OPEC Is Cause for Worry But Not Panic
Back to the Future--the news is energy once again. A new 5-cent-a-gallon California gasoline tax goes into effect today, and the Organization of Petroleum Exporting Countries will add 7 cents a gallon--or perhaps 17 cents--onto that in the next year.
A new cycle of rising energy prices has begun. Last week’s $3-a-barrel boost by the Organization of Petroleum Exporting Countries will be followed by another hike next year.
And while there’s no need for panic--gasoline prices won’t shoot up as dramatically as they did in the 1970s--the consequences will be widespread, affecting everything from inflation to U.S. relations with the Soviet Union.
So there is a need for a change of thinking, for Americans once again to pay attention to Middle East politics and the price of oil.
We haven’t had to worry about energy for some time. The 1980s was a decade of lower prices, thanks to increased oil production in Mexico, the North Sea, Alaska and elsewhere, along with a lot of conservation; U.S. energy usage is still declining 1.2% a year. As a result, notes economist Anthony Finizza of ARCO, today’s oil price, adjusted for inflation, is not much more than it was in the early 1970s.
That’s about to change. “The OPEC price of $21 a barrel will take hold by the end of this year,” predicts economist Theodore Eck of Amoco, “and by next June the OPEC price could reach $25 a barrel--the level that Iraq’s ruler Saddam Hussein is seeking.”
How could OPEC make such a comeback? Because non-OPEC production has been falling. U.S. oil production is down 17% since 1986--Alaskan output has peaked--and the country now imports 50% of the oil it uses. Production is down in Canada and in Mexico too. Output has peaked in the North Sea and is declining in the Soviet Union--which needs to export oil to pay for imports.
To be sure, there is no shortage of oil in the world. Saudi Arabia, Iraq, Kuwait and other Middle Eastern countries have vast reserves. And, until recently, they have produced abundantly, bringing low prices to us all.
But the price of oil responds to politics as well as economics, says Joseph Tovey of Tovey & Co., an investment bank specializing in energy. And Middle Eastern politics are like the proverbial shifting sands. Right now, Iraq--a country of 13 million people with a 1-million-man army--is forcing its neighbors to cut production so that prices can rise.
Iraq’s President Hussein, who once used poison gas on his country’s Kurdish minority, is extorting billions of dollars from Kuwait under threat of invasion--and drawing a cautionary response from U.S. warships maneuvering in the Persian Gulf. Which is ironic, because a few short years ago, Iraq would have lost its war with Iran were it not for aid from Kuwait--and arms from the United States.
The upshot is that today’s events could lead to a future Persian Gulf war. What Hussein is trying to do, explains Thomas L. McNaugher, a senior fellow at the Brookings Institution--and author of “Arms & Oil: U.S. Military Strategy and the Persian Gulf”--is build up Iraq while Iran remains wracked by internal political troubles.
And what such Middle Eastern intrigues promise for you is higher gasoline prices.
OPEC price hikes will add 7 cents a gallon this year and an additional 10 cents a gallon next year--over and above further rises in California’s gas tax and whatever energy taxes the federal government imposes.
Between OPEC and taxes, a full point will be added to inflation, says Joyce Yanchar of DRI-McGraw Hill, the economic consulting firm. Which in turn will increase cost-of-living adjustments for Social Security benefits and labor contracts.
The oil price rise will add to the federal budget deficit and the trade deficit. The whole burden could tip the U.S. economy into recession--although OPEC seems to have wised up. Its new price increases seem moderate enough not to cause recession in Western economies, nor to spur widespread efforts to find substitute energy sources. The United States will end up importing 60% of its oil by the mid-1990s.
But those are not the only consequences. This new cycle in energy prices will also mean new business. The Soviet Union will be able to earn more for its oil and natural gas--which suddenly is in our interest because it enables the Soviets to purchase U.S. grain and other goods.
Also, a higher oil price will help Mexico work on its oil fields to increase production. And, of course, just about anything that helps the Mexican economy helps the United States.
In the Middle East, the extra money will help Saudi Arabia work on projects that have been on hold for most of the 1980s, which means new contracts for U.S. engineering firms. And Iran will be able to repair its oil fields and rebuild its economy--which is also in accord with U.S. interests, a strong Iran providing a counterbalance to the ambitions of Iraq’s Saddam Hussein.
Finally, perhaps the best thing to be said at the outset of a new price cycle is that energy no longer frightens us. We know it’s not about to run out, that conservation can dramatically affect its price and that if prices rise too fast--or some dictator threatens an embargo--we can use alternative energy forms. In short, we learned something in the ‘70s that will stand by us in the ‘90s.
