Oil is a subject that preys on the national capacity for self-delusion. We are feeling good about it these days. The Organization of Petroleum Exporting Countries is on the ropes. Prices may drop further. It's difficult not to suppress a sense of satisfaction and even spite. OPEC is finally getting its due, and our oil problem is over. Whoopee!
If the Lebanon hostage crisis reminds us of anything, it's our vulnerability to a cutoff of some -- or all -- Mideast oil. The region's violent politics are largely beyond our control and, therefore, its oil (representing two-thirds of the noncommunist world's known supplies) is inherently insecure. While these realities endure, we have an oil problem. It's measured in decades, not years or months.
Prudent societies protect themselves against plausible dangers. Dropping oil prices will spur economic growth but not ease our long-term problem. By 1995, the Department of Energy projects that oil imports nearly will double. We should be taking steps to minimize future risks: imposing an oil tax (say 25 cents a gallon) to limit oil consumption, enlarging our Strategic Petroleum Reserve as insurance against a cutoff and eliminating tax subsidies for oil production that make us less vulnerable now but more vulnerable later.
We aren't doing any of these things.
Even now, the world's huge excess of oil production capacity is concentrated heavily in the Persian Gulf. Most other supplier nations are producing all they can. A few OPEC nations (Nigeria, Venezuela, Libya) are significantly below their peak capability. But their combined shortfall wouldn't compensate for a catastrophic loss of Persian Gulf oil. Any disruption to those supplies would quickly change the oil outlook.
And, in the decades ahead, the world's -- and America's -- dependence on Persian Gulf oil almost certainly will rise. Rapid production elsewhere will exhaust other reserves and mean that future demand will have to be met increasingly from the Mideast. Only large new discoveries or a sharp fall in world oil demand would avert this outcome. Both are possible; neither seems likely.
Why? The 1970s price increases stimulated the discovery of new supplies, more efficient use of oil and the substitution of other fuels for oil. In 1984, noncommunist nations' oil consumption was lower than in 1973. But the recent oil price decline (about one-third since 1981, after adjusting for inflation) is reversing these effects. In 1984, oil consumption rose 3.2 percent in the United States. At the same time, the long-range supply outlook is deteriorating, especially in the United States.
Since 1972, America's proven oil reserves have dropped by more than one quarter, although drilling and inflation-adjusted "real" prices -- the incentive to find oil -- are triple their 1972 levels. The oil simply may not be there. Geologist Joseph Riva of the Congressional Research Service estimates that our production will drop at least 17 percent by the year 2000. Recent exploration in Alaska and off the Atlantic Coast -- two prime areas -- has been disappointing; 46 test holes in the Atlantic, drilled at a cost of more than $3 billion, haven't produced a commercial find.
If oil were like other commodities, its price gradually would adjust to shifting supply-and-demand conditions. But oil is different. Mideast strife can change its supply and price radically overnight. Moreover, it's more important than other commodities. Because industrial economies subsist on oil, its scarcity creates the potential for strategic blackmail. By comparison, the TWA hijacking was child's play.
We need to reconcile our long-term strategic interests with our short-term economic interests. The best defense against supply interruptions is limiting our oil consumption. Unfortunately, the drop in real prices since 1981 is increasing it. We should tax gasoline and other oil fuels to offset this effect. A 25-cent-a-gallon tax (which would roughly restore 1981 real prices) need not disrupt the economy. It could be imposed gradually -- say a penny a month for 25 months.
No tax is painless, but an oil tax has more strategic advantages and fewer economic liabilities than almost any alternative. It would signal consumers to use oil efficiently. Just coincidentally, it would reduce the budget deficit by about $50 billion. If world prices fell further, revenue from a steeper oil tax might even allow income tax reductions. The point is that we shouldn't allow lower prices to flow directly to consumers but should capture the economic benefits elsewhere.
At the same time, artificially stimulating premature production of our limited domestic oil supplies will deepen dependence later. Tax incentives such as the deduction for "intangible drilling expenses" actually erode our long-term energy security. It's true that domestic oil production can't respond instantly to the higher prices caused by shortage. This is the rationale for a Strategic Petroleum Reserve. Freezing the reserve at 1985 levels -- one budget-cutting idea -- is short-sighted. It should be enlarged from the current 750-million-barrel target to 2 billion by early in the next century.
Niccolo Machiavelli diagnosed our oil problem more than four centuries ago. "The Romans," he wrote, "acted as all wise princes should, having regard not only to present ills but to future ones as well. . . . For if evils are anticipated, they can easily be remedied but if you wait till they come to you the remedy is too late and the sickness is past cure . . . "
No one knows whether we will face a future oil crisis. We can't necessarily prevent one or even predict what it might be like. But we can take precautions to limit its potential damage. Are we that wise?