Falling Oil Prices Can Hurt, Too
Years late and reluctant to the last, the 13 countries of the OPEC cartel have finally had to acknowledge the bitter reality that they can no longer control the price or the supply of oil. OPEC will now concentrate simply on trying to maintain its shrunken share of the world oil market. In its glory days OPEC provided nearly two-thirds of the non-communist world’s oil. That share is down by nearly half. In a brief five years OPEC’s future has changed from one of seemingly limitless enrichment to a scramble for survival.
OPEC can be expected to fight bitterly for its market share. Its members will fight each other, and they will fight the major non-OPEC oil exporters--the Soviet Union, Britain, Norway, Egypt and Mexico--in an effort to head off further revenue losses. People who get paid to guess about such things think that by next spring this competition will push oil prices down somewhere between $3 and $10 a barrel.
In the 1970s, when the world was on an oil-consumption binge, OPEC was virtually without competitors. But soaring oil prices inevitably slashed demand and set off a productive search for new supplies. OPEC lost its dictatorial powers. Meanwhile, though, enormous damage had been done. High prices and the expectation that eventually oil would sell for $50 a barrel or more encouraged dangerously illusory judgments. Banks made billions in bad loans. Some oil producers, Mexico most notably, assumed tens of billions of dollars in debts in anticipation of revenues that suddenly evaporated.
Oil prices, as the 1970s sometimes calamitously demonstrated, are linked directly to rates of inflation, interest and national growth. Declining prices will hurt some countries and benefit many. Even Mexico, which will earn less from its oil exports, will gain as borrowing and servicing costs for its $96-billion foreign debt drop. But if rising oil prices have shown that they can produce economic havoc in consuming countries, falling prices can also spell trouble.
For major oil users, like the United States, that trouble could come if cheaper prices encourage a too-rapid rise in demand. Were that to happen in this country and elsewhere, the surplus of oil that keeps prices down would before long dry up, allowing OPEC once again to assert its menacing control over the market. The most beneficial way to prevent an unnecessary rise in oil demand is by filling the void left by lower prices with a virtually painless offsetting tax. A 10-cent-a-gallon federal tax on gasoline alone, for example, would raise about $11 billion a year. There is no better time than now to act.
