Protect Our Oil Interests Now : Price War Is Destroying the Industry and U.S. Reserves

<i> S. Fred Singer is a visiting eminent scholar at George Mason University in Fairfax, Va. His most recent book is "Free Market Energy" (Universe Books, 1984)</i>

We are in the midst of an undeclared war waged by Middle East oil monopolists bent on eliminating competition from other exporters so that they can once again raise the price to new heights.

At the same time, the price war is permanently destroying significant portions of the American oil industry and our reserves, discouraging further investment in exploration--therefore limiting future production--and threatening our banking system. The price war is bound to derail our continuing efforts to make energy use more efficient.

Together, these double blows against conservation in the oil field and among oil users will drastically increase our dependence on imported oil, raise dollar outflow and endanger national security.

What can America do?


Saudi Arabia’s flooding of the oil market comes as no surprise; it has been threatened since at least 1983. But the Saudis are selling oil below their economic optimum price, which is about $22 a barrel. This indicates clearly that they are “dumping” oil in order to squeeze out competition--a tactic that calls for countervailing duties under existing anti-dumping legislation. A countervailing duty in the form of a variable import fee would bring the price from the lower world level to a stable reference level near $22 a barrel. By setting the reference price at this “correct” level for world oil, the variable import fee would not become a tax. Rather, it would go into operation only when excess oil production drove the price below $22. Whatever income the U.S. Treasury gained from the fee could be used to pay a tax dividend to American taxpayers or to buy oil for the strategic petroleum reserve while the price is low.

Conversely, if OPEC pushes the price above $22 a barrel by withholding production, we should sell oil from the strategic petroleum reserve, which was set up by law to protect us in case of a disruption in world oil supplies and a price jump. It now contains around 500 million barrels, the equivalent of more than 100 days of current imports. Our principle should be to buy low and sell high. Other oil-consuming countries would likely follow our example, because it is also in their interest to keep their internal price stable.

With the customs service in place, there is no need to set up a new bureaucracy to administer a variable import fee. As a matter of fact, a small import fee on oil--now 50 cents a barrel--has been in existence since the passage of the Internal Revenue Act of 1932. With all imported oil subject to the variable import fee--without exemptions--there would be no need for “entitlements” or price controls as some have feared. Since it is not a tax, it would not significantly affect the GNP, inflation or the value of the dollar.

Consumers benefit from lower oil prices only after a certain time lag, but they get hit immediately with higher prices at the pump when crude prices rise. Consumers therefore lose if the price moves up and down, and so does the economy as a whole. It is difficult for businesses and households to plan if the oil price can be manipulated by Saudi Arabia and the rest of the OPEC nations. For example, the tripling of the price in 1979-80 caused great economic losses for industries and banks because of overinvestments. These losses are showing up now.

We are also seeing a weakening of the conservation effort that was instrumental in bringing down the price of oil in the first place. But the general public is not aware of how even a temporary dip in oil prices, lasting perhaps no more than a few weeks, can cripple U.S. oil production. The great majority of U.S. wells are “stripper wells” that produce fewer than 10 barrels per day. Together these nearly half-million stripper wells produce almost 15% of all U.S. oil. Well closings increased to 15,000 in 1984, double the number of 1980. The price collapse is certain to hasten the premature abandonment of these marginal wells, which are very sensitive to price. Once plugged, they would not be reopened, even when the price recovered. Their oil would be permanently lost.

Even more productive wells--for example, California wells that use enhanced recovery such as steam flooding--are in danger of being closed. Because of high transportation costs, Alaskan North Slope wells may become uneconomical when the price drops below $12. They will be reopened as the price rebounds, but only with significant economic loss and the loss of recoverable hydrocarbons.

Alaskan production, now nearly 20% of the U.S. output, will go into normal decline after 1987. If investments in new fields are not made in a timely fashion, we will lose substantial U.S. output and become even more dependent on oil imports. Because of increased consumption and reduced domestic production, our import dependence is likely to double by the early 1990s--to about two-thirds of U.S. oil use. With oil production concentrated in the Middle East, the site of the world’s largest oil reserves, we would again be in a squeeze when producers drive up the price.

In view of the clear and present danger to our national security, it is difficult to understand the objections that have been raised against a variable import fee. It would stabilize the price and be temporary; it would self-destruct when the world price recovered to the reference price. It would not hurt our neighbors, Mexico and Canada, because they receive the world price for their oil, whether we impose a fee or not.


Using his existing authority under the Trade Adjustment Act of 1962, President Reagan should invoke a variable import fee. President Gerald Ford actually did establish import fees, and President Jimmy Carter threatened to do so. Now that oil prices and OPEC are collapsing on Reagan’s watch, it would be ironic if he were to miss the opportunity to finish the job.