The collapse of oil prices, despite the shock waves it is sending through the banking and energy industries, is a healthy development that will lead to lower inflation and interest rates and act as a stimulus to economic activity in most of the world.
It is also music to the ears of those of us who for several years have been insisting that the two oil shocks engineered by the Organization of Petroleum Exporting Countries in 1973 and 1979 had created revolutionary changes that made an oil price collapse all but inevitable.
This view of the oil world was largely hooted down by the Establishment, which had a commitment to high-priced oil. The professional oil consultants, by and large, looked for oil to hit $90 to $100 a barrel, and those banks and oil companies that listened to their advice, thirsting for such a bonanza, are weeping today. Prices, which shot up from $2 to $3 a barrel in 1972 to a peak of more than $35 after the second oil shock crashed this week below $20, off more than $10 since November.
"There is no natural floor," said Washington oil analyst Joseph Lerner, a Washington oil consultant who was confident that prices would go down. "Oil could easily go to $10." Expert Philip Verleger agrees -- and says that, "Unless somebody starts to cut production, you'll see that price by spring."
On the other hand, S. Fred Singer of George Mason University, who has been uncanny in his forecasts for years, thinks that it is wrong to assume there is no bottom. He believes the price cannot go below $10 a barrel, and could stay there only briefly. Others see a move down to no higher than $15.
Now that the Saudis are flooding the markets with oil, trying by that stratagem to force the North Sea producers into a compact -- a grander OPEC -- by which they all would agree, once again, to limit production, Singer suggests that the counterstrategy should be for the North Sea producers to buy up the Saudi oil at today's bargain prices, shut down their own production temporarily, and then resell the oil at a profit.
Wherever the oil slide stops, we are witnessing a great drama. The process not only hurts all OPEC producers outside of Saudi Arabia, which is rich enough to suffer these low prices for a while, but Third World producers such as Mexico and Venezuela, the banks that have financed such borrowers (as well as expensive drilling here) and domestic oil companies.
But the wider community of consuming nations -- Third World and industrial -- that have suffered recession and high debt for the past 13 years because of the oil price shocks would begin to regain their health.
The spectacular news of the oil price collapse that was front-paged this week has been in the making for at least four years -- but there were distinguished persons who promised us that it couldn't happen, or, worse, that it shouldn't be allowed to happen. The inflated price of oil had caused economic hardship, some of them conceded. But a sharp drop in prices might be equally bad medicine, they said.
On Dec. 28, 1982, after one of the many OPEC meetings in Vienna revealed that the cartel might be losing its grip, Henry M. Schuler, director of energy programs for the Georgetown University Center for Strategic and International Studies, wrote in a Washington Post op-ed page piece:
"If, however, we focus on the political survival of the House of Saud instead of OPEC's economic survival, we come to the inescapable conclusion that a durable oil glut and price collapse is impossible. Being essentially free of population-driven revenue requirements, the rulers of Saudi Arabia have enormous latitude in choosing either to maintain market share by reducing price or to maintain price by reducing production."
In that same period, New York oil expert Walter J. Levy, former World Bank economist Hollis Chenery and former Iranian finance official Jahangir Amouzegar -- writing in learned journals such as Foreign Affairs and the CSIS Washington Quarterly -- warned that falling oil prices were dangerous. Because high prices had induced conservation and the petrodollars for recycling to the debtor countries, they urged the West to strike a deal with OPEC to preserve the status quo -- and the high prices.
"The salutary inducements of high oil prices . . . are now being reluctantly recognized and acknowledged. . . . OPEC has saved the world from itself," Amouzegar said in The Washington Quarterly for Autumn 1982.
Others, such as John Lichtblau of the Petroleum Industry Research Foundation of New York, prayed for moderation. If OPEC could move together to assure a nice gentle slide, rather than abrupt price cuts, the world would be better off, Lichtblau argued.
These views of the energy world have been difficult to shake. There was plenty of evidence back in 1982 that the oil glut would continue. But as recently as last year, Daniel Yergin, president of the Cambridge Energy Research Associates -- while acknowledging a real drop of 40 percent in oil prices from 1981 to mid-1985 -- still was saying that "the concentration of oil reserves in OPEC and in the Middle East . . . will eventually put the era of surplus behind us."
But Yergin can't know what other oil reserves will be found -- none of his group of experts foresaw the great bulge of non-OPEC production since 1973. And when the era of surplus will end, nobody knows. But it won't be for a long time.
Among the most perceptive oil analysts -- active in 1982 and before -- were Singer and Eliyahu Kanovsky, an economics professor with American and Israeli citizenship. Some dismissed Kanovsky's expertise, assuming his Israeli connection disqualified him as an objective source.
But their shrewd perspectives have been borne out. Kanovsky accurately forecast that the world's dependence on OPEC and the Middle East would diminish (not continue until the end of the century as the Establishment experts saw it). Moreover, Kanovsky figured out what escaped Schuler, that the Saudis would become so dependent on their fabulous oil revenue that they would pump oil out, not store it in the ground.
Singer pointed out in his book, "Free Market Energy" (Universe Books, New York, 1984), that, in 1979, the Saudis became intrigued by the idea of letting the price go up -- which it did, driven by panic buying, from about $12 to $36 a barrel. They then failed to bring the price down, choosing instead to lower their production from more than 10 million barrels a day to -- eventually -- just about 2 million barrels a day.
"Apparently, they did not realize that it was in their interest to maintain the lower price level. Yet, it was this high price, sustained for more than two years, that really spurred on consumers to replace oil with cheaper alternatives such as coal, gas and nuclear energy," Singer wrote.
These forecasts and analyses, which pointed to a continued glut and price decline -- were reported in these columns and elsewhere. Singer, for example, was quoted widely on a regular basis in The Wall Street Journal. But governments and investors largely ignored what they heard from Singer and Kanovsky. The banks and the money markets went blithely on, betting that OPEC could hold out and control the market. The presumed dangers of cheaper oil were trotted out -- and we can expect to hear more of the same at this stage of the game. We will be told that, above all, we need stability.
"Maybe human nature seeks stability," Robert S. Pindyck wrote in The New York Times. "But more of the same high unemployment and negative economic growth? That stability we can't afford."