Falling prices keep Cassandras at bay

March 23, 1998|By George F. Will

WASHINGTON -- Twenty-five years ago this October the first "oil shock" supposedly ushered in an era of "limits" and "diminished expectations," small cars and Jimmy Carter's cardigan sweater. Today gasoline is cheaper -- less than 80 cents a gallon in some parts of America -- than the designer water people sip from plastic bottles while walking to their sport-utility vehicles that are so unfairly safe when they collide with the small cars Americans are encouraged to drive in order to save gasoline. (Worrying about plastic bottles and SUVs keeps environmentalists in moral trim.)

A gallon of gas costs, in inflation-adjusted terms, less than half what it cost 40 years ago. Yet Irwin Stelzer, resident polymath at the American Enterprise Institute, reports that the daily rate for renting drilling rigs rose 42 percent last year. Oil companies are eager to find more of the commodity they are selling for less because the cost of producing oil has fallen even faster than the price of oil.

Technological boon

One reason is new software that removes much of the guesswork in exploration. And Mr. Stelzer notes that, whereas 50 years ago it was considered a marvel to drill in 20 feet of water, drilling soon will be done in 10,000. Mr. Stelzer recalls that in 1972, when proven world reserves were 670 billion barrels, the Club of Rome report predicted exhaustion of the world's oil supplies by 1990. Since then 550 billion barrels have been used, but proven reserves are more than 1 trillion.

Asia's economic boom increased oil consumption there sixfold in 25 years. Today's Asian bust has an aspect helpful to the U.S. economy. Asian demand for U.S. goods and services has contracted, but so has Asian demand for oil, which contributes to declining oil prices. That decline increases the disposable income of American consumers.

The price of oil has dropped more than 40 percent since October, and last week drifted below $13 a barrel. Mr. Stelzer believes that important oil-exporting nations can make money selling at $5 a barrel, and will soon be doing so. This could have a stimulative effect -- an America equivalent to a tax cut approaching $100 billion annually.

Until oil prices plummeted, it had been an axiom of journalism that all news is economic news and all economic news is bad. Rising unemployment? Here comes a drain on the budget, social waste, declining consumer confidence. Declining unemployment? Expect inflationary overheating of labor markets. Rising interest rates? A recipe for sluggishness. Declining interest rates? Look for general overheating.

The task of finding the gloomy dimension of declining oil prices is testing the ingenuity of the Cassandra class. However, Colin J. Campbell, writing in The National Interest quarterly argues that:

Since 1850, when the world's population was 1 billion, population has increased sixfold and oil extraction has increased in direct proportion. So "the world is using up its geological endowment at a prodigious rate." Although discovery has become cheaper, discovery rates are falling sharply, and by 2003 half the planet's supply of conventional oil will have been consumed."

Mr. Campbell says the world is on the eve of a "historic discontinuity," not because it is running out of oil, but because it is running out of the abundant cheap oil. Writing with Jean H. Laherrere in Scientific American, Mr. Campbell stresses the imprecision -- some of it reflecting the limits of science, some of it politically motivated -- of estimates of proven and undiscovered reserves.

OPEC members have an incentive to inflate estimates of their reserves: The higher their reserves, the more they are allowed to export. Mr. Campbell suspects that this is why in the late 1980s six of the 11 OPEC members increased their reserve figures by amounts ranging from 42 percent to 197 percent.

However, even if Mr. Campbell's cautionary strictures are all valid, they mean only that this golden moment cannot last forever, not that it is not golden beyond the dreams of just two decades ago. Furthermore, this moment is not simply a gift extracted from a bountiful planet. Rather, it has been produced by scientific creativity that is largely the fruit of freedom in industrialized countries.

Freedom is a political, not a natural resource, and America has the world's largest supply of it.

George F. Will is a syndicated columnist.

Pub Date: 3/23/98

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