Oil: Win, Lose or Draw?

Predicting the future is always risky, but when it comes to the oil business, it often seems downright impossible. Who could have foreseen the shocking oil- price hikes of the 1970s? And then prophesied bottom-of-the-barrel cuts in the 1980s? No wonder the possibility of a cease-fire between Iran and Iraq threw oil traders into a frenzy last week as they tried to divine whether the cost of crude would ultimately go up or down.

For now, at least, traders are betting that oil production will drop and prices will rise. Reason: both Iran and Iraq have pumped as much oil as possible to pay for their holy war, helping depress prices. Peace could eliminate the glut, the theory goes, by bringing back tighter production quotas from Iran, Iraq and the other members of the Organization of Petroleum Exporting Countries. Such thinking caused the price of oil futures to seesaw violently last week. The price of a barrel of West Texas crude jumped 84 cents, to $15.70, when Iran first proposed peace, then plunged 47 cents per bbl. the next day, after Iraqi fighters bombed Iranian targets.

Even if a cease-fire takes hold, however, the long-term outlook for petroleum prices is far from settled. Economists estimate that the two countries will need a total of at least $300 billion to rebuild their ravaged economies, twice their annual gross national products. The simplest solution is to sell more oil. Analysts predict that Iraq could nearly double its current production of 2.4 billion a day by 1990; Iran's daily capacity might jump from 2.5 million to 6 million. If they pump that much oil to pay for reconstruction, prices will plunge.

Or will they? "Iran and Iraq might surprise everyone and agree to keep a lid on production," cautions Peter Beutel, an oil-market analyst for the Manhattan commodities firm Elders Futures, Inc. Another variable is Saudi Arabia's strategy, says G. Henry Schuler, an energy specialist at the Center for Strategic and International Studies in Washington. Schuler points out that in 1987, when oil sold for $20 per bbl., Riyadh increased its production to drive down the price and deprive Iran of its war chest. "But once the war is over, then the Saudis don't have any reason to keep prices down," he says. Schuler's prediction: oil could jump to $22 to $24 per bbl. in a year.

A handful of industry analysts maintain that a cease-fire will make little difference in prices. World demand for crude is flat, they argue, and OPEC, which controls only 37% of the market, in contrast to 56% in 1973, may find it difficult to push prices much higher. "If the war ends, the geopolitics of oil are changed greatly," says Daniel Yergin, president of Cambridge Energy Research Associates in Cambridge, Mass. "But the price may not be changed nearly as much." The possibility of peace in the Persian Gulf seems to have left the petroleum community as bewildered as the rest of the world.