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This was written before the recent rise in oil prices, but it does offer an interesting perspective.

"The Arab embargo - from oil crisis to OPEC crisis

Richard Mably LONDON

A quarter of a century after the Arab oil embargo, the West's lingering nightmare that the petrol pumps might again run dry has scarcely felt so remote.

Awash with oil, the once-mighty OPEC cartel now suffers the lowest real crude prices since it tipped the world's leading industrial powers into crisis in 1973. Saudi Arabia's King Faisal sanctioned the embargo on 17 October that year to punish the West for its support of Israel in the Arab-Israeli war that started 11 days earlier.

Oil prices quadrupled, scarring the economies of the West for years with recession, inflation and unemployment. The Organization of Petroleum Exporting Countries (OPEC) ushered in the era of shared baths, power cuts and little stickers urging consumers to "save it."

Twenty five years later, in the worst oil glut for a decade, it is OPEC that is feeling the backlash of the first oil shock. This year's severe glut is only the latest in a series caused by persistent oil market overcapacity, partly a consequence of the 1973 embargo. Sheikh Zaki Yamani, the mastermind behind Saudi oil policy at the time, admits mistakes were made.

"I think we were intoxicated in the seventies and some major consumers helped us dig our grave," the former Saudi oil minister told a recent conference in London. Vowing not to be caught out again, the West invested in its own oil. The major companies, sent packing by the nationalizations which swept OPEC producers, invested heavily in regions like the North Sea. New technologies were invented to slash the cost of finding crude. Power generators in nations without oil turned nuclear and then increasingly to cleaner fuels like natural gas. Consumers also became more efficient. High taxes in most parts of the industrialized world, with the exception of the US, have replaced high prices as the incentive for efficiency gains. In Europe, tax now counts for more than 80 percent of the price of gasoline. European motorists pay $185 a barrel at the pump for gasoline which fetches $17 a barrel at the refinery gate. Oil demand growth this decade has been quelled to little more than two percent a year, from seven percent annually in the 20 years before the 1973 embargo. Stagnating demand and this year's low prices have already started to reshape the structure of the oil industry.

Shell chairman Mark Moody Stuart has predicted that oil prices, having averaged $18 a barrel over the past 10 years, could stay depressed at $12-$16 in the medium term.

"Financial instability has already taken a toll on the oil industry in terms of lower demand growth," warned Franco Bernabe, chief executive of Italian energy giant ENI.

The giant merger of British Petroleum and Amoco Corp is expected to spark further consolidation among companies keen to cut costs.

"Lower cost is the driving force for big oil," said analyst Fadel Gheit at Fahnestock and Co.

"It is a mature industry with slow or no growth. There is no question that we are at a turning point and oil companies can only merge." Meanwhile, the big Gulf oil states are starting to welcome back the multinationals they shunned two decades ago. OPEC ministers, by the time of the second oil shock in 1979 in the aftermath of the Iranian revolution, were able to force prices to $41 a barrel.

Now the free market writes the rulebook and oil is back around $14. Flickering futures screens and financial derivatives dictate market direction.

"The interplay of commercial, political and economic forces has fundamentally altered," said Robert Priddle, executive director of the International Energy Agency, set up by the industrialized powers to safeguard energy security in the wake of the 1973 embargo.

"Market forces have overwhelmed the institutions which were created to manage them." Past oil shocks were caused as much by the fundamentals of supply and demand as by the fear factor of politics. Surplus supply capacity was negligible in the months before the 1973 embargo after years of soaring demand. After this year's three million barrels a day of supply cuts, designed to bolster prices, spare capacity stands at more than five million barrels on the 75 million barrel a day market. Nevertheless, few are prepared to rule out a future oil shock. Prices soared briefly above $40 in 1990 when dealers thought Iraq's invasion of Kuwait might turn into missile strikes on Saudi oil facilities. And the volatile Middle East remains home to 65 percent of the world's one trillion barrels of known oil reserves.

OPEC's 40 percent share of global production, down from two-thirds in the 70s, will rise again, once low prices start to squeeze out high-cost production.

"A new era of Middle East dominance in oil supply will come when North Sea production has peaked and before non-conventional oils are widely used," predicted the IEA's Priddle. Geologists say that despite new sources such as the Caspian Sea and offshore West Africa, oil companies are losing the race to replace depleting reserves.

British academic Colin Campbell, in a study of what is left in the world's petroleum reservoirs, concludes that oil is nearing the point of terminal decline.

"We can be in no doubt," says Campbell, "that 'Hydrocarbon Man' is approaching a turning point as conventional oil production reaches its peak within a matter of a few years."

-- Ken Decker (kcdecker@worldnet.att.net), April 24, 2000