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Dunsmore: The Price Of Oil

In Beirut in the summer of 1973, some journalist colleagues and I met with a then relatively unknown Arab technocrat. His name was Sheik Ahmed Zaki Yamani, the Oil Minister of Saudi Arabia. Yamani had law degrees from NYU and Harvard and spoke perfect English. He was also the leading figure in the oil cartel known as OPEC- the Organization of Petroleum Exporting Countries.

What he told us that day had been the subject of much speculation, but his saying it made it official - in the event of another war between Israel and the Arab states, OPEC had every intention of using oil as a weapon. In other words, it would embargo its oil shipments to those countries supporting Israel.

A few months later, Egyptian President Anwar Sadat sent his troops across the Suez Canal to engage Israeli forces. That 1973 war ultimately brought on the threatened oil embargo, which created huge lines at gas pumps throughout most of the industrialized world and sent shock waves through many economies. When the embargo ended, the price of oil had quadrupled - and OPEC, it seemed, ruled.

Yet what really controlled the price of oil then and now, was that oldest of market forces - the law of supply and demand.

Washington Post columnist David Ignatius summed it up this week: “One of the biggest stories of 2014 was the stone-cold death of OPEC as a viable cartel. It turns out there are just too many producers for price fixing to work.”

Four of its five founders were Middle Eastern. But OPEC at one stage grew to 14 members, including African and Asian producers, and most can’t afford to cut production.

Moreover, big new non-OPEC producers appeared on the scene. Russia became one of the world’s largest energy exporters - and its economy is super-dependent on those sales. In the United States, the new fracking technology first produced large new supplies of natural gas from shale formations. Later that technique was used to extract oil from shale. This helped make America basically energy independent.

Yet as the supply of energy significantly increased, world demand fell. China’s red-hot economic development slowed, and austerity programs hampered growth in Europe. Meantime, increasing mileage requirements on new vehicles, and the modest success of solar and wind programs, also reduced the demand for traditional energy sources.

And so, as long as Saudi Arabia refuses to cut its production - which it is doing to weaken its competitors - low oil prices are expected to continue.

Barrie Dunsmore is a veteran diplomatic and foreign correspondent for ABC News, now living in Charlotte.
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