Repeat of ‘70s Feared : Plentiful Oil May Prove to Be Mirage

For four years, Dan Beck of Pasadena hauled his pool-cleaning gear 50 miles a day from swimming pool to swimming pool in the back of a little Toyota pickup truck. A few months ago, he traded in the Toyota on a full-size Ford.

Beck, the proprietor of Dan’s Pool Service, is also an inveterate watcher of oil prices. He bought the bigger but less fuel-efficient truck because he figures, as many economists do, that the price of gasoline is going to remain low for several years.

“I’m counting on OPEC staying screwed up,” he joked.

Beck is a closer student of the world oil scene than most consumers, but he has plenty of company in his response to today’s cheap gasoline. Americans are buying bigger cars and trucks and driving them farther and faster.

Conservation Jeopardized

It is just part of the mounting evidence that today’s plentiful supply of oil at bargain prices is fast erasing the memory of the 1970s, undoing much of the dramatic progress on the energy front that was triggered by the world’s oil shocks of 1973 and 1979.

In fact, many believe the world changed for the worse three years ago last month, when the price of oil began a historic slide that took it to $9 a barrel from $30 in six months.

The collapse unleashed forces that are driving the nation’s reliance on imported oil up sharply once again. In energy, the policy of the ‘70s is being turned on its head. William W. Hogan of the Energy and Environmental Policy Center at Harvard warned: “The danger in the 1980s is in creating a mirror image of the mistakes of the previous decade.”

In a study this year on the effects of the oil price collapse, the Harvard center summed up the threat:

“Ironically, low prices today sow the seeds for high prices tomorrow by encouraging use, by improving prospects for economic growth, by shifting demand back to the OPEC countries, and by lulling consumers, industries, and governments into energy security complacency.”

It is a latter-day version of what became conventional wisdom after the nation’s energy crises: that unless the nation acts to find more oil and use less of it, the United States will become hostage once again to the seemingly inexhaustible oil pits and volatile politics of the Middle East.

Of course, energy forecasting is as whimsical as ever. In 1891, the U.S. Geological Survey said there was little chance of finding oil in Texas. In 1920, the survey said U.S. oil production had peaked. On pa per, the nation has had about nine years’ worth of oil reserves for at least 35 years.

Indeed, that dismal record is part of the problem. Warnings of energy apocalypse are liable to be laughed off today, both because of the false warnings of the past and the bountiful supplies of the present.

But there is a big difference between the amount of oil brought to the earth’s surface each day, which is decided by human beings driven by economics, science and politics, and how much oil is down there to begin with, a geological fact of life.

Despite a perception that the energy efficiency built into the economy since 1979 has bought us protection from another oil crisis, the price collapse of 1986-88 is taking a toll that is difficult to ignore.

Low prices and a free-market ideology have led the government to relax auto fuel economy standards, raise speed limits, gut non-nuclear energy research and insist that alternative fuels live or die in the marketplace--where many are doomed by today’s cheap oil.

Use Exceeding Forecasts

The nation’s use of oil is far exceeding the forecasts made just last year by a Reagan Administration task force on energy security. Oil-demand growth in Japan and the Pacific Rim in 1988 is several multiples higher than expected.

U.S. demand for gasoline has been especially strong, and suddenly an excess in refinery capacity has given way to warnings that we won’t have enough. Cheap oil has also undercut natural gas in price, making it the boiler fuel of choice once again for many electric utilities.

The amount of energy used per dollar of gross national product has been the measure of U.S. gains in energy efficiency for the last 15 years, a figure that has dropped annually amid much ballyhoo. But the rate of decline has slowed abruptly. In the first half of this year, energy consumption actually rose faster than the economy.

And three years after the oil price collapse cut a deep, wide swath through the economy of the Oil Patch, the nation’s oil production continues to tumble. While daily U.S. demand for oil has grown by more than 1 million barrels, the nation is producing about 1 million fewer. The gap is being filled by imported crude--most of it from the Middle East--wiping out much of the progress made by the nation since the oil shocks.

Whether we remember them or not, the gas lines and shortages of 1973 and 1979 were an economic watershed.

The oil jolts of 1973, when Arab producers embargoed the United States and a few other nations over Israel’s presence on the West Bank--and 1979, when a revolution briefly cut off Iran’s oil shipments to the West--drove prices from $2 to a staggering $34 per barrel. The reductions in actual supply were minor, making it a particularly dramatic illustration of our reliance on other people’s crude.

Recession Triggered

This oil-driven havoc helped undo the presidency of Jimmy Carter and tore up the landscape with double-digit inflation and soaring interest rates, triggering a deep world recession and permanently changing the face of the industrialized economies at enormous cost. It also exposed a national vein of near-hysteria that caused a rapid response.

Bursting with petrodollars, the oil and gas industry put thousands of drilling rigs and seismic crews to work and discovered new reserves to compete with the Middle East. Government unleashed energy development and conservation programs. Consumers stifled their oil appetite with smaller cars, turned-down thermostats, and electricity was produced from turnips.

Energy use, inhibited more importantly by the deep recession caused by the oil shocks, plummeted while supplies surged. Market prices began to slip in 1981. Suddenly, the oilmen from the Middle East were pounding the pavement for customers. Within two years, OPEC was officially cutting prices for the first time in its history.

Inflation oozed out of the economy and gave way to prolonged Reagan-era prosperity in the United States. Economists say that the good times were themselves due, in part, to the abrupt crisis-induced reversal in the energy picture.

“It was not good fortune that brought the present surplus and removed the pressure on consumers,” commented the Harvard report. “Rather, it was the earlier price shocks that created the current glut.”

For Western consumers, it was icing on the cake when crude oil prices abruptly collapsed in the waning days of 1985. After easing from $34 to $30 a barrel in four years, the price of crude nose dived to $9 in six months. In dollars and cents, it was the best energy news of modern times.

Adjusted for inflation, the price of gasoline today is cheaper than at almost any time since at least 1935. Not even the long, bloody Persian Gulf war and its hundreds of attacks on oil tankers could skew the relentless forces of supply and demand.

The apparent good news continues to pile up. Though crude oil prices recovered somewhat, to as high as $18 per barrel, the overproduction of oil that caused the collapse has again increased in the last several months and driven prices down steeply to $12-$14.

The Organization of Petroleum Exporting Countries threatens to self-destruct, its members struggling to resist a masochistic bid to hang on to their share of the shrunken market for OPEC oil by opening the spigot ever wider. Even November’s agreement to trim that output faces huge stumbling blocks.

Non-OPEC Output Rises

And in a world where the 13 OPEC nations are blessed with more than three-quarters of all proven oil reserves, the oil output from non-OPEC regions--notably the North Sea, Angola, Syria, Brazil, Canada and such new oil provinces as North Yemen--has confounded experts by expanding rather than shrinking since the price collapse.

At the moment, said John Lichtblau of the industry-funded Petroleum Industry Research Foundation, there’s a greater chance of an OPEC collapse and dismantling of the world price system than of shortages and a price run-up.

And there is no apparent need to fret about the survival of Big Oil, which managed to double its oil and gas profits last year by slashing exploration and pushing ever-higher sales of refined oil to consumers.

Meanwhile, the nation’s Strategic Petroleum Reserve, the underground oil storage system that did not even exist in the 1970s, just passed the 550-million-barrel mark. That is enough to last nearly 100 days in the hard-to-imagine case of a complete cutoff of imported oil.

Recalling the dearth of spare oil-producing capacity, tight inventories and other conditions that prevailed before the two shocks of the 1970s, Lichtblau said: “None of these factors apply even remotely in today’s environment.”

It is no time for Cassandras to attract much of an audience.

Cries of Alarm

But that has not prevented cries of alarm from unlikely bedfellows. Although they cling to opposite sides of the bed, oilmen and environmentalists alike warn of future shortages of oil and rising national vulnerability on the energy front.

“The correction in oil prices is a major event,” said Christopher Flavin, energy expert at the Worldwatch Institute, the environmentally oriented research group. “The oil glut brings many benefits to the world economy, but blessings are mixed. It is almost certain that the momentum achieved in the early 1980s will dissipate and may eventually contribute to a new energy crisis.”

Even allowing for axe-grinding, the two camps paint a convincing picture of the dangers of declining U.S. oil production and rising demand. In an arena where good news has such troublesome cross-currents--a healthy economy fostered by cheap energy merely whets the energy appetite--the future seems obvious.

Sometime before the year 2000, these forces will converge to form a trap for the oil-importing nations, many experts say, because they will inevitably drive down non-OPEC oil production even as the world grows thirstier for oil.

OPEC Could Again Control

The Middle East oil producers, led by Saudi Arabia, have so much oil and idle production capacity that they alone could meet the rising demand. OPEC’s output has already risen to 65% from less than 60% of its estimated capacity since 1985. When their fields reach 80% of capacity, recent history suggests, OPEC will once again decide the price and availability of oil.

The argument seems to be when, not whether, this will happen.

Since 1985, lower prices have put about 26,000 U.S. oil wells out of business, driving down the nation’s production by 10% or nearly 1 million barrels a day. The oil gap has been met not by solar or coal or other forms of energy, but with imported crude.

Some highlights of the import picture:

--Imported oil now accounts for about 41% of this country’s consumption after bottoming out at 32% just three years ago. The all-time high was 48% in 1977.

--Though stable and friendly neighbors now supply much more of our imported oil than they did in the 1970s, most of the import surge of nearly 2 million barrels per day since 1985 has come from Persian Gulf nations.

--For the first time since 1976-81, Saudi Arabia is atop the list of U.S. suppliers, tied with Canada for first place.

--The rising need for foreign oil sent about $42 billion out of the country last year, accounting for more than one-fourth of the nation’s trade deficit.

With imported oil expected to account for more than half of our consumption in just a few years, the symbolism of that approaching milestone has already caused patriotic drum rolls. For example, last year Texas Sen. Lloyd Bentsen proposed legislation to keep imports below 50% of the nation’s needs.

Sharper Production Decline

There is no mystery about the oil-import surge. Cheap oil is unrewarding to look for and, in the case of thousands of small U.S. wells, unprofitable to produce. Thus the decline in U.S. oil production--considered inevitable anyway because there is not much oil left here--has accelerated sharply.

But the story has not entirely followed script around the world, prompting some policy-makers and analysts to grow sanguine about the outlook.

Earlier this year, some observers--noting a rise of about 1 million barrels a day in non-OPEC oil production since 1985, enough to satisfy nearly half the jump in the world’s demand for oil--pushed their crunch timetable out to the late 1990s instead of the early 1990s. Nor has production from America’s tired old oil fields fallen quite as rapidly as some forecast. A veteran Department of Energy analyst said: “The predictions were far more drastic than has occurred.”

Some, including Daniel Yergin, president of the consulting firm Cambridge Energy Research Associates, believe the growth in overseas oil output could continue, partly because of the strong support of oil exploration by governments outside the United States through tax and other policies.

“Indeed, the only major non-OPEC country not to . . . make it more attractive to producers is the United States,” Yergin said.

One example of such good news came in October, when the British government gave the go-ahead to develop a sizable oil field in the North Sea said to hold 300 million barrels.

Quick Payouts Favored

But to others, that news underscored the optimists’ myopia because the field in question was discovered in 1982, the peak spending year for oil exploration. Energy experts note that much of today’s new non-OPEC oil stems from investments in the high-price climate of the early 1980s or the quick-payout, low-risk projects favored by a retrenching industry.

They cite as examples the development of fields in the North Sea and the Gulf of Mexico that might not have been developed at all if nearby pipelines had not already been in place to serve other fields.

“The short-term effect is to make the glut even worse,” said Richard Gordon, a former Phillips Petroleum economist now at Petroleum Finance Co., an oil trading and advisory firm in Washington. “What they’re doing is depleting the inventories of readily developed reserves. It’s like a company filling orders out of a backlog. The long and the short of it is, this gives a false impression of an ongoing glut or surplus.”

Exploration Funds Cut

The multinational oil companies are spending far less money on oil exploration at today’s low prices: $8 billion worldwide last year versus $15 billion in 1985, according to Salomon Bros. Inc. of New York. Most of the reduction came in the United States. And in 1986 and 1987, the 30 big companies tracked by Salomon racked up their poorest performances of the decade in replacing their production through new oil discoveries.

But U.S. oil reserves are not the only issue, and the Exxons and Shells are not the only players. Economist Gordon notes that such national oil companies as Petrobras in Brazil, Petroven in Venezuela and Pemex in Mexico played major roles in oil development early this decade. The price collapse--impetus for the record $3.5-billion U.S. bailout of Mexico announced in October--has devastated such oil-based national economies.

“You should legitimately ask what role they are going to play now. These (government monopolies) are in a very severe budget crunch,” said Gordon.

Although the long-expected decline in production from Alaska’s huge North Slope fields has been repeatedly delayed by technology that effectively increased the size of the state’s oil reserves, Atlantic Richfield announced in September that output from Prudhoe Bay--the nation’s biggest field--has finally begun to fall.

Author of 1987 Forecast

Scott T. Jones, an energy economist with AUS Consultants in Philadelphia and author of a widely circulated 1987 study that forecast another oil shock, said: “There will no longer be any continued improvement in non-OPEC supply.”

As supplies of affordable and reliable oil grow more problematic, the other half of the puzzle--how much oil the world will need--is the greatest unknown because it depends so much on price.

But the record to date shows that free-world demand for oil--fueled both by unexpectedly strong economic growth and by a shift in consumer behavior--is growing at more than four times the 0.7% annual rate prophesied by the U.S. government as recently as last year.

The United States has now reached a consumption level of 17.4 million barrels of oil per day, nearly 11% higher than 1985. The nation was not supposed to surpass the 17-million level until the 1990-1995 period, the Reagan Administration’s big energy-security report of last year said.

Dale M. Jorgenson, a Harvard economist considered an authority on energy demand, said forecasters underestimated the stimulation to the economy caused by the low energy prices themselves.

“Demand has been far in excess of what was expected,” he said. “And if current price levels persist, we will see even stronger levels of demand.”

A huge October surge in U.S. demand for residual fuel oil, for example, is explained by DOE analysts as the result of New England and California utilities switching from natural gas to cheaper oil to power their electricity-generating boilers.

The Pacific region has seen a veritable demand explosion this year, according to new figures from the East-West Center in Honolulu, a U.S.-funded think tank on Asia-Pacific issues. Fereidun Fesharaki, head of the center’s energy research, said: “We haven’t seen this kind of growth in oil demand since the late 1960s and early 1970s.”

Thirst For Oil

Japan, whose total reliance on imported oil gives it a big role in the price and availability of oil worldwide, is suddenly among the thirstiest despite its historic leadership in energy efficiency. Discounting some unusual factors, Fesharaki said Japan’s underlying oil demand rose 2% in the first half of this year. A year ago, when prices were similar to today, the center forecast growth of 0.5%.

“It’s quite incredible,” he said.

In this country, despite all the energy savings now built into the economy--in cars, buildings and appliances subject to efficiency standards, for example--it appears that the nation’s self-congratulatory posture on its efficiency gains is getting harder to justify.

The best single gauge of this--the amount of energy consumed for every dollar of gross national product--illustrates the dramatic progress of the last decade. Despite a 35% increase in the size of the U.S. economy, the nation actually burned fewer British thermal units of energy in 1985 than it did in 1973.

However, Harvard’s Jorgenson estimates that less than half of this improvement was due to conservation heroics or technological wizardry. In addition to the deep recession, part was due to the nation’s economic restructuring away from manufacturing toward service industries, which use less energy.

Although that gain is real, it was serendipitous. As such, it diminishes the credit that the United States can claim for instigating energy improvements.

Stacked up against Japan and West Germany, the nation’s energy gains are puny. The United States still uses twice as much energy per dollar of GNP as those industrial giants, and the gap with Japan has grown since 1973, according to the International Energy Agency.

Lately, after 10 straight years of steep annual reductions, U.S. progress has ground to a halt. January through June, the nation actually used more BTUs per GNP dollar than it did in the year-earlier period, according to the U.S. Energy Information Administration.

Part of the problem is cars and trucks.

Gains Since 1978

The dramatic fuel-efficiency gains in the U.S. car fleet have been a big bragging point in the nation’s energy conservation performance. As a result of mandatory U.S. mileage standards for cars that took effect in 1978 and of motorists’ eagerness--until lately--to buy fuel-stingy vehicles, today’s total fleet goes about 50% farther on a gallon of gas than it did in 1976.

“I don’t think we give ourselves enough credit,” said John S. Herrington, the outgoing U.S. energy secretary.

But cars and trucks remain at the heart of the oil problem because, along with aircraft, they still rely almost exclusively on oil for fuel. With other big energy users having largely weaned themselves from involuntary oil use, fully 63% of the oil consumed by the United States now goes for transportation. Cars and trucks alone used up the equivalent of the entire output of the nation’s oil fields last year.

More striking is that, alone in the economy, the oil-dependent transportation sector is using more rather than less energy today. The greater efficiency of today’s cars is more than offset by the greater number of cars, the greater distances and speeds they are going and the rising role played by trucks, which have lagged on fuel economy and swallow two of every five gallons of gas.

Contrary to the conventional wisdom, the combined gallonage used by cars and trucks has climbed annually since 1982. In 1986 it eclipsed the old record set in 1978, then rose sharply last year to an all-time high of 128 billion gallons, according to the Federal Highway Administration.

Far from depicting new heights in oil savings, FHA statistics show an extra 417,000 barrels of oil per day--a greater output than any oil field in the nation except Prudhoe Bay--has been required to feed the extra motor-vehicle fuel demand unleashed since the 1986 oil collapse.

Meanwhile, the public’s switch to larger vehicles has worsened the fuel-economy mix of cars sold by Detroit, preventing General Motors and Ford from achieving the technologically ho-hum goals set out by the federal fuel-economy standards that were to peak at 27.5 miles per gallon in 1985. Not even that level has yet been reached by GM and Ford, which persuaded the Department of Transportation to relax the standards in each of the last four years.

Now, the Reagan Administration--and the regulatory-reform panel headed by President-elect George Bush--have proposed wiping the standards off the books so that market forces can decide purchasing habits.

“The two biggest disasters in energy policy in the 1980s have been rolling back the fuel economy standards and raising the speed limits,” said Charles K. Ebinger, a prominent energy economist. “It sent the entirely wrong signal.”