Warning Flags Go Up
In late 1973 the United States woke up to fact that it is dangerous to depend too much on foreign oil suppliers. That lesson may be starting to fade. The oil shortages and price shocks that recurred throughout the rest of the 1970s in time led to significant cuts in oil consumption and important investment in new energy sources. Helped along by an international recession that itself was due in no small part to the great runup in oil prices, oil imports were in fact reduced markedly. But now signs of a dangerous new dependency are again appearing.
Last year, for the first time since 1979, U.S. crude-oil imports rose over the previous year’s level, by 6.5%. Even more troubling was a 30% rise in gasoline imports. Major oil producers, in Kuwait and Saudi Arabia particularly, have been boosting their refining capacity and expanding their exports of gasoline, which they can produce more cheaply than domestic refiners. Coming on top of a slowed growth in oil demand, this new competition in the refined-products market has been a major blow to the domestic petroleum industry. The United States, in common with other industrialized countries, now has a huge glut in refining capacity that some in the oil industry think will never again be used.
The problem, though, goes deeper than surplus refining capacity. Oil price declines that have been good news for consumers have been bad news for oil exploration efforts. In 1983, spending by the U.S. petroleum industry on exploration and development fell 36% from the year before. It typically takes three to five years before a major oil or gas discovery leads to commercial production. Just as the recent modest gain in domestic oil production reflects the increased drilling activity of four or five years ago, so will the current decline in exploration likely mean lower production by 1990.
Recent moves in the oil industry involving mergers and unwanted takeovers are also destined to affect future oil output. Chevron borrowed nearly $11 billion to buy Gulf Oil. Paying off that debt will inevitably divert a lot of capital that could have gone toward new exploration. Atlantic Richfield Co., as part of its reorganization, is borrowing $4 billion to buy back stock and sweeten its dividends. ARCO denies that its reorganization is aimed at preventing a takeover, though some analysts are not so sure. Those same analysts see other oil companies, among them Exxon and Mobil, joining the restructuring parade, and in the process adding greatly to their debt.
Last year about one-third of the oil that Americans consumed was imported, at a cost of $60 billion. If U.S. consumption grows by 2% a year, fully 46% of the nation’s oil will be imported by 1994. At that level imports as a percent of total consumption will be back to where they were in 1978, just before the Iranian revolution pinched supplies, led to a near-tripling in the price of oil, and helped push the world into economic recession.
What’s to be done to try to head off this possibility? Further conservation remains a matter of urgency as well as sound economics. Research into non-oil energy alternatives needs a boost. Most important, the search for new domestic oil supplies will have to expand. That will take a lot of money--much of which, in the normal course of things, could be borrowed. But this is not a normal time for the oil industry.
Takeover attempts and responses to them are creating a lot of unproductive debt that in the near-term at least does nothing to enhance the nation’s oil supplies. The Reagan Administration opposes any legislative interference with takeovers, arguing that competition in the market for corporate control is a good thing, and so indeed it is. But national energy security, which means not coming to depend excessively on foreign suppliers, is a good thing as well. With the warning flags flying, it would be wise not to overlook this part of the problem.
