The economics of petrodollars has had far-reaching distributional
effects in national and international economics. Yet, being dependent
on oil price and exported quantities of oil, petrodollars will
have to follow a pattern of cyclical fluctuation in its upward
and downward phases.
A study of the economics of petrodollars reveals that no one country
or group of countries such as OPEC has enough power to dictate
a price level and maintain it through a production policy. OPEC's
past ability to raise oil prices was mainly due to oil shortages
in the market rather than to a monopolistic power. While a typical
monopolistic behavior is to sustain a higher price through a cut
in production, OPEC raised the price and increased their production
even during the oil glut. Furthermore, as a result of the downward
phase of the petrodollar cycle, it seems highly unlikely that
OPEC will be able to revive its pre-1979 coordinated efforts.
Internal political and economic conflicts among countries belonging
to OPEC could prevent the meaningful agreement necessary for a
long-term unified policy, be it in pricing or in production, unless
economic benefits resulting from a proposed agreement clearly
outweigh the negative aspects of those conflicts. This seems impossible
As to the price of oil, it will he affected mainly by free market
forces since from the beginning of 1986 most of it has already
been transacted at free market prices. fit effect, OPEC will be
unable to raise oil prices unless world oil markets permit it.
Furthermore, OPEC will not be able to pursue air effective policy
of contrived scarcity because in the current depressed oil market
a glut still exists in spite of' the minimal level of production
they can live with to meet their necessary needs.
Nevertheless, as oil prices dropped sharply in March 1986 as a
direct consequence of the war among oil exporters each trying
vigorously to acquire a larger market share, some producers were
unable to survive. This meant a drop in oil supplies while demand
has been increasing. It seems, therefore, that the current oil
glut will probably disappear by the end of 1988, after which an
upward phase of the cycle of oil prices will be reinstated.
I would argue that the sharper the drop in oil prices in the downward
phase, the higher they become in an upward phase, within certain
limits dictated by income constraints and conservation capabilities.
Because of such limits a new upward phase of the demand curve
for petroleum as introduced above may have an upper limit less
than that of the upward phase of the previous cycle. And if another
downward phase occurs, its lower limit may be higher than the
previous one. In other words, in seeking a stable equilibrium
in oil markets, intervals between upper and lower limits become
narrower over time. This dynamic process is illustrated in Figure 3.
This is, however, a case of stable equilibrium. Theoretically,
fluctuations in oil markets may follow an explosive pattern in
a case of unstable equilibrium.
In an analysis of oil markets it seems that certain pertinent
conclusions can he drawn. First, the dynamics of oil pricing in
world markets may follow the pattern of Figure 3.
In normal circumstances, a stable equilibrium may eventually he
reached. Yet it may not remain at a fixed level. Depending on
forces of demand and supply, a neutral equilibrium for price mechanism
may be followed by a change to another point of equilibrium over
time. Second, the forces of demand and supply of oil in world
markets are greater than any other counter force. This implies
that if OPEC adopts a unified strategy--which is almost impossible
to achieve--of contrived scarcity whereby oil production is to
be curtailed, it will have only a limited effect on international
oil markets, leaving the dominant effects to the interaction of
world supplies and world demand for oil. If the former exceeds
the latter, there will be a downward effect on the price of oil,
while an opposite case will have an upward effect, regardless
of any collective decision made by OPEC. Third, given the current
projections of world oil supplies and demand, it seems that oil
prices may not follow the dramatic upward pattern of the 1970s.
This implies that the rate of petrodollar accumulations seen in
the 1970s may not be repeated in the foreseeable future.
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