From Today's NYTimes
Cheap Oil's Tough Bargains
By ROBERT A. MOSBACHER
he press has trumpeted the news that crude oil prices are three times higher than they were a year ago. But it was the $10 or $11 price of February 1999, not the one today, that really deserved the headlines.
When inflation is taken into account, that 1999 price was the lowest in modern history, while oil has gone above today's seemingly high price several times. And for the past 14 years, at $17.50, oil has been one of the real bargains of the modern age.
The low price has been a mixed blessing. In the United States, we have lost over 500,000 jobs in the oil industry while we have grossly increased our dependency on foreign oil; we now import 55 percent of what we use. With little incentive for drillers to find and tap new oil, supplies eventually dropped, and in the past year the Organization of Petroleum Exporting Countries deliberately dropped its production as well. In response to the law of supply and demand, prices have now risen.
A high oil price is not the inflationary threat it once was because with the shift toward the information and services economy, and away from manufacturing, the United States is less dependent on oil. But try to tell a consumer paying to heat his home, a trucker moving goods across the country or a commuter who goes by car that oil and gasoline are not major factors in the economy, and the answer is likely to be, "It feels like I'm being ripped off."
American consumers have been lulled into thinking cheap oil is their entitlement. Syndicated columnist Carl T. Rowan wrote recently: "We are truly a spoiled society! We insist on driving gas guzzlers and using a grossly disproportionate amount of the world's energy, and we believe we should forever be able to do so at bargain rates."
Sooner or later, oil prices are likely to drop. But prices at today's level have their advantages. With the incentive for more production back in place, there will be more drilling in new places, like the deep water off the coasts of many countries of the world, including the United States. Off our Gulf Coast, deep-water drilling, developing and producing are already going on.
Remarkable new technology now allows pipelines to bring oil from miles out to sea, where the water is as much as 8,000 feet deep. The ubiquitous deep waters of the world have great potential for additional oil and gas reserves, but drilling in 5,000 to 10,000 feet of water and then through many thousands of feet of sand, shale and other formations makes for huge costs. In many cases, this kind of oil production can only be justified by prices of at least $25 to $30 a barrel.
A higher price also encourages development of other new technologies already on the horizon, including three-dimensional seismology for mapping and horizontal drilling. And $30 oil also brings attention back to development of synthetic fuel, solar energy, wind power, gasification of coal and other methods of producing energy.
Some members of Congress have been lobbying for taking oil from the Strategic Petroleum Reserve to help bring prices down, and President Clinton recently announced he is not ruling this out. But these reserves are set aside for use in an emergency, and tapping them is only justified if there is a genuine threat of a supply interruption, as there might be in a war or political crisis.
The reserve holds about 570 million barrels, not much when we use about 19.4 million barrels of oil products daily. Even releasing all of it could be only a temporary solution to a price problem. Tapping it would also signal the main oil-producing countries that we were trying to control world energy prices, which is inconsistent with our normal free and fair trade policies.
Even if the control of oil prices were in American hands, which it is not (since we have no means of influencing it other than using our reserves or jawboning OPEC), we would still face a daunting decision. Would we be better off getting prices back under $20 a barrel to prevent any oil-influenced inflation today, or should we take the longer view and let today's price work to bring about more drilling and new interest in other sources of energy?
Simple realities argue for the latter course: In the long term, even if bent by cartels, the law of supply and demand will rule.
And in the long term, we will need the new sources of energy that higher prices can bring.
Robert A. Mosbacher, chairman of the Mosbacher Energy Company and former chairman of the National Petroleum Council, was commerce secretary under President George Bush. |
