DISADVANTAGE/OIL

LOWER OIL PRICES DESTROY ECONOMIES

LOW OIL PRICES DESTROY RUSSIAN ECONOMY

Amy Myers Jaffe and Robert A. Manning January, 2000 / February, 2000 [ AMY MYERS JAFFE, former Senior Economist for Petroleum Intelligence Weekly, directs the Energy Research Program at the James A. Baker III Institute for Public Policy at Rice University. ROBERT A. MANNING is Senior Fellow and Director of Asian Studies at the Council on Foreign Relations and author of the forthcoming The Asian Energy Factor Revisited. ] HEADLINE: The Shocks of a World of Cheap Oil. Foreign Affairs. //LXNX ARF

Low oil prices did not inflict pain just in Central Asia and the Middle East. In 1998, they coincided with unprecedented political strains in key oil-producing countries like Russia, Indonesia, and even such Latin American nations as Venezuela, Mexico, Ecuador, and Colombia. Russia has historically relied heavily on oil and gas for its hard-currency earnings and still does today; its oil exports generated $ 16.1 billion in 1996, some 20 percent of Russia's total export revenue. Russia's recent financial crisis was hastened and worsened by disheartening oil earnings. Low oil prices will complicate the country's troubled transformation and leave it prisoner to its cashless "virtual economy." Elsewhere, Venezuela's flagging economy in 1998 helped elect a military populist, usher in a period of political turmoil, and stymie the implementation of major constitutional reforms. Plunging oil revenues in 1998 also destabilized Mexico, whose traditional political system is groaning with strain.

ANY RISE IN OIL OUTPUT WILL DEVASTATE THE OPEC COUNTRIES ECONOMIES

The Independent (London), July 31, 1999, HEADLINE: OUTLOOK: OIL PRICE HIKE

OPEC HAS a long history of being able to resist everything except temptation. Right now the temptation is to cash in on the rising oil price by abandoning production quotas and letting the black stuff gush. With the oil price touching $ 20 a barrel - a level not witnessed for almost two years - It is a minor miracle that the Opec members have maintained their discipline for so long, particularly with producers like Nigeria and Venezuela just dying to let nip.

What will probably stay their hand, at least for a while longer, are the continuing high levels of crude oil inventories. Until there is a substantial drawdown on these inventories, any rise in output would be suicidal for the oil price, the producers and their economies.