Don’t Forget Oil Woes of ‘70s

Asia’s economic woes have slashed its energy needs and helped push down world oil prices to an inflation-adjusted level not seen for decades. The response from oil producers, led by OPEC, the Organization of Petroleum Exporting Countries, has been to try to reduce output. Last June, the producers agreed to a cut of 3.2 million barrels a day, which has been only partly met. Last week, they agreed to apportion an additional cut of 2 million barrels a day among major oil exporters. While oil markets rallied modestly on that news, few expect the announced reductions in output to be fully implemented or to last long.

Cheating on quotas has long been the norm among oil producers, and if prices rise, the temptation to boost output--thus restoring the oversupply--will be all the greater. Iran, Indonesia and Russia, whatever they might promise, pay little attention to output-limiting agreements. Mexico, a big supplier to the United States, says that it will reduce exports but not production. A quarter-century ago the OPEC oil cartel held the world in thrall, steadily escalating prices and bringing on a global recession. Today only about 40% of global oil production comes from OPEC countries. Meanwhile, new technology has allowed greater recovery from seemingly played-out oil fields.

What’s bad news for oil exporters is good news for consumers. Cheap oil has contributed significantly to holding inflation in check. But cheap oil is a mixed blessing. It has once again encouraged heedless consumption, especially with the return of gas-guzzling vehicles to American roads. The United States now imports about half of the oil it consumes, and while it is much less dependent than it once was on oil from the volatile Persian Gulf, it nonetheless invites political and economic risks by such heavy reliance on foreign sources. That was the grim lesson of the 1970s, and it shouldn’t be forgotten.