Good Luck, OPEC, but Not <i> Too</i> Good : Further Oil-Price Fall Could Put Us All in Deep Trouble
For months the members of the Organization of Petroleum Exporting Countries, or OPEC, have been trying without success to agree on a new scheme to shore up world oil prices. The most recent failure came at a meeting last week in Geneva.
Considering the disruptive effect that the would-be oil-export cartel has had on the world economy in the last dozen years, it’s easy to say that the recent collapse of world oil prices couldn’t happen to a better bunch of guys.
But, un-American as it may seem to say so, we really should be wishing OPEC a bit of luck--though not too much--in its efforts to reduce the huge oil surplus that brought on the plunge in prices.
All of us like paying 80 cents to 90 cents for a gallon of gasoline instead of the much higher prices that prevailed just a few months ago. However, Americans already are paying a heavy price for those bargains at the gas pump. And if oil prices fall further, as they may in the absence of a new OPEC agreement, we will all be in deep trouble.
In the good old days before the Arab oil embargo of 1973-74, the world price for a 42-gallon barrel of oil was about $3. By early 1974, thanks to the embargo, prices had quadrupled to $12. The cutoff of oil from Iran in early 1979 caused world oil prices to go soaring again until, by early 1981, they had reached $35 a barrel.
As time passed, however, OPEC’s position was undermined by increased oil production in non-OPEC areas, especially Mexico and the North Sea. Downward pressures also were exerted by conservation efforts and increased natural-gas production in the United States. As recently as last December, however, the world oil price was still close to $28.
But then the bottom fell out. Oil is now selling for $10 to $13 a barrel--hence the good news at the gas pump. Some, though not all, economists believe that the price will fall to $6 or less unless OPEC can agree on production cutbacks to absorb the current glut in world oil supplies.
Most economic analysts at first welcomed the plunge in oil prices as a godsend for the U.S. economy. They believed that, together with a declining dollar and lower interest rates, cheaper energy prices would generate faster economic growth and a turnaround in the dismal U.S. trade balance. But it hasn’t happened.
The economy is barely growing. Talk of recession is increasingly in the air, and a few Cassandras are whispering depression.
What went wrong?
For one thing, it turns out that U.S. manufacturing, having taken a pounding from imports over the past few years, will not easily be brought back to health. At the same time, mining and agriculture are in crisis because of worldwide surpluses. Now, as a result of the collapse in oil prices, the same thing has happened to the domestic petroleum industry.
Of an estimated 10,000 independent producers, only about 7,000 are still operating. Stripper wells, which produce a significant proportion of the nation’s domestic oil supply, are being closed down because production costs exceed the new, low, oil prices. Drilling rigs are being idled as exploration dries up.
Unemployment is soaring as oil companies, big and small, retrench or go out of business. As many as 142,000 oil workers will have lost their jobs by the end of this year if prices remain below $15 a barrel. Another 100,000 employees in supplier businesses ranging from advertising agencies to steel-pipe makers face the same fate.
Texas and other oil-patch states are suffering a veritable depression, and will be a long time recovering if oil prices stay depressed.
People in other parts of the country may not feel all that sorry for Texans, who did not display much human concern for the unfortunates in other regions as long as their own state was prosperous. But of course the effect is being felt far beyond the oil patch.
When oil drillers go out of business, they no longer buy trucks or pumps from plants in the upper Midwest. Unemployed workers don’t buy furniture from North Carolina or cars from Detroit, nor do they take vacations in Colorado or California. (Declining demand for oil-country pipes was one factor in LTV Corp.’s declaration of bankruptcy.)
Much more dangerous is the potential effect on the nation’s financial structure, already overburdened as a result of the huge federal budget deficit and bad loans to farmers, Third World countries and real-estate developers.
Bank failures already are up, and, according to Business Week, hundreds of banks--including some large ones in Texas--are in the danger zone. If too many banks go under as a result of uncollectable petroleum loans, credit will be less available to businesses having nothing to do with oil. That would mean fewer investments, fewer new jobs and even greater problems for American business in holding its own against foreign competition.
Even for the consumer, plunging oil prices are bad medicine in the long run.
Let’s say that oil stabilizes below $10 a barrel, which would make the present shrinkage of the U.S. oil industry permanent and dampen the search for new oil worldwide. America and other consuming nations would in short order become heavily dependent on OPEC oil again.
What happens then if the supply of oil from the Persian Gulf is again disrupted by war, sabotage or anti-Western political upheavals? With our own oil industry partly dismantled, the United States might have no alternative to military action.
Such dramatic scenarios aside, once cut-rate OPEC oil has effectively driven higher-cost producers in the United States and elsewhere out of business, does anyone really believe those nice fellows from Saudi Arabia, Nigeria and Iran wouldn’t take advantage by boosting prices back to $30 or $40 or $50 a barrel?
Everything considered, the U.S. interest would be served far better by a modest boost in oil prices--perhaps to the $15 or $20 range--while our own petroleum industry is still in one piece.
