Oil-Price Collapse: What Can the U.S. Do?

The extraordinary fall in oil prices has now been deep enough to bring a decided change in the words out of Washington. But has U.S. government policy on oil prices actually shifted away from wholeheartedly applauding the price collapse?

Certainly the focus of national discussion has shifted. Until two weeks or so ago the focus was on the positive economic benefits of falling oil prices. And the benefits are many--countering inflation, lower interest rates, a major stimulus to economic growth. Until late last week the anticipated effects were driving a no-less-extraordinary boom in the bond market and on Wall Street.

Many of these economic benefits are still there at $10 a barrel--for instance, a $30-billion reduction in the U.S. trade deficit and a $115-billion to $125-billion saving for oil-importing countries.

But with prices collapsing below $15 a barrel, the negatives have begun to loom larger. For instance, new oil and gas exploration would be frozen, although the United States needs to find about 4 billion barrels of oil a year to make up for current production. The result could be a substantial increase in oil imports by the end of the decade, if not before then, renewing energy security and vulnerability concerns.

What seems to be currently much on Washington’s mind is the effect on the banking system. One study has identified more than $60 billion worth of domestic energy loans, most made by major banks both inside and outside the oil patch. At $10 a barrel for any length of time, a lot of those loans--and potentially some of those banks--are not very viable.

The collapse in petroleum prices also means a deep recession in the energy industries and in energy-producing regions. Of course, many people living in the Middle West, the Northeast and the West will shrug, remembering the bumper stickers that said “Let a Yankee Freeze” and the lack of sympathy in energy-producing states for the sudden increases in energy costs. But Texas discovered during the last few years that when Michigan goes into an economic depression, Texas experiences it through the fall in energy demand. In turn, the rest of the country would probably end up feeling the ripple effects of the depression in the oil patch.

A number of surprising voices have been added to those now expressing concern that the collapse has gone too far, that it is too much of a good thing. Japan, one of the great beneficiaries of the collapse, is expressing concern as to whether this could set up a new crisis in the future. It is also worried about the economic viability of its alternative-energy projects such as liquefied natural gas and nuclear power, which have made a major contribution to creating the oil glut.

Most surprising of all, perhaps, was a statement by Prime Minister Shimon Peres of Israel that the collapse had gone too far because it was endangering the economic health of Israel’s neighboring Arab states. This is all the more ironic when one recalls that it was the Arab-Israeli war in October, 1973, that ignited the first oil-price increase.

And now some people in the Reagan Administration are worried that the price collapse threatens “our national-security interest,” as Vice President George Bush commented in Saudi Arabia only this week.

But what can the United States do? After all, the recent history of intervention by the U.S. government in energy markets has been an unhappy one.

The government has five options.

It can enter discussions, or at least jaw-bone, with Saudi Arabia and other OPEC countries or with key non-OPEC countries like Norway and Great Britain. It can play fireman--for instance, merging troubled banks into other banks. It can put on a tariff, otherwise known as the oil-import fee, which has continuing support in Congress. It can change the federal tax code to encourage new investment and exploration.

Or it can decide to do nothing and let the market itself sort things out. The events of the last week will suggest to some, however, that Washington is less keen to choose that last option when oil is $10 a barrel than when the price is $15.