The Concise Encyclopedia of Economics


by Benjamin Zycher
About the Author








How successful has OPEC been since the early seventies? Not as successful as many people perceive. Except in the wake of the 1979 Iranian revolution, and in anticipation of possible destruction of substantial reserves in the 1990-91 Persian Gulf conflict, real (inflation-adjusted) prices of crude oil have fallen since 1973. Prices began dropping very rapidly in the early eighties after the Saudis concluded that lower prices and higher production were in their best interests. Official prices fell from $34 (for the benchmark crude oil, Arabian light) to $29 in 1983, $24 in 1984, and about $18 in 1986 to 1988. Indeed, even prices unadjusted for inflation often have fallen. For example, prices fell from $35.10 per barrel ($49.10 in 1990 dollars) in 1981 to $16.69 ($18.69 in 1990 dollars) in 1987. (Price data are shown in table 1, and current reserves, production capacity, and production levels are shown in table 2.)

World Crude Oil Prices
(U.S. dollars per barrel)

Year Nominal Price In 1990 Dollars Year Nominal Price In 1990 Dollars
1955 2.25 10.88 1973 3.27 8.69
1956 2.36 11.04 1974 11.17 27.20
1957 2.73 12.34 1975 11.57 25.66
1958 2.45 10.85 1976 12.41 25.86
1959 2.27 9.82 1977 13.33 26.05
1960 2.23 9.49 1978 13.43 24.46
1961 2.27 9.57 1979 20.19 33.78
1962 2.26 9.32 1980 32.27 49.52
1963 2.25 9.13 1981 35.10 49.10
1964 2.23 8.91 1982 32.11 42.22
1965 2.22 8.64 1983 27.73 35.10
1966 2.24 8.42 1984 27.44 33.50
1967 2.27 8.31 1985 25.83 30.63
1968 2.24 7.81 1986 12.52 14.47
1969 2.27 7.50 1987 16.69 18.69
1970 2.35 7.36 1988 13.25 14.36
1971 2.52 7.46 1989 16.89 17.59
1972 2.64 7.47 1990 20.42 20.42
SOURCE: U.S. Departments of Energy, Commerce, and Labor.

OPEC Reserves, Production Capacity, and Production Levels
Nation Reservesa Capacityb Productionc
Algeria 9,200 800 750
Ecuador 1,514 330 280
Gabon 733 200 260
Indonesia 8,200 1,300 1,200
Iran 92,860 3,000 3,100
Iraq 100,000 3,500 3,100
Kuwait* 97,125 2,200 1,800
Libya 22,800 1,600 1,250
Neutral Zone n.a. 600 300
Nigeria 16,000 1,700 1,700
Qatar 4,500 600 365
Saudi Arabia* 257,559 7,000 5,300
Un. Arab Em. 94,105 2,210 2,060
Venezuela 58,504 2,400 2,000
OPEC Total 763,100 27,440d 23,465
World Total 1,001,572 63,740d 60,320
aMillions of barrels on January 1, 1990.
bMaximum sustainable as of August 1990, thousands of barrels per day.
cThousands of barrels per day as of May 1990, excluding natural gas liquids.
dNon-OPEC capacity for first quarter 1991, from internal Department of Energy/Energy Information Administration estimate.
* Includes one-half of the Neutral Zone.
n.a.—not available.
SOURCE: U.S. Department of Energy, Central Intelligence Agency.

This downward trend has increased tensions between two rival groups within OPEC. The price "hawks," usually nations with smaller crude oil reserves relative to population, argue for lower oil output and higher prices. The principal hawks within OPEC are Iran and Iraq. The price "doves," usually nations with larger reserves relative to population, argue for higher output and lower prices to preserve, over the longer term, their oil markets and thus the economic value of their oil resources. The principal doves within OPEC are Saudi Arabia, Kuwait, and the United Arab Emirates.

Such relatively lower prices serve the interests of the doves because oil consumers have used less oil in response to prior price increases. For example, U.S. energy use per dollar of GNP (adjusted for inflation) was 27.49 thousand BTUs in 1970. By 1988, after the price increases of 1973 and 1979, it had decreased to 19.93 thousand BTUs. Thus, the price "doves," led by Saudi Arabia, generally have resisted pressures for higher prices.

Over the long run, real prices of natural resources and commodities usually fall, largely because of technological advances. Crude oil is no exception. Technological advances in seismic exploration have dramatically reduced the cost of finding new reserves, thus increasing oil reserves greatly. Horizontal drilling and other new techniques have reduced the cost of recovering known reserves. Also, improvements in technology provide both substitutes for oil and ways to use less oil to achieve given ends.

Moreover, advances in technology will reduce prices for such substitute fuels as natural gas, thus exerting continuing downward pressure on crude oil prices. And increasing willingness to devote resources toward environmental improvement suggests that the market for crude oil will decline relative to those for such "cleaner" energy sources as natural gas and nuclear technology, unless other technical advances yield substantial improvement in the ability to use oil cleanly. Thus, the demand for crude oil is likely over the long term to decline relative to the demand for competing fuels. This has been the experience of mankind, as wood gradually gave way to coal, which in turn declined as the use of oil expanded. These facts suggest that the economic power of OPEC inexorably will erode.

About the Author

Benjamin Zycher is a senior economist at the Rand Corporation and a visiting professor of economics at the University of California at Los Angeles. He was formerly a senior staff economist with President Reagan's Council of Economic Advisers.

Further Reading

Bohi, Douglas R., and Milton Russell. Limiting Oil Imports: An Economic History and Analysis. 1978.

Bradley, Robert L., Jr. The Mirage of Oil Protection. 1989.

Horwich, George, and David Leo Weimer, eds. Responding to International Oil Crises. 1988.

Glasner, David. Politics, Prices, and Petroleum. 1985.

Zycher, Benjamin. "The Silly Season for Energy Policy." Regulation (Spring 1991): 6-9.

Zycher, Benjamin. "Emergency Management." In Free Market Energy, edited by S. Fred Singer. 1984.

Return to top