A painful choice between inflation control and oil security confronts the incoming administration. Domestic oil prices will rise over the coming months. Once again, increases in oil prices will stimulate inflation of all prices. There seems no way to avoid this bitter potion for the cure of our energy ills.
The choice centers on the dosage, not the medicine. Should we swallow it now, and immediately eliminate oil price and allocation controls, or sip it slowly, and wait for the gradual decontrol process now under way to run its course by October 1981? In the present oil market, sooner would be better than later.
Seven years after the first oil price shock, we are tantalizingly close to the final decontrol of oil prices. No longer will we subsidize oil imports or burden ourselves with government management of oil supplies. Each month brings us closer to the goal, but the president could take the final step overnight by executive order.
Those opposed to such decisive action fear the inflationary effects of a sudden price shock as domestic oil prices move up to world levels. (Currently, the gap has been narrowed to 15 percent.) Knowing that they cannot avoid the oil price rise, they hope to dampen the secondary increases in wages and other prices though a policy of delay.
Surely this is delusion. The monthly oil price increases still creep into the Consumer Price Index. If anything, anticipation of continuing oil price increases will feed inflationary pressures over the year. It will be easier to avoid the secondary price effects when we clearly recognize and clearly label the oil price jump as a one-time shock needed to meet an emergency.
The war between Iraq and Iran presents us with the emergency. Even if the war stops soon, which seems unlikely, oil production will remain severely curtailed for many months, awaiting repairs of pumps and other facitlities. At the same time, world consumption of oil will increase as we go through the coldest winter months in the major oil-importing countries.
Oil inventories built up during 1979 have prevented oil panic despite the war. These inventories must now supply the winter demand. But no nation will accept a serious depletion of inventories without turning to the oil producers and placing substantial pressure on world oil prices. We could see another price jump on the world oil market, spot shortages in the spring and gasoline lines by summer.
Here lies the great danger in the process of gradual oil price decontrol. Gradualism applies only to the price. The full mechanism for quantity allocation remains in place, ready to swing into action as soon as shortages appear. We need instant decontrol in order to eliminate the quantity allocation program. We need to abolish the allocation program to protect ourselves from a repetition of the errors of the past, when central management by government added to our difficulties, creating shortages in some states and surpluses in others.
Immediate decontrol of oil prices and elimination of the allocation program would help us meet the oil dangers of 1981. The domestic price shock, which may be small in any event, will stimulate conservation. Without the allocation program, we won't aggravate the impending oil shortage. To the extent that the other countries follow the American lead, we may prevent some increases in world oil prices and reap an inflation windfall.
President Carter launched us on the path of gradual decontrol. This was a courageous action, but one that did not anticipate the war and present emergency. The changed circumstances call for an acceleration of this policy. It would be a natural culmination of his policy and a statesmanlike step for Carter to eliminate the controls now. Otherwise, it will be a pressing matter of national interest for President Reagan.