Oil is Not Gold
Relying on oil to secure credit doesn't work as well as gold (or other solid, tangible items). Think of the problem in terms of storage. An ounce of gold is worth roughly $290.00. An ounce of gold is tiny and anyone can purchase it. You could put many ounces -- even pounds of gold in a small safe. When a lender calls a debt due, he can take possession of the gold. On the other hand, the equivalent of one ounce of gold in oil at $12/barrel is 24 barrels. At 42 gallons per barrel, that would be 1,008 gallons of crude oil. Try storing 1,008 gallons of crude oil in a safe. . .

Logistically, the best way to store huge amounts of crude oil is to leave it in the ground where we refer to it as "reserves." The problem is that as long as the oil is in the ground, no one knows exactly how much of it there is. Petroleum Engineers around the world spend long hours diligently calculating and recalculating reserves. Because reserves are still in the ground, the value of the reserves is based on the cost of production, i.e. if you cannot produce the oil for the market value or better, then you theoretically don't have any reserves. Thus, reserves are generally calculated as "that oil which can be produced at the current market value of crude oil." You should know this tidbit because if the price of crude oil remains low past January 1, 1999, next year's estimate of reserves will be significantly lower than this year's estimate. Not that there is any less oil in the world -- it's just not available at the current price.

See the table of data by Country

So, although oil has often been referred to as Black Gold, it has some significant limitations that should be considered as the world deals with rapid industrialization in emerging economies. Remember, the U.S. economy, which works so well now, was originally developed on a gold standard, not oil.

Getting Better
If production is on the path projected, the world should be nearing balance -- although additional factors must now be considered. For instance, as a result of the lack of cash flow and subsequent credit problems, economies slowed down and demand for oil decreased in many countries, therefore production actually must be reduced to levels below former production rates to balance supply with demand. Once economies become reestablished, demand should rise, and so should the price of crude oil. Right now, it looks like the world economy is on the path to recovery. Success depends on how well disciplined producers will be in managing crude oil production.

The NOESIS forecast shows recovery of crude oil prices in 1999, assuming producing nations continue to hold crude oil production down. By next year, the U.S. will be in a normal buying mode, which will increase bidding for crude oil available on the open market and will further tighten the supply.

Countries that produce no oil, but consume oil, have been blessed with huge savings this past year. Major, fully integrated oil companies have seen losses in crude oil production, but savings at the refinery in their purchase price of crude oil. In some cases, product prices have not completely followed the price of crude oil downward, so there remains some profit on the sale of products.

Above all, U.S. consumers and the U.S. economy has benefited enormously from the price decrease. As consumers of 26% of the world's resources, collectively, we saved 21 billion dollars in the past 9 months.

On the other hand, those institutions that invested heavily in foreign economies that were largely depending on cash flow from crude oil are now seeing losses. Some countries that depended on revenues or income from those investments are failing. The situation is complex -- better left to the world's economists to sort out. But there's no question that over-production of crude oil in the winter of 1997-1998 played a key role in producing the world's economic problems.