OPEC'S THREAT TO THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-01315R000400120003-5
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 1
• Document Creation Date: December 16, 2016
• Document Release Date: October 26, 2004
• Sequence Number: 3
• Publication Date: January 1, 1978
• Content Type: OPEN

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OPE C'S THREAT
TO THE W 'EST
by Robert S. Pindych
VVi at kinds of changes should be expected
in the prices and availability of world energy
supplies during the next 15 years? Will oil
prices increase slowly over time, or is an-
other large and sudden price hike likely to
be levied by the Organization of Petroleum
Exporting Countries (OPEC) ? Will energy
supplies be available even at higher prices,
or should we expect worldwide shortages?
And how will these changes in energy prices
and availability affect the economies of the
industrialized countries?
According to recent projections by the
Central Intelligence Agency, a crisis is likely
to occur in the early 1980s as world energy
demand exceeds supply, resulting in short-
ages of energy, rapidly rising prices, and
economic contraction in all of the industrial-
ized countries. By the early 1990s, the agency
believes, the oil shortage will become worse
as countries scramble for the. scant supply
available. This view has had an important
role in forming the rationale for the Carter
administration's energy program. However,
it is a highly unrealistic view, because it ig-
nores the impact of past and future changes
in energy prices on energy supply and demand.
In fact, this kind of crisis is very unlikely
to occur, but another kind of crisis--an oil
embargo or OPEC production cutback-could
occur quite easily. That prospect needs more
attention in the design of U.S. energy policy.
Available data can lead to answers to the
questions listed above different from those
offered by the CIA. Since the evolution of
world energy markets hinges on the OPEC
cartel, one may begin by describing OPEC's
most likely pricing and production behavior.
ROBERT S. PINDYCK is associate professor of eco-
nomics in the Sloan School of Management. Massa-
chusetts Institute of Technology.
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This will provide the basis for discussing
the kinds of energy crises that should or
should not be of concern, and the implica-
tions for domestic and international energy
policy. Finally., it is appropriate to discuss
the likely impact of rising energy costs on
economic growth, inflation, and unemploy-
ment in the industrialized countries.
OPEC and the Price of Oil
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With the power to set the world price of
oil, OPEC is a driving force behind world
energy markets, and its decisions have pro-
found implications for the economies of all
the industrialized countries. It is therefore
important to understand the ways in which
OPEC is likely to change the price of oil in
the future.
OPEC's pricing behavior is surprisingly 1
predictable, since. the cartel is most likely to
take only those actions that are in its best
economic interest. Considerations other than
economic ones may, of course, influence
OPEC pricing decisions, but economic in-
terests have dominated in the past and are
likely -to dominate in the future, and they
provide the best basis for predicting oil
prices. One must therefore put himself in
OPEC's position and ask what is the best
price to charge for oil.
What do we mean by the best price? It
is often interpreted to mean the price that
maximizes profits---or equivalently for
OPEC, where production costs are insignifi-
cant, the price that maximizes revenue. But
a price that maximizes today's revenues, ig-
noring future revenues, is clearly not "best."
As several OPEC members have already made
quite clear, the depletion of existing reserves
and its impact on future revenues must also
be considered in determining today's price.
It makes most sense, then, to adjust the price
so that it always maximizes the flow over
time of all current and discounted future
revenues. Future revenues must be discounted
to reflect income lost by not investing cur-
revenues. Just as the stockholders of a
rent
company hope that its management will act
Approved For Release 2005/01/12: CIA-RDP88-01315R000400120003-5C0$TINU?ID