The United States Exerts Limited Influence on the International Crude Oil Spot Market

EMD-80-98: Published: Aug 21, 1980. Publicly Released: Aug 21, 1980.

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In 1979, the world oil market was in disarray. Crude oil prices more than doubled. Unified pricing by the Organization of Petroleum Exporting Countries (OPEC) crumbled as many of these countries first placed surcharges on the price of their oil, and then in a number of cases, imposed whatever prices they believed the market would bear. At the height of this turmoil, the international crude oil spot market drew the attention of the highest levels of government in oil-consuming countries. In June 1979 in Tokyo, concern about the wider effects of the spot market on oil prices in general led the United States and six other major oil-importing countries to pledge, among other things, to encourage oil companies to moderate their involvement in the spot market, and to refrain from buying oil for government stockpiles when this would place undue pressure on oil prices. No U.S. policy or program had been designed to influence directly the spot market. Nonetheless, some programs designed for other purposes have indirect, and sometimes marginal, implications for that market or for U.S. oil company activity in it. Occasionally, the Department of Energy (DOE) has taken actions which also affected the spot market.

The effects of these actions and programs on the spot market at times have worked in different directions. The United States suspended purchases for its Strategic Petroleum Reserve in April 1979, citing the possible effects of crude oil acquisition on the volatile international spot market. In early 1979, DOE also privately advised U.S. oil companies to restrain their crude oil spot purchases. However, fearing that imports had been sharply reduced, DOE in May of that year advised companies that spot purchases might be necessary. In late 1979, DOE sold oil from the Elk Hills Naval Petroleum Reserve, accepting bids approaching the highest international spot prices. Some countries then raised their oil and gas prices citing the DOE sale as justification. Additionally, DOE programs can simultaneously encourage and discourage companies from participating in the spot market, and it can affect a company's acquisition costs variously at different times. The Crude Oil Entitlements Program provided modest financial incentives to companies which relied on the pre-1979 spot market when spot prices were less than average contract prices. DOE took action in 1979 to increase U.S. imports and inventories of distillate oil. The Mandatory Crude Oil Allocation Program was used to provide supplies to small refiners which otherwise have had to compete on the spot market. Crude oil price deregulation, being phased in through September 1981, could have a two-sided effect, either by being a source of upward price pressure or by moderating demand and prices on the international spot market.

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