Oil: Glut and Gluttony
Peer through all the good-news dazzle produced by falling oil prices--cheaper fuel costs, lower interest rates, reduced inflation, higher corporate profits--and behold the specter of bad news just waiting to make itself known. As world oil prices tumble, this country is losing a good chunk of its own oil production even as its demand for oil rises. To satisfy that demand, more oil has to be bought overseas. Carry all this forward a few years, and the United States almost certainly is going to find itself right back where it was in the 1970s--perilously dependent on foreign oil suppliers and their merciless manipulation of prices.
Oil & Gas Journal, a trade publication, projects that oil priced at $15 a barrel means a fall in U.S. oil production by 1990 of more than 2.4 million barrels a day. The reason is that low prices take away the incentive to search for new oil at the same time that they force the shutdown of uneconomic wells. If lower oil prices help push consumption up by 2% a year, which is quite possible, total oil demand is likely to soar from 15.67 million barrels a day last year to 17.3 million barrels a day in 1990. In just four years, then, 52% of U.S. oil demand would have to be met by imports, against 29% now.
Cheaper oil has already shaken the economies of Texas, Louisiana and Oklahoma, of Alaska to a lesser extent, and of California, where last month alone, according to the California Independent Producers Assn., more than 5,000 wells were shut down. In the oil belt the clamor is increasing for an oil-import fee, the aim of which would be to build a floor under domestic oil prices so that high-cost wells could keep producing, new exploration could be made attractive and banks threatened with collapse could be reprieved. The good thing about an oil-import tax is that it would help hold down demand for foreign oil. The bad thing is that it would make American exports a lot more expensive than those of foreign competitors who are still able to use cheap oil.
When oil prices began their big slide last year it appeared that the free market was finally being given the chance to work. The supply of oil greatly exceeded demand, and therefore prices had to come down. Since then it has become clear that the oil market is still being manipulated, and still by Saudi Arabia. In the past the Saudis held down their production to prop up prices. Lately they have been boosting their production to force prices down. It’s not that the Saudis are trying to do the world a favor. What they’re trying to do instead is force other oil producers, both in an out of the Organization of Petroleum Exporting Countries, to curb their output so that the world oil glut will disappear. Only when that happens can prices start to return to their old high levels.
It’s costing the Saudis nothing to flood the market. In fact, they make more money selling4 million barrels of oil a day at, say, $12 than they were able to earn selling 2 million barrels at $20. Nor do the Saudis have to worry for quite a while about running out of their major income source, unlike a lot of exporters both in and out of OPEC. The Saudis own more oil than anyone else. Their proven petroleum reserves are fully 10 times those of the United States.
So far the Saudis have failed to whip other oil exporters into line on production cuts. They undoubtedly intend to keep trying, and that has the United States worried. Vice President George Bush, just before he left on a trip to Saudi Arabia, let it be known that he planned to talk to his hosts about how American domestic and security interests require a stable oil market. Bush’s public announcement was imprudent, to say the least, since it indicated that he would be going to Saudi Arabia either as a supplicant or as an arm-twister. It implied further that the Reagan Administration’s fidelity to a free market in oil might be somewhat shaky. The White House quickly asserted that this wasn’t so, but meanwhile Bush’s remark had an effect. Oil-price futures, which had been steadily falling, rallied.
Whatever the Saudis decide to do, the United States still faces the problem of paying later--and perhaps quite dearly--for the benefits of cheaper oil that it is enjoying now. If prices stay low, a significant percentage of domestic oil production stands to be shut down and the chance to replace it through new exploration will at best be postponed. Meanwhile, unless demand is controlled, oil imports will increase, which is good neither for the trade deficit nor for national security. If oil prices go back up to anywhere near their previous levels, conversely, the domestic petroleum industry and its bankers will be happy, but everyone else will be stuck with higher product prices and interest rates.
There isn’t any good or easy way to assure that domestic oil production won’t continue to decline. But at least there’s a way to control the kind of unhealthy increase in demand for foreign oil that threatens long-term interests of the United States. A hefty federal tax on gasoline would cut consumption, and in the process cut the federal deficit, without an adverse effect on continuing economic growth and without a major effect on inflation or interest rates. A popular idea? Hardly. But, set against the threatening prospect of a revived overdependence on foreign oil, it’s an idea whose necessity has become apparent.
