Energy Futures vs. Cartel: Counterpoints in Oil Prices

By Morris, John | American Banker, July 30, 1985 | Go to article overview

Energy Futures vs. Cartel: Counterpoints in Oil Prices


Morris, John, American Banker


ENERGY FUTURES OR OPEC -- which has more influence on world oil prices?

The answer to that is not as easy as one would think.

Until 1978, the Organization of Petroleum Exporting Countries' price-setting cartel ruled supreme. As long as the world was thirsty for oil, the producers had the upper hand, and they could -- and did -- charge whatever they could get. In those days, it was not uncommon for an oil price hike in Riyadh to be reflected in gasoline prices in Des Moines the very next day.

But since then the oil industry's rigid price-fixing structure has been shattered by rising production and shrinking demand, both of which forced OPEC to lose control. And amid the debris, the New York Mercantile Exchange (NYMEX) has risen to a position of unprecedented importance.

Seven years ago the NYMEX dared to suggest that oil should be treated like any other commodity, indeed, traded like any other commodity. Accordingly, it launched a futures contract in heating oil, following up with contracts in gasoline futures in 1981, and then the ultimate threat to OPEC in 1983 -- crude oil futures. (A futures contract is an obligation to make or take delivery of a specified amount of a specific commodity at a certain date in the future, at a price decided today by open outcry on a supervised exchange).

Some see the NYMEX -- the self-styled "Energy Exchange" -- as symbolizing the now-common gyrations in oil prices. Others see the exchange as a destabilizing influence. And still others see it as the result of instability.

"If the NYMEX hadn't invented energy futures, the oil industry would have created them," said Larry Goldstein, president of business development at the New York-based Petroleum Intelligence Research Group, referring to the use made of the exchange by much of the oil industry.

OPEC, understandably miffed at losing what it believed was the producer's sovereign right to charge whatever it liked for its oil, took a swipe at NYMEX early last year. "The current expansion of the futures market is a result of OPEC's market power decline and not the cause of it," stated an editorial in an OAPEC (Organization of Arab Petroleum Exporting Countries) publication.

But this could prove to be the exchange's heyday, it suggested. "The oil futures market may grow on the strength of recent innovation. In the longer run, however, especially if the price of oil does not increase greatly, the number of oil suppliers including OPEC members will decline and the demand for OPEC oil will strengthen; as a result the role of the futures market is expected to decline.

"This will happen earlier if OPEC members agree soon on a clear long-term market supply and price strategy."

Such harmony doesn't appear likely anytime soon. This pipe dream of the market fixers contrasts curiously with the rapid expansion of the free markets.

And expand it has! A total of 342,216 contracts for crude oil futures, representing 342 million barrels, changed hands on the NYMEX in June, for an average daily volume of 17.1 million barrels. This is about 40% of world crude oil production (excluding the Soviet Union and Eastern block countries) of 42.6 million barrels a day during April, according to Petroleum intelligence Weekly.

While volume on the NYMEX is growing between 35% and 50% a year, OPEC's share of world oil production continues to decline. Money Market Services Inc. an analytical firm based in Belmont, Calif., recently estimated that OPEC accounted for a mere 29.6% of world market share in January 1985 compared with 49.6% in 1978.

The difficulty in obtaining reliable information on the cash markets illustrates a fundamental difference between the price-fixers and the marketeers -- namely, the free flow of data. …

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