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Volume :3 Issue : 9 1977      Add To Cart                                                                    Download


Auther : Dr. Ibrahim Oweiss


This study deals with pricing of oil in world trade which has been, and still is, one of the major international economic and political issues since the Mid-East War in October 1973 and the following increases in oil prices.  These increases have been a major concern to industrialized countries, the oil-exporting countries and the less developed countries in varying degrees, as well as to the United Nations, the Board of the International Monetary Fund and the International Bank for Reconstruction and Development.

The writer believes that the campaign mounted in U.S.A. against Middle oil-exporting countries is unjustifiable, for this campaign attempts to hold these countries responsible for the economic problems, the Western World is facing now due to the increase in oil prices although economic facts cannot verify this allegation.

From reviewing the history of the pricing of oil in world trade, the writer deduces the following fact:
1) Pricing of oil in world trade was not determined by competitive forces of supply and demand, but was actually controlled by international oil companies.
2) As a result of administered pricing of oil, there was a disparity of prices between oil originating from the Gulf of Mexico and oil originating from the Middle East over the period between 1948 – 1973.  For instance, when 1945–47 Gulf of Mexico prices of oil were raised by $1.17 per barrel (to $2.68), Persian Gulf prices were raised by only $1.17 per barrel (to $ 2.18). Furthermore, Persian Gulf prices were reduced in May 1948 to $2.03 per barrel so as to make Middle Eastern oil competitive with Venezuelan oil in the markets of Western Europe.
3) While the economic development of the oil-exporting countries is based on the conversion of their subsoil resources into other assets such as plants, equipments, education and technology, production of oil was not conducted to serve the interests of oil-exporting countries, particularly these of the Middle East, for oil was pumped at a rate far in excess or an optimum rate.
4) The system of buy-back price emerged as a result of the desire of oil-exporting countries to participate in the ownership of concession-holding oil Companies, and buy the buy-back price is meant what an oil company pays to the host countries for the percentage of oil produced and which represents the government’s ownership share in the company on December 13th 1974, members of the Organization of Petroleum Countries replaced the multiple pricing system of oil, which revolved around the posted price, by a uniform pricing system based on the government take, that is, the portion it gets of the price paid for a barrel of crude oil.
5) Middle East oil was cheaply sold in world markets, and its prices were reduced several times over the period between 1947-59.  This means that the terms of trade of Middle Eastern oil-exporting countries were deteriorating over time.

In the course of assessing the recent development in the price of oil, the writer argues that since oil is still the main source of energy and has no competing substitutes in the foreseeable future, the demand for oil will be inelastic within a certain band of prices and during a certain time interval.  Hence, oil produces could have increased their revenues if they offered fewer units for sale by imposing supply restrictions.  Yet the writer finds out from available date that Saudi Arabia, Kuwait, Qatar, Bahrain, Libya and the United Arab Emirates produce oil far in excess of the amount they would have produced if they were to observe their own economic interests, thus granting a subsidy to oil importing countries.  He also believes that the inconveniences created in Western Europe, U.S.A. and Japan as a result of increases in oil prices are manageable, and he justifies these increases by the facts that:
1) The increment in oil bill resulting from the increase in oil prices constitutes a very small fraction of the overall economic performances of these countries.
2) There has been a significant acceleration in the rate of inflation in these countries before the prices of oil and other primary commodities rose, and inflation is only partially explained by these increases.
3) Oil-exporting countries are paying for the rise in the prices of goods and services they import from oil-Consuming Countries.
4) Since oil is a depletable natural resource and a real form of wealth, the wealth holder has the right to protect himself against constant decline in the purchasing power of money paper.
5) Higher oil prices could serve a dual purpose, namely, the elimination of wasteful use of oil and a decline in demand with the end result of spreading this depletable natural resource over a wider span of time necessary for mankind to develop other resources of energy.









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