Wisdom slips and slides in the oil patch How the free world has eluded chaos

The Economy

December 20, 1998|By Jay Hancock

THE DOGGED fall of oil prices is one of the big economic stories of the century, a lesson in grand adjustment wrought at the atomic level, in the danger of divining the future by projecting the present.

Twenty years ago, Salomon Brothers predicted crude oil prices could hit $75 a barrel by 1990. MIT Professor Carroll Wilson called evaporating oil supplies "a ticking time bomb" that would wreck commerce and roil politics.

"We've tried to pin down the ways in which it will explode," Wilson told reporters, "if the free world doesn't act soon enough."

Wilson's 1977 report, backed by 15 nations analyzing energy use, predicted power shortages by 2000 even if coal production doubled, even if increases in oil demand fell by half, even if nuclear-power use grew 25-fold.

The free world acted, but not the way many people expected.

Few of us ride monorails to work or wear cardigans in the kitchen. Solar power is still tomorrow's technology. Nuclear power is still yesterday's.

But per-capita oil use has indeed plunged, thanks to four-cylinder engines, double-paned windows and coal-fired electricity plants.

Since 1980, the world's economy has swollen by half; its population by a third. Oil use, however, crept up by only a tenth.

This year's Asian recession helped drain any remaining pressure on oil use, as prices sank below $10 a barrel before last week's Iraq attack. Crude prices have fallen by half in a year and by three-fourths since Iraq's Kuwait invasion in 1990. They never got close to $75.

But moderating oil consumption is only half the story. Maybe less than half.

The less-told tale of petroleum involves the "upstream" side -- the exploration, the drills, the wells and the refineries. If anything, this scenario would have sounded even more dreamy and implausible two decades ago than wishful thinking about lower consumption.

According to the American Petroleum Institute, the average cost of finding and rendering a barrel of oil has plunged by 60 percent in 10 years.

Proven reserves of oil are greater than ever, API President Red Cavaney said in a speech this month, and industry has never been better at finding them and sucking them to the surface.

Thanks partly to geological CAT scans and MRI scans, drillers hit black goo almost one in four tries vs. one in 10 a few years ago, Cavaney said. In the 1970s, offshore rigs were limited to a few hundred feet of water; now in some cases they're floating more than a mile above the seabed. Land-based wells sometimes plumb crude pools more than five miles down.

"Predictions that we are running out of oil," Cavaney said, "seem truly quaint."

Imploding from all this efficiency, Big Oil is anxious for Wall Street's respect. That's another outcome unsuspected 20 years ago, when conspiracy theories ruled. API, Big Oil's trade group, likes to quote economist Lester Thurow, who said recently that the business "has been infused by so many new technologies" that it should be considered "one of the new man-made, brain-power industries like biotechnology."

Yeah, that's it. Exxon is an Internet stock.

Granted, in terms of price, oil gave an uncanny imitation of a Pentium chip this year. Many of the same economic forces are acting on both, but the painful difference is that Pentium-maker Intel doesn't have billions in unprofitable sunk costs.

Perhaps the most impressive trick from the annals of oil is the way markets adjusted to economic stress.

When seers spun their equations two decades ago, the factors that were treated as more or less constant -- technology and demand -- turned out to be the biggest, loopiest variables of all.

Pub Date: 12/20/98

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