, i n d e e d , been a number of non-OPEC p r i c e
i n c r e a s e s i n the l a s t three q u a r t e r s of 1982
-
n o t a b l y from the UK,
USSR, USA and JZgypt, a l l of whom have b r o u g h t o f f i c i a l prices back up
towards t h o s e of OPEC. Such moves would s u g g e s t t h a t t h e i r e a r l i e r
u n d e r c u t t i n g had been e x c e s s i v e i n terms of t h a t r e q u i r e d t o m a i n t a i n
o u t p u t , a n d / o r t h e i r earlier c u t s had been made i n a n t i c i p a t i o n of
l a r g e r c u t s from OPEC a t t h e i r March m e e t i n g t h a n a c t u a l l y o c c u r r e d .
Table 3 p r e s e n t s t h e o f f i c i a l price d i f f e r e n t i a l s of
non4PEC c r u d e s a g a i n s t Arabian L i g h t a t the end of November 1982 and
r e v e a l s a c l e a r widening of d i f f e r e n t i a l s . Without e x c e p t i o n , non-OPEC
p r o d u c e r s were p r i c i n g w e l l below what w a s r e q u i r e d t o r e s t o r e the
d i f f e r e n t i a l s t r u c t u r e of 1978. I n o r d e r to a c h i e v e t h e same p e r c e n t a g e
d i f f e r e n t i a l s as 1978, non-OPEC prices would h a v e needed t o be
i n c r e a s e d by, f o r example, $3.97
(UK);
$2.56 (Mexico); $2.53 ( E g y p t ) ; $2.77
$3.75
(Norway); $3.02
(USSR);
( B r u n e i ) . The e f f e c t of this
u n d e r c u t t i n g by non4PEC members w a s t o allow them to m a i n t a i n t h e i r
o u t p u t despite t h e fall i n worldwide demand i n 1982. Hence, w h i l s t OPEC
as a whole w a s o p e r a t i n g a t o n l y 58% of its c a p a c i t y , non4PEC o u t p u t
had i n c r e a s e d s t e a d i l y o v e r the y e a r , and by September had r e a c h e d i t s
43
h i g h e s t e v e r t o t a l of o v e r 2 0 m i l l i o n b a r r e l s / d a y .
T h i s w a s 6% h i g h e r
t h a n September 1981; OPEC o u t p u t for t h e same month w a s 1 1 % lower t h a n
t h e previous year.
OPEC p r o d u c e r s made r e l a t i v e l y f e w e r changes t o o f f i c i a l
p r i c e s in 1982, as Figure 6 shows.
The full OPEC meeting i n
March r e s i s t e d p r e s s u r e t o c u t the Marker c r u d e p r i c e ( a n d hence a l l
O P E p r i c e s ) and s e t t l e d i n s t e a d for some f u r t h e r r e - a d j u s t m e n t s
differentials.
mese,
of
i n f a c t , had the e f f e c t of t a k i n g the s t r u c t u r e
somewhat away from t h e ' c o r r e c t ' 1978 s t r u c t u r e
-
with t h e sole
e x c e p t i o n of N i g e r i a , whose $ l / b i n c r e a s e r e s t o r e d p a r t of the
d i f f e r e n t i a l with Arabian Light though s t i l l l e a v i n g
d
l a r g e problem.
I n t o t a l , f o u r OPEC c o u n t r i e s c u t their p r i c e s a t the meeting (Abu
Dhabi, Qatar, Libya and A l g e r i a ) , and i n each case t h e e f f e c t was t o
u n d e r c u t the S a u d i marker r a t h e r more t h a n had been the case a t the end
of 1981.
Y e t t h e p o l i c i e s of OPEC and n o n 4 P E C p r o d u c e r s i n t h e s l a c k
m a r k e t of 1982 caused problems and p l a c e d s e r i o u s s t r a i n s on t h e
p r i c i n g s y s t e m w i t h i n OPEC.
The main problems w e r e :
1 . D i f f e r e n t i a l s between d i f f e r e n t u u a l i t v c r u d e s .
This r e f e r s i n
p a r t i c u l a r t o t h e d i f f e r e n t i a l between Middle E a s t e r n L i g h t c r u d e s
( e s p e c i a l l y Arabian L i g h t ) and A f r i c a n L i g h t crudes of h i g h e r
quality.
As we have s e e n , whilst a l l of the A f r i c a n p r o d u c e r s were
p r i c i n g above A r a b i a n L i g h t ,
t h e i r p e r c e n t a g e d i f f e r e n t i a l s were
s u b s t a n t i a l l y l o w e r t h a n t h e y had been i n 1978 and i n d e e d l a r g e
i n c r e a s e s i n A f r i c a n c r u d e s would have been r e q u i r e d t o r e s t o r e t h e s e
d i f f e r e n t i a l s : $7 .46
( L i b y a ); $2.24
( A l g e r i a ) and $2.27 (Nigeria 1
.
S a u d i Arabia i n p a r t i c u l a r demanded t h a t t h e s e d i f f e r e n t i a l s be
restored,
to r e d u c e the p r e s s u r e on S a u d i s a l e s . However, whilst the
o f f i c i a l $35.52 c h a r g e d for N i g e r i a n Bonny, f o r example, w a s $2.27/b
less than r e q u i r e d t o r e s t o r e 1978 d i f f e r e n t i a l s , i t w a s s t i l l $2.02/b
more e x p e n s i v e t h a n comparable UK F o r t i e s c r u d e . With such c o m p e t i t i o n
from non4PEC sources, t h e A f r i c a n OPEC members were u n l i k e l y t o a g r e e
to any increase i n t h e i r prices.
44
O t h e r c o u n t r i e s who reduced t h e i r d i f f e r e n t i a l s a g a i n s t lower
q u a l i t y Saudi L i g h t were Venezuela a n d I n d o n e s i a
-
t h e l a t t e r ' s move
h a v i n g come a t t h e end of November 1982. The e x t e n t of the narrowing
was r a t h e r less t h a n i n N i g e r i a and Algeria's cases.
2 . O f f i c i a l p r i c e d i f f e r e n c e s for s i m i l a r c r u d e s .
In t h r e e s e p a r a t e
moves in February 1982, I r a n u n i l a t e r a l l y c u t a t o t a l of $ 4 / b from the
o f f i c i a l p r i c e of its c r u d e s l thus s e v e r e l y u n d e r c u t t i n g a l l of t h e
rest of OPEC. As T a b l e 3 shows, I r a n i a n L i g h t w a s some 8 %c h e a p e r a t
t h e end of 1 9 8 2 t h a n A r a b i a n L i g h t , d e s p i t e a $l/b i n c r e a s e by I r a n i n
l a t e J u n e , In F e b r u a r y , the I r a n i a n c u t s d i d n o t c a u s e the u p r o a r t h a t
they m i g h t have done as I r a n i a n o u t p u t w a s a mere 500,000 b/d.
o u t p u t r e c o v e r e d t o 2 . 3 m i l l i o n b/d,
When
the u n d e r c u t t i n g of t h e OPEC p r i c e
s t r u c t u r e began to c a u s e i n c r e a s i n g alarm. Its e f f e c t , as w i t n e s s e d by
the r a p i d rise i n I r a n i a n o u t p u t , like t h e squeezed d i f f e r e n t i a l s
d i s c u s s e d above, w a s t o place the m a j o r i t y of t h e burden of a d j u s t m e n t
t o the s l a c k m a r k e t on those c o u n t r i e s who were h o l d i n g t h e o f f i c i a l
O P E price l i n e .
3. U n o f f i c i a l d i s c o u n t i n g .
I n a d d i t i o n to the two forms of r e d u c t i o n s
i n o f f i c i a l prices d e s c r i b e d above, 1982 a l s o s a w t h e emergence of
discounting.
Through a v a r i e t y of t e c h n i q u e s
-
o f f e r s of "improved
terns" to e q u i t y h o l d e r s , which spread t o n o n - e q u i t y b u y e r s i n the form
of s t r a i g h t d i s c o u n t s , p r o c e s s i n g d e a l s e t c .
-
producers sold c o n t r a c t
c r u d e w e l l below o f f i c i a l prices. b b t s u r p r i s i n g l y , p r i c e d i s c o u n t i n g
enabled some c o u n t r i e s to increase s u b s t a n t i a l l y t h e volume of t h e i r
sales.
( d ) T h e o r e t i c a l C h a r a c t e r i z a t i o n s of the 1982 O i l Market
We s a w i n S e c t i o n X I t h a t most of the w o r l d ' s o i l p r o d u c e r s , w i t h the
e x c e p t i o n of Saudi Arabia, a c t e d as price makers i n t h e d i s e q u i l i b r i u m
m a r k e t of 1979/80. In this, we argued, t h e y conformed t o Arrow's
n o t i o n , t h a t i n d i s e q u i l i b r i u m a l l p r o d u c e r s f a c e a sloping demand
c u r v e . Tb h a t e x t e n t , then, d i d t h i s h o l d f o r the 1982 oil market
a g a i n i n d i s e q u i l i b r i u m , b u t this t i m e one of s u b s t a n t i a l e x c e s s
supply?
-
45
First of all, it is clear from t h e evidence above that the bulk
of the world's producers, OPEC and non-OPEC alike, did not act as a
passive price-taking fringe.
They did not simply accept the price
determined by either OPEC or Saudi Arabia.
Rather, they acted to
maximize their revenue by cutting prices individually in attempts to
capture a larger share of the declining market.
To use Chamberlin's
terminology, they operated on their own downward sloping 'subjective'
demand curves, whose elasticities were sufficiently large to give, at
least in the short run, a perception of positive marginal revenues.
In
this, they acted as rational "Arrowian" sellers in a disequilibrium
market, mirroring their behaviour in the tight market of 1979/80,
but
this time operating on negatively sloping demand curves.
There is, however, a very important difference between the
experience in 1 9 7 9 / 8 0 and that of 1982.
As we have seen, in 1979/80 the
influence of Saudi Arabia, the dominant supplier, on the so called
'fringe' oil producers was rather weak.
This was not mirrored in the
experience of 1982. The unilateral price setting of the 'fringe'
producers was a l l done within sight of the marker price.
Saudi Arabia
effectively chose the level at which the pricing game was to be played,
and to that extent retained a form of price-leadership.
It was clear
throughout the year that any movement down by the Saudis would be
followed very quickly by all other producers.
This
leadership" by Saudi Arabia was achieved at substantial
If
cost to itself in terms of lost output and hence revenue
-
costs which
resulted from its unwillingness to prevent t h e competitive p r i c e
undercutting by the rest of the world's producers.
Being the lowest
cost producer with the largest reserves gives Saudi Arabia the potential
ultimate sanction, of being able to drive out any producer which
undercuts its prices in a slack market.
As we have seen, the nature
and meaning of leadership is entirely different in a tight market.
46
Conclusions
L e t u s r e v i e w b r i e f l y the main f e a t u r e s of t h e p o s t - I 9 7 8
h i s t o r y of o i l price movements which emerge from o u r s t u d y .
-
September 1978 t o March 1979. The f i r s t price rises came i n t h e spot
markets i n t h e t h i r d quarter of 1978, a l l of which had shown
s u b s t a n t i a l i n c r e a s e s by t h e end of 1978. There is l i t t l e t o s u g g e s t
t h a t t h e small i n c r e a s e s i n t r o d u c e d by OPEC at their D e c e m b e r 1978
m e e t i n g were i n d i r e c t r e s p o n s e t o t h e s e s p o t price movements.
In f a c t
t h e f i r s t c o u n t r i e s to respond t o spot price rises were non-OPEC
p r o d u c e r s , b e g i n n i n g with t h e UK.
They w e r e f o l l o w e d by some of
the smaller OPEC m e m b e r s i n F e b r u a r y 1979. OPEC as a whole d i d n o t
i n t r o d u c e comparably l a r g e i n c e a s e s u n t i l t h e i r m e e t i n g i n March 1979.
-
1979/1980 w a s a c o n f u s e d p e r i o d of p r i c e - l e a p f r o g g i n g .
Again, s p o t
p r i c e s w e r e the l e a d i n g edge, w i t h a rnglge of c o n t r a c t price rises
f o l l o w i n g . S e v e r a l of t h e smaller p r o d u c e r s a t t e m p t e d to s t a y close t o
t h e spot p r i c e , whilst o t h e r , o f t e n l a r g e r p r o d u c e r s l a g g e d f u r t h e r
b e h i n d . Saudi A r a b i a k e p t i t s p r i c e s below a l l o t h e r s t h r o u g h o u t t h e
period
-
c o n s e q u e n t l y p r i c e d i f f e r e n t i a l s a g a i n s t Arabian Light widened
enormously.
-
1981. I n t h a t y e a r p r i c e s
-
spot, OPM3 and non-OPEC , o f f i c i a l -
f i n a l l y tended t o r e g r o u p around the r e f e r e n c e s e t by t h e Piarker
c r u d e . This w a s b r o u g h t a b o u t by a c o m b i n a t i o n of two f a c t o r s : the
s l a c k e n i n g of w o r l d demand f o r OPEC o i l , and the s t r o n g export
a d v a n t a g e e n j o y e d by Saudi Arabia i n t h i s d e p r e s s e d market t h a n k s t o
i t s low p r i c e p o l i c y .
Non-OPEC p r o d u c e r s a d j u s t e d t o the s i t u a t i o n by
c u t t i n g t h e i r prices f a i r l y s w i f t l y ; b u t most OPEC m e m b e r s h e l d o u t
through t h e f i r s t three quarters of 1981 a g a i n s t the S a u d i attempts to
r e u n i f y the o i l price s t r u c t u r e .
The i n e v i t a b l e r e s u l t w a s s u b s t a n t i a l
l o s s e s of s a l e s which u l t i m a t e l y encouraged everybody t o a g r e e a p r i c e
r e a l i g n m e n t around a new Marker price of $34/b a t t h e OPEC meeting of
O c t o b e r ? 981
.
47
-
1982. Demand c o n t i n u e d t o d e c l i n e , b u t OPEC remained t h e o r e t i c a l l y
committed to t h e $34/b marker price d e s p i t e d e c l i n i n g s p o t crude and
product prices.
A l l major non-OPEC p r o d u c e r s set c o n t r a c t prices b e l o w
the Marker, and c o n s e q u e n t l y managed t o produce a t n e a r - c a p a c i t y
t h r o u g h o u t the y e a r .
I n mid-1982 s e v e r a l OPEC p r o d u c e r s began to
u n d e r c u t t h e Marker price
-
e i t h e r o p e n l y o r through a v a r i e t y of
d i s g u i s e d means.
I n t i g h t markets
Saudi Arabia w a s n o t a b l e t o exercise
e f f e c t i v e l e a d e r s h i p : i t could n o t l e a d o t h e r c o u n t r i e s along t h e price
path of its c h o i c e .
It had however some i n f l u e n c e on b e h a v i o u r ,
p r o v i d i n g an o p p o s i t e pole t o the spot market.
The b e h a v i o u r of
-
i n d i v i d u a l OPEC p r o d u c e r s was s h a p e d by t w o f a c t o r s
a n almost
i r r e s i s t i b l e l e a d from a nervous m a r k e t and a l o n g - s t a n d i n g h a b i t of
c a r e f u l and r i g i d price a d m i n i s t r a t i o n .
Nobody
- except
f o l l o w e d the OPEC p r i c e - d e t e r r @ n a t i o n system; nobody
-
Saudi Arabia
s a v e Ecuador
-
-
f o l l o w e d b l i n d l y t h e price movements of spot markets.
The s t o r y was n o t a s t o l d by t h e 'dominant p r o d u c e r /
c o m p e t i t i v e f r i n g e ' models.
i m p o s e it on its peers.
A l a r g e producer
set a p r i c e b u t c o u l d n o t
Very small p r o d u c e r s took t h e s p o t m a r k e t
p r i c e and gave u p a l l pretence a t a d m i n i s t r a t i o n .
prices
l a Arrow.
A l l o t h e r s made
I n s h o r t , we o b s e r v e t h a t p r o d u c e r s have some
d i s c r e t i o n over t h e i r own prices when e x c e s s demand o b t a i n s , and this
d i s c r e t i o n c a n be e x e r c i s e d d e s p i t e the r e s t r a i n i n g a c t i o n s of t h e
dominant s u p p l i e r .
But the p r o d u c e r s ' freedom i s n o t w i t h o u t bounds.
They c a n make t h e i r own prices w i t h i n a g i v e n range.
As t h e y move
t o w a r d s t h e upper end of t h e range t h e y become t a k e r s of the
c o m p e t i t i v e e q u i l i b r i u m p r i c e (as e x e m p l i f i e d by t h e spot m a r k e t ) .
And
t h o s e who remain c l o s e t o the dominant s u p p l i e r are i n d e e d t a k e r s of a n
administered price.
The s t r o n g e r t h e i n f l u e n c e of m a r k e t forces, t h e
more r e s t r i c t e d is t h e price d i s c r e t i o n e n j o y e d by p r o d u c e r s .
Mabro's view t h a t t h e s m a l l OPEC m e m b e r s ,
Hence,
in the t i g h t m a r k e t
c o n d i t i o n s of 1979, w e r e ' a p p a r e n t price makers'.
"They appear as
price makers b e c a u s e t h e y keep on posting h i g h e r and h i g h e r p r i c e s (1
a m r e f e r r i n g , to g i v e one example, t o what w a s w i t n e s s e d t h r o u g h o u t
19791, b u t t h e i r p o s t i n g s follow ( u s u a l l y w i t h t i m e l a g s and a t a
48
d i s t a n c e ) , and never lead price d e t e r m i n a t i o n on t h e market."24
It i s
t h u s possible t o go one s t e p beyond Arrow's c h a r a c t e r i z a t i o n , and
r e c o g n i z e t h a t i n this c o n t e x t price making i s u l t i m a t e l y a s u c c e s s i o n
of i m p e r f e c t r e s p o n s e s to m a r k e t s i g n a l s .
sorts.
I t is p r i c e taking of
When e q u i l i b r i u m is r e a c h e d small p r o d u c e r s have no o t h e r
c h o i c e b u t t o t a k e unambiguously t h e r u l i n g p r i c e .
I n very s l a c k m a r k e t s , the s m a l l p r o d u c e r s of t h e ' c o m p e t i t i v e /
price-taking f r i n g e ' a l s o enjoy discretion.
They are always tempted to
u n d e r c u t t h e r e f e r e n c e p r i c e set by the dominant s u p p l i e r i n o r d e r to
maximize s h o r t - t e r m revenues.
Again, t h e y are p r i c e makers of sorts,
and the Arrow c h a r a c t e r i z a t i o n becomes r e l e v a n t .
the dominant p r o d u c e r i s now v e r y s t r o n g .
But the i n f l u e n c e of
The ' c o m p e t i t i v e / p r i c e -
c u t t i n g T 2 5 s e l l e r u s u a l l y q u o t e s i t s own prices j u s t below t h e l e v e l
set by t h e l e a d e r .
I n this s e n s e t h e small p r o d u c e r is a price t a k e r
of s o r t s , s i n c e the p r i c e he makes is c l o s e l y r e l a t e d t o
ref erence
d
given
.
P r i c e l e a d e r s h i p o b t a i n s when t h e m a r k e t i s a l i t t l e slack.
Saudi Arabia was able to e x e r c i z e p r i c e l e a d e r s h i p of a c o n v e n t i o n a l
t y p e i n 1981 when p r o d u c e r s j u s t began t o g a i n c o n f i d e n c e i n a
turn-round i n market c o n d i t i o n s .
They a g r e e d t o p r i c e r e a l i g n m e n t
around the marker as t h e y f i n a l l y p e r c e i v e d t h a t the market had ceased
t o be t i g h t .
I n the very s h o r t p e r i o d d u r i n g which the market i s j u s t
a l i t t l e s l a c k , no p r o d u c e r can b e n e f i t from r a i s i n g h i s price above
t h e l e v e l d e f i n e d by t h e market, and no p r o d u c e r f e e l s a s t r o n g u r g e t o
'The D i l e m m a between S h o r t a n d Long-Term Oil P r i c e s ' ,
Khouja ( e d . ) , The C h a l l e n g e of Energy, Longman, 1981, p.40.
24 Robert Mabro,
i n M.W.
I n one
25 Note t h e t w o d i f f e r e n t meanings of t h e term ' c o m p e t i t i v e ' .
s e n s e , c o m p e t i t i v e r e f e r s to a market s t r u c t u r e i n which a g e n t s are too
small o r t o o numerous t o be able t o i n f l u e n c e p r i c e s . Y e t i n common
usage, c o m p e t i t i v e r e f e r s to the a g g r e s s i v e b e h a v i o u r of t h o s e who s e e k
t o s c o r e b e t t e r r e s u l t s t h a n others. To compete i n a market may
i n v o l v e d i r e c t a c t i o n on p r i c e s , such as u n d e r c u t t i n g , i n o r d e r t o
i n c r e a s e sales a t the expense of somebody else.
I n some c o n t e x t s ,
c o m p e t i t i o n means t h a t economic a g e n t s are p r i c e t a k e r s , and i n o t h e r
c o n t e x t s it means j u s t t h e o p p o s i t e !
49
undercut the r e f e r e n c e p r i c e .
attained.
An e q u i l i b r i u m of s o r t s
is t h e n
lhis is n o t t h e c o n v e n t i o n a l c o m p e t i t i v e e q u i l i b r i u m s i n c e
t h e r e f e r e n c e is d e t e r m i n e d by an a d m i n i s t r a t i v e d e c i s i o n and need n o t
relate to the r e l e v a n t c o s t c o n c e p t .
As i n t h e textbook m o d e l of t h e
o i l market, a dominant group of p r o d u c e r s s e t s a p r i c e which t h e f r i n g e
producers take.
B u t t h e r e is a d i f f e r e n c e .
The p r i c e set by the
dominant group may w e l l c l e a r t h e market from time t o t i m e ; b u t i t is
d o u b t f u l whether p r i c e s s e t i n t h i s way could e v e r clear markets i n
s u c c e s s i v e p e r i o d s Over t h e long r u n .
50
Annex 1
The d i s c u s s i o n i n t h i s paper is based on o f f i c i a l price data
f o r the main world c r u d e s , drawn c h i e f l y from P e t r o l e u m I n t e l l i g e n c e
Weekly o v e r t h e period s i n c e September 1978. For c o n v e n i e n c e ,
a n a l y s i s of the b e h a v i o u r of i n d i v i d u a l c o u n t r i e s i s founded on the
movements i n t h e price of a ' k e y ' c r u d e f o r each c o u n t r y i . e .
that
crude of which the c o u n t r y produces most. These are l i s t e d i n the
t a b l e below. W e have e n s u r e d t h a t a l l "premia" and " s u r c h a r g e s " which
are sometimes a p p l i e d to a c o u n t r y ' s price are i n c l u d e d i n the
a n a l y s i s and indeed t h a t they are i n c l u d e d i n t h e database. F i n a l l y ,
i n o r d e r to help i d e n t i f y any price-leadership, the data used in the
paper p r e s e n t s a l l price changes on t h e date a t which the d e c i s i o n
w a s made and n o t n e c e s s a r i l y on the date at which the price change
became e f f e c t i v e . U s e of r e t r o - a c t i v e
p r i c e changes h a s been common,
p a r t i c u l a r l y w i t h i n OPEC, and c a n g i v e the i m p r e s s i o n t h a t prices are
changed i n unison when i n f a c t s e v e r a l w e e k s may separate the
d e c i s i o n s of i n d i v i d u a l producers.
S p o t price data i s t a k e n l a r g e l y from OPEC B u l l e t i n s and i s
expressed i n t h e form of monthly a v e r a g e s t h r o u g h o u t the paper u n l e s s
o t h e r w i s e s t a t e d . As a l l s p o t c r u d e prices have moved t o g e t h e r it is
n o t u n r e a s o n a b l e to talk in terms of "the" spot c r u d e p r i c e . S p o t
p r o d u c t p r i c e movements have been r a t h e r less uniform.
F i n a l l y , a l l d a t a on c r u d e oil o u t p u t used here is drawn f r o m
the r e g u l a r tables of World Oil P r o d u c t i o n i n Petroleum Economist.
They are e x p r e s s e d i n b a r r e l s - p e r - d a y
throughout.
52
'ReDresentative
OPEC :
Non-OPEC :
'
c r u d e s c h o s e n for e a c h c o u n t r v
Saudi Arabia
L i g h t 34
Iran
L i g h t 34
Iraq
Basrah L i g h t 35
Abu Dhabi
Murban 3 9
Qatar
Marine 36
Kuwait
Kuwait 31
Gabon
Mandji 30
Libya
Es S i d e r 3 7
Algeria
S a h a r a n 44
Nigeria
Bonny 37
Venezuela
T i a J u a n a 31
Ecuador
O r i e n t e 30
Indonesia
Sumatran L i g h t 34
S h a rjah
Mubarak 38
Dubai
F a t e h 32
UK
F o r t i e s 36.5
Norway
Ekofisk Blend 44
USSR
Export Blend ( M e d i t e r r a n e a n 1 33
USA
L o u i s i a n a Light Sweet 37.5
Mexico
Isthmus 33
Oman
Oman 36
Syria
Suwaidiyah 24
EWPt
Suez Blend 34
China
Daquing 33
Malaysia
T a p i s Blend 43.5
Brunei
S e r i a 36
Angola
Cabinda 31.7
Cameroon
Kole 33.5
Annex 2
September 1978 a s t h e b a s e d a t e
As noted i n S e c t i o n 11, w e have c h o s e n September 1978 as t h e
b a s e d a t e €or the a n a l y s i s of official c r u d e o i l price movements.
Ln
s o d o i n g , we s e e k t o i d e n t i f y a t i m e a t which w e c a n view t h e
s t r u c t u r e of p r i c e d i f f e r e n t i a l s as being broadly i n e q u i Librium.
This we d e f i n e as t h a t s t r u c t u r e of p r i c e s which more-or-less
r e f l e c t e d t h e b u y e r s ’ v a l u a t i o n of t h e d i f f e r e n t q u a l i t y c r u d e s , so
a s t o make him i n d i f f e r e n t between any t w o .
M e a c c e p t , of c o u r s e ,
t h a t i n t h e r e a l w o r l d w e are u n l i k e l y t o f i n d the oil market i n
perfect e q u i l i b r i u m i n t h i s s e n s e ; w e m u s t s e e k r a t h e r t o f i n d a time
a t which the price s t r u c t u r e a p p e a r s t o be “ l e s s i m p e r f e c t “ t h a n a t
others.
The c h o i c e of d a t e w a s i n f l u e n c e d b y t w o f a c t o r s :
1
.Price
Stability.
September 1978 marked t h e end of a p r o l o n g e d p e r i o d of r e l a t i v e
s t a b i l i t y i n contract prices.
Table A , below, shows the l a s t date
p r i o r t o September 1 9 7 8 a t which OPEC members changed their o f f i c i a l
prices.
54
Table A
OPEC M e m b e r
D a t e of L a s t P r i c e Change
before Sevtember 1978
Iraq
Iran
Qatar
December 1976
Ve n ez ue 1a
Indonesia
Gabon
S a u d i Arabia
Abu Dhabi
J u l y 1977
Kuwait
J a n u a r y 1978
Algeria
Libya
Nigeria
A p r i l 1978
Only Kuwait and t h e t h r e e A f r i c a n p r o d u c e r s a l t e r e d t h e i r
prices i n the f i f t e e n months p r i o r t o September 1978
- and
t h e n by
o n l y v e r y s m a l l amounts, as t h e y sought to adjust t h e i r d i f f e r e n t i a l s
w i t h the r e s t of OPEC.
T a b l e s B and C compare t h e p e r i o d from J a n u a r y 1977 t o
September 1978 w i t h p r i o r and s u b s e q u e n t p e r i o d s of similar l e n g t h .
T o g e t h e r t h e y show c l e a r l y b o t h t h e r e l a t i v e i n f r e q u e n c y and s m a l l
s i z e of price changes i n t h e months a p p r o a c h i n g September 1978.
Both
t a b l e s p r e s e n t a p i c t u r e of s u b s t a n t i a l d i s e q u i l i b r i u m i n the 1973-74
oil market, followed by f o u r y e a r s of i n c r e a s i n g s t a b i l i t y , e n d i n g i n
l a t e 1978 with t h e s t a r t of t h e 1979/80 price e x p l o s i o n .
Outside OPEC, official price c h a n g e s were r a t h e r more
f r e q u e n t , b u t a g a i n w e r e n o t of any s i g n i f i c a n t s i z e o v e r t h e two
y e a r s from t h e end of 1976.
North Sea prices, f o r example, d r i f t e d
down by a r o u n d 40 c e n t s (2.8%) from J a n u a r y 1977 to A p r i l 1978, and
t h e n recovered around half of this f a l l o v e r t h e next two quarters.
Such movements w e r e f a i r l y t y p i c a l of non-OPM: prices o v e r t h e p e r i o d
- greater
f r e q u e n c y of change t h a n o f f i c i a l OPEC prices, b u t still a
p e r i o d of relative s t a b i l i t y .
55
Table B:
N u m b e r of O f f i c i a l Price Changes in key crude of main OPE€ producers
ISaudi Arabia
' Iran
! A h Dhabi
'Qatar
Libya
Algeria
Nigeria
Venezuela
Indonesia
Mean
7/73-3/75
4/75-12/76
1 /77-9/78
8
2
2
0
8
\
\
8
8
7
7
8
7
5
7.45
1 O/78-6/8O
7
1
1
11
2
1
8
2
3
6
4
4
2
0
8
11
9
2.91
3
3
3
0
0
1.09
9
8
10
9.36
Table C:
Percentage Changes i n O f f i c i a l Prices of key crude of main OPEC
producers
Saudi Arabia
Iran
Iraq
Kuwait
Abu Dhabi
Qatar
Libya
Algeria
Nigeria
Venezuela
Indonesia
I 0/78-6/ao
7/73-3/75
4/75-12/76
6/77-9/78
288
298
16
20
5
0
120
176
293
30 1
31 2
20
19
10
0
-1
6
130
140
297
243
226
f 91
254
238
20
25
0
19
32
1
20
8
-0.5
138
140
167
-1
-1
171
160
0
0
139
132
I
56
2. S t a b l e Outwut S h a r e s
S t a b l e p r i c e d i f f e r e n t i a l s would n o t i n themselves s u g g e s t
e q u i l i b r i u m i n the o i l market, i f a t t h e same t i m e t h e r e w e r e wide
f l u c t u a t i o n s i n t h e s h a r e s of t h e t o t a l market going t o e a c h
T a b l e D shows t h e s h a r e s of e i g h t major OPEC p r o d u c e r s i n
producer.
t o t a l O P E p r o d u c t i o n o v e r the year t o September 1978.
T a b l e D:
S h a r e s i n t o t a l OPEC output, Sep.1977 t o Sep.1978
1
I
I
I
1
1
I
1
1
1
I
I r a n 1 I r a q 1 Saudi1 Kuwait! Abu 1 Libya1 N i g e r i a ( Venezl
Dhabi
-uela
Arabia
1
19.2
18.2
19.4
19.6
19.3
1977 Sep
Oct
Nov
Dec
1978 Jan
Mar
19.4
19-1
19.9
19.7
19.9
19.5
19.0
Apr
May
Jun
J u1
Aug
Sep
7.9
8.1
7.9
7,6
7.6
8.7
8.6
8-5
8.4
8.2
8.2
8.8
9.0
27.7
28.2
28.3
29.4
28.1
29.0
26.5
27.1
25.3
25.5
25.2
23.9
26.2
I
!
,
I
!
!
I
~
I
7.3
6.1
7.4
8.2
6.2
6.0
7.3
6.7
6-3
6.6
6.6
7.9
8.1
5.2
5.5
5.0
5.0
5.0
5.2
5.0
4.6
5.2
4.9
4.9
4.9
4.5
1
6.5
6.9
6.6
6.0
6.5
6.3
6.5
6.4
6.7
6.8
6.8
6.9
6.6
\
6.5
6.4
6.1
5*7
5.9
5.4
5.2
5.7
6.0
6.4
6.5
6.9
6.6
7.6
7.6
6.6
6.1
6.5
5.5
7.2
7.5
7.8
8.0
7.8
7.3
7.1
V a r i a t i o n s i n a c o u n t r y ' s o u t p u t may be caused by a number of
f a c t o r s o t h e r t h a n p r i c e d i f f e r e n t i a l s w i t h competing p r o d u c e r s ( f o r
example, p h y s i c a l p r o d u c t i o n problems, s e a s o n a l f a c t o r s , c h a n g e s i n
demand p a t t e r n s f o r d i f f e r e n t c r u d e s , e t c . 1.
With t h i s i m p o r t a n t
c a v e a t , t h e e v i d e n c e from T a b l e D d o e s s u q g e s t a h i g h d e g r e e of
s t a b i l i t y i n o u t p u t s h a r e s among OPEC p r o d u c e r s o v e r t h e p e r i o d .
It i s a g a i n u s e f u l t o compare t h i s s t a b i l i t y w i t h o t h e r
periods.
T a b l e E shows S t a n d a r d D e v i a t i o n s of s h a r e s i n total OPEC
production
-
a s a measure of t h e i r v a r i a b i l i t y
over t h r e e sub-periods
from 1975 t o 1980.
-
€ o r OPEC p r o d u c e r s
I t d o e s not c o n f i r m v e r y
c l e a r l y t h e n o t i o n of i n c r e a s i n g l y s t a b l e s h a r e s up t o September
1978; b u t i t d o e s c e r t a i n l y r e v e a l the d i s e q u i l i b r i u m i n t h e
post-September
1978 m a r k e t , h i g h l i g h t e d by t h e v e r y s u b s t a n t i a l
i n c r e a s e i n the S .D.s of t h e major OPEC c o u n t r i e s .
57
Comparing 1975-76 w i t h 1977-Sep.1978,
he
find t h a t the S.D.s
t e n d to be lower i n o u r r e f e r e n c e p e r i o d for most c o u n t r i e s e x c e p t
Saudi a r a b i a .
I n o t h e r cases where t h e S . D . s appear t o bs h i g h e r i n
the second p e r i o d , the d i f f e r e n c e s a r e n o t v e r y s i g n i f i c a n t .
T a b l e E:
S t a n d a r d D e v i a t i o n s of Country S h a r e s i n T o t a l OPEC Output
I
1974-75
S a u d i Arabia
Ir a n
Iraq
Kuwait
Abu Dhabi
Qatar
Libya
Algeria
Nigeria
Ve nezue 1a
Indonesia
1975-76
1.67
1.05
1.26
0.89
0.94
1.74
1.07
1.07
1.06
0.84
0.32
0.30
1.36
0.27
0.63
0.90
0.31
1.15
0.27
0.50
1.02
0.29
1977-Sep.78
2.09
1 .14
0.59
0.88
0.30
0.19
0.28
0.36
0.60
0.66
0.27
Oct.78-1980
4.08
4.04
3.00
1.23
0.28
0.18
0.33
0.35
0.60
0.61
0.53
Our a n a l y s i s i s t h a t most p r o d u c e r s e n j o y e d much g r e a t e r
s t a b i l i t y i n t h e i r monthly o u t p u t s h a r e s i n 1977-78 t h a n i n the
p r e c e d i n g and s u b s e q u e n t p e r i o d s , p a r t l y because t h e p r i c e s t r u c t u r e
was c l o s e r to e q u i l i b r i u m and p a r t l y because Saudi Arabia absorbed
more r e a d i l y OPEC random o u t p u t f l u c t u a t i o n
.
September 1978 would appear to s e p a r a t e a f a i r l y prolonged
p e r i o d of s t a b l e p r i c e s and o u t p u t s h a r e s from one of marked
disequilibrium i n both.
As s u c h i t p r o v i d e s us w i t h an a p p r o p r i a t e
s t a r t i n g p i n t and base d a t e for o u r a n a l y s i s .
OXFORD INSTITUTE FOR ENERGY STUDIES
57 WOODSTOCK ROAD, OXFORD OX2 6FA ENGLAND
TELEPHONE (01865) 311377
FAX (01865) 310527
E-mail: [email protected]
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