Hussein Abdullah argues that oil prices, although high, are still fair The OPEC officials who met in Isfahan, Iran, on 15 March 2005, temporarily suspended the pricing range that has been in force since 2000. According to the old system, oil prices were allowed to fluctuate between $22 and $28 per barrel for average crude (also known as OPEC Reference Basket, ORB). The average market price for a typical oil barrel has hovered around $50 for the past few months. What new price range could OPEC possibly come up with? To answer this question, let's review oil's recent history. When oil prices stabilised at around $18 per barrel in 1987, producers and consumers were both convinced that this was the fair price and must be maintained in real terms. In other words, the dollar value of the barrel would be allowed to go up, but only inasmuch as the purchasing power of the dollar went down. In actuality, the nominal price of oil, remained at about $18 per barrel for most of the 1990s, which means that its real price dropped to about $4.5 by 1973 standards. To bring the real value of the barrel to where it should be, the price of the barrel needs to go up. Western industrialised countries do not allow the drop in crude oil prices to be passed on to the consumer. As oil prices dipped, Western governments imposed more taxes on oil consumption to keep the price of gasoline and other products high. For example, average taxes on products derived from a barrel of oil climbed from $22 in 1987 to about $65 in the 1990s. When signs of oil shortages became noticeable in 1998, the International Energy Agency accurately predicted today's situation and told the world to expect a gradual rise in oil prices. Meanwhile, oil exploration and production costs have increased and are responsible for the increase in the price of crude oil. Another relevant development is that industrial countries have been trying to develop alternative sources of energy, and have been using the reduction in crude oil prices to fund their research. In short, oil prices have actually been dropping in real terms. Therefore, a rise in dollar terms is overdue. Western governments may grumble about the rise in crude oil prices, yet they are the ones who have been taxing final oil products by up to 70 per cent of their final price. Still, there is a need to find a price range that is fair to consumers as well as producers, a price that encourages further exploration for oil, offers reasonable profits for the companies involved, and fairly compensates producing nations for a depletable resource. Global demand for oil is expected to climb from its present level of 82 million barrels a day, to 120 million barrel a day in 2025. For a matching increase in supply to occur, oil prices have to go up to encourage further investment. Let us return to a bit of history. In 1971, an agreement between OPEC and oil companies recommended a gradual rise in oil prices of 2.5 per cent to keep up with inflation. The price of a barrel of oil back then was only $2, but the idea of adjusting prices to inflation was a good one. At present, a fair price for oil, after correction for inflation, is anywhere between $40 and $50 a barrel. And this price needs to be adjusted annually to compensate for inflation and to stimulate investment in the industry. One other thing that makes this price fair to consumers is that over the past three decades, the cost of extracting refined products from crude oil has dropped nearly by half. In other words, one barrel of oil in the 1970s was just as useful to the final consumer as half a barrel or less is now. Consumers can deal with the current prices, for in real terms they are equal to those of the 1980s. A price of $40 to $50 a barrel would also offer the necessary stimulation for producers, allowing companies to invest more, and would compensate the producing countries for the loss of a depletable asset.
