One of the great casualties of the 1980s was the myth that you could get away with anything. Important unions like the air controllers, giant corporations like General Motors Corp., oppressive governments like the Soviet Union and greedy financiers like Michael Milken all were humbled by the discipline of the marketplace or occasional law enforcement or both. Only Ronald Reagan and Congress, who cut taxes without cutting spending, seem to have been issued a free pass -- so far.
Now keep your eye -- again -- on the Organization of Petroleum Exporting Countries and on the Iraqis, the Iranians and the Saudis, in particular.
Who else do you know who aggressively raises prices during a global recession?
The world historical significance of OPEC was one of the great certainties of the 1970s. President Jimmy Carter himself once figured that the oil might be used up by the end of the 1980s. The press, especially, relished its role assuring the world that a crisis was at hand. Oil was a scarce commodity, we intoned; they weren't making any more of it. Its price would go on rising indefinitely. That was before the price broke in 1981 and crashed in 1986.
What comes next?
Nobody has studied OPEC more assiduously than M.A. Adelman, the premier energy economist at the Massachusetts Institute of Technology. It was Adelman who first scouted out the real nature of OPEC, in a famous Foreign Policy article called "Is the Oil Shortage Real? Oil companies as OPEC tax collectors." And he's followed the situation since then with ever-increasing perspicacity. He turned up last month on Capitol Hill to testify.
The price of oil is a study in monopoly, Adelman says, nothing more. The question of mineral depletion doesn't really enter into it. For a nearly a century, it was the early U.S. oil companies, led by John D. Rockefeller, that kept the price above the finding and developing cost of creating reserves abroad. But with the discovery of huge new fields in the Middle East, they lost control after World War II. The inflation-adjusted price declined by 80 percent.
Then, 20 years ago, the OPEC nations shouldered the companies aside and took over themselves. "That made a big difference," Adelman says, understating the case.
Since then, instead of the smoothly administered pricing of the Seven Sisters (as the multinational oil companies were briefly known), consumers have suffered instead the ins and outs of Persian Gulf politics. World economic growth has suffered greatly as a result; indeed, many economists figure that the mysterious worldwide slowdown in productivity since 1973 owes to little more.
The way the OPEC holdup works is this: The pain of falling real oil prices turns someone greedy and desperate. The cause of the current situation in the gulf, for example, was a glut of oil in June. But, within OPEC, no one wanted to see prices fall below the already depressed levels of $13 a barrel, least of all Saddam Hussein, who needed money to rebuild his country after its ruinous war with Iran.
The underlying mechanism of the Third Oil Shock is just the same as the first two, Adelman says. Saddam threatened to cut production, and invading Kuwait added credibility to that threat. The invasion stampeded the market into massive stockpiling, for oil even at a high price is better than a shutdown loss. Then governments raised their official prices, ratifying the spot market's fears. And when demand falls off, cartel members can be expected to cut back on pumping to maintain those prices -- at least for a time.
The secret of OPEC's short-term success -- massive excess capacity, deliberately withheld -- is also the secret of its ultimate failure, Adelman says.
"They have no choice but to overbuild. A cartel member with no excess capacity gets no respect. To have bargaining power over production quotas, a member must make a credible threat: to create a nuisance or a danger by overproducing to undermine price."
The fundamental fact remains that prices will fall again, Adelman says -- probably sooner than later. First, the burgeoning worldwide recession will cause demand to fall. Second, once the panic is over, oil will pour into market as forestalling ceases and hoarders unload. Third, there will be more conservation. For a benchmark in thinking about the price today, Adelman recommends $18 a barrel, midway between what he reckons is the $30-a-barrel monopoly ceiling and the $8 competitive price.
Above all, the key thing to understand is that the oil price is not a case study in depletion, Adelman says. True, it has been handled this way since Columbia University professor Harold Hotelling in 1931 handed economists a way to think of natural resources as a fixed stock to divide between two or more periods. Such thinking about "running out of oil" dominated the thinking of the Carter administration. It even persists in the talk of resource economists today.
But, in fact, there is no "fixed stock" of oil, Adelman says; there is only an inventory we call "reserves," which we replenish with new prospecting and lifting techniques. What we don't choose to find or lift remains a secret of the Earth, "unknown, probably unknowable, surely unimportant; a geological fact of no economic interest." In the "endless tug of war between diminishing returns and increasing knowledge," he says, technology has always beaten scarcity in the past. But who's to know whether it will continue to do so in the future? Therefore, Adelman says, monitor oil two ways: development costs and value of reserves. So far, neither points to an increase in scarcity. Thus, in 1977, he notes, worldwide reserves were 643 billion barrels. Through 1989, nearly half of that -- 295 billion barrels -- was used up. But reserves now stand just over 1 trillion barrels, and worldwide stability of the development cost of new oil since 1955 shows that oil is no more scarce today than it was then. "The great shortage is like the horizon, always receding as you go toward it," Adelman says. What's left are monopolistic political high-jinks.
Such is the economic context in which to think about the U.S.-led coalition's expedition to the Persian Gulf. As much as anything, the war in the offing is aimed at achieving global economic stability. (Whether it works is another question.) Three oil-driven recessions in 15 years is a high price to pay for Arab sovereignty over oil.
David Warsh is a columnist for the Boston Globe.