The price of oil rises again

Press, 18 December 1976, Page 14

The price of oil rises again

After a respite of more than a year, countries which must import oil face a price increase of up to 10 per cent from the beginning of next year. The initial reaction is likely to be relief that the rise is more modest than some members of the Organisation of Petroleum Exporting Countries had sought. There should be no optimism that this increase will be reduced. In 1975, depressed levels of demand after savage price increases led to offers of discounts and long-term credit concessions. But that situation is unlikely to recur in 1977. Even to hope that the price increase will slip back to the 5 per cent being sought by two members of O P E C, would be unwise. World-wide demand for oil this year has been up significantly on 1975 levels. The higher prices the O.P.E.C. countries are demanding will be paid because demand for oil is likely to continue buoyant through 1977, especially in the United States in spite of the faltering economic recovery. Had the United States done more to restrain oil imports, the bargaining power of O.P.E.C. would have been reduced. But the policies of President Carter’s Administration are expected to be mildly reflationary. and this will sustain the American demand for oil and so support the new O P E C, price. The continuing demand for oil encouraged some members of O.P.E.C. to press for much larger increases. Fortunately, they were restrained by others who took seriously the warning that a larger increase could cause a severe recession in the industrial States which would reduce the demand for oil and so lower the return to oil-exporters, in spite of higher prices. The O.P.E.C. countries claim they need the extra revenue because the costs of their imports have been rising. But since October. 1975. when the price of oil last

rose, the composite price index of imports into O.P.E.C. has risen only 2.7 per cent, partly because of various devaluations. Some O.P.E.C. members face deficits because of excess spending—on armaments and to sustain the extravagant styles of life to which the rulers of some O.P.E.C. members have become accustomed.

If the world demand for oil continues high, further increases in the price may be imposed late in 1977. The increases just announced were for six months only. But they could, just possibly, be the last real price increases for a few years, unless O.P.E.C. members manage to agree among themselves to make cuts in production. The solidarity of O.P.E.C. is not rock-hard. Splits were threatened openly this month if the increase was more than 10 per cent, and while hopes should not be pinned on the possibility of O.P.E.C. breaking up, and the price of oil falling, disagreements within O.P.E.C. could continue to restrain plans to increase the price again. Economic forces, too, may restrain further increases. The indications are that the market simply' will not bear another increase. The immediate effects of the rise next month should not be too severe. Economists have been assuming that, the price would rise by 10 per cent and this can be absorbed without excessive disruption of the international economic system, especially if members of O.P.E.C. carry through their plans to mitigate the effects on developing countries. To New Zealand the rise will obviously be troublesome. The cost of imports is a major economic issue and the weather may require the country to use large amounts of fuel oil to generate electricity next winter. The incentive now to save electricity—and petrol —should be greater than ever.