The 1970s were particularly unkind to American consumers of fuels and power, but those years were only prologue: the 1980s will be harsher by far. Indeed, the crossover into a world of permanent petroleum shortages, once predicted to occur in the mid- to late-1980s, is now at hand, foreshadowing oil-driven economic crises, social unrest and the growing possibility of military action -- the time-honored remedy of nations whose peacetime policies have failed.
It is now recognized that an energy trasition with profound implications for our society began in the 1970s. But what is so striking -- and less widely recognized -- about the transition is that it occurred despite the existence of chronic, large surpluses of oil production capacity. Whatever its outcome, the Iranian revolution has eliminated those surpluses, thereby removing a strategic cushion that has insulated consumers against exogenous shocks for more than two decades.
The golden era of surplus-producing capacity began in 1947, as production from rich pre-war finds in Venezuela and the Middle East began to be felt in world markets. As a result, oil prices were distinctly favorable to consumers -- so much so, in fact, that the real price of crude oil (the price adjusted for inflation) dropped 50 percent between 1948 and the 1973 oil embargo. Those surpluses and price declines were attributable to the continued success of the petroleum industry in its exploratory activities.
Immense new reserves were added to the world's total year, with the bulk of the new supplies to be found in the nations that now make up OPEC. Those additions followed a pattern set in the early days, a pattern decreeing that most produciton comes from relatively few large fields and that peak producing capacity occurs early in the exploitation life of the field.
Those surluses served to buffer the impact of political instability on world markets beginning in the early 1950s and extending through the Arab-Israeli war of 1973. They existed until the Iranian revolution, when the disappearance of Iran's share of OPEC production -- 20 percent -- was offset by increased production from other nations. Without this response, the relatively minor disruption of petroleum markets in the United States would have been transformed into chaos.
For the past two or three years, it has been evident that forces were at work that would eliminate this strategic cushion of surplus-producing capacity by the mid- to late-1980s. That date has been advanced by the Iranian revolution. Indeed, that crossover may be occurring now. For it is probable that the revolution's political fallout will be in the form of reduced investment in new capacity by other Middle East nations, a development for petroleum supply that will transcend the loss of Iranian output.
The leadership of Saudi Arabia, Kuwait, the United Arab Emirates and perhaps Iraq will go slow on expansion plans largely as a result of internal political pressures created in the wake of the revolution. This in turn will virtually guarantee that OPEC producing capacity will not expand beyond present levels and may even contract during the next five to 10 years. In the past few weeks, there have been unmistakable manifestations of the trend that is precipitiating the "crossover" -- in Kuwait, the UAE, Iraq and Saudi Arabia, where officials either have been noncommital about their plans or have announced production cutbacks.
The consequences of these trends are not difficult to predict. During the decades of sustained surpluses, we had first a 25-year period in which prices in real terms declined and then the sharp upward movement that came about as a result of the economic and political pressures arising from the Arab embargo of 1973-74. Following the embargo from 1974 until 1978, the old surplus-enforced pattern of declining costs reasserted itself, with the result that the real price of petroleum at the beginning of 1978 in real terms was significantly below the price at the beginning of the 1973-74 embargo period.
The Iranian revolution has caused a spiking in price that has paralleled the spiking that occurred during the 1973-74 embargo. Will we see a repetition of the downslide in real prices in the years to come? The answer almost certainly is no, because the major factor contributing to falling prices -- chronic and sustained surpluses -- has disappeared. In fact, it is fair to predict that from this time forward, at least during the 1980s, we shall see constant upward pressure on price.
But price impacts will not be the most serious consequences of "crossover." Rather, the enormously disruptive effects of even relatively small supply interruptions, interruptions that are almost inevitable during the 1980s, will contribute to widespread uncertainty and, during times of crisis, to severe economic disruption. As these periods of oil-driven economic crisis occur, there will almost certainly be a spillover into social unrest and, with it, the growing possibility of military action.