Oil and the Decline of the West

Walter J. Levy

From Foreign Affairs, Summer 1980

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Summary:  The year 1979 was one of grievous setbacks for the future security of the oil supply of the Western world, its economic and financial prospects, its strategic capabilities, and its political stability.

Walter J. Levy is a consultant to industry and governments.

The year 1979 was one of grievous setbacks for the future security of the oil supply of the Western world, its economic and financial prospects, its strategic capabilities, and its political stability.

To begin with, we were completely unprepared for the collapse of the Shah's regime in Iran, even though there were many early warning signals. And our government and business community share a substantial measure of responsibility for shortsighted policies which contributed to the destabilization of the Shah's regime.

What followed in terms of oil alone should now be a familiar story. During the course of 1979, the decline in Iranian oil production was more than made up by other producing countries. And taking account of a virtually unchanged world oil demand, importing countries were able to increase their oil stocks during the year by well over one million barrels a day, more than has been achieved during recent periods. Nevertheless, a temporary decline in world oil production led to apprehensions by importing countries and their oil companies that they might be unable to cover their future needs. Accordingly, importers tried to obtain added supplies and to increase stocks at almost any cost. This, in turn, resulted in panic buying at largely uncontrolled and escalating spot oil prices.

Obviously, the Organization of Petroleum Exporting Countries (OPEC) would not maintain its official quotations at a lower level if an increasing proportion of its oil was purchased on the spot market by importing countries or companies at much higher prices. In due course, OPEC increased its official prices to more than double their previous levels. Also, OPEC countries would naturally try to sell more and more of their oil directly or through intermediaries at the higher spot prices. This would mean that the established customers for OPEC oil could only obtain smaller quantities of the oil they had previously been able to acquire directly from the producing countries. Accordingly, more and more companies and countries were unable to purchase oil from their former regular major oil company suppliers; instead, they were forced to turn to producing countries or trading companies to assure themselves of supplies, and they showed themselves willing to pay them practically any price that they asked for.

As early as February 1979 it was painfully clear that this state of affairs posed a massive danger for the world oil economy and that it required coordination and cooperation among importing countries and among their companies if this buying panic were to be stopped. As a minimum, the major importing countries would have had to establish a firm policy for themselves and their companies not to buy oil at above OPEC price levels; at the same time they had to be willing to establish an international and national allocation system that would assure all countries and companies an equitable share in the oil that was available at OPEC prices. Without such arrangements, higher spot prices would sooner or later be incorporated into higher official OPEC prices. This would be ...

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