Public perception of Arab oil power has grown suddenly during the past decade. After many years of abundant supplies, price controls on oil and gas gave rise to shortages in the United States in the early 1970s. By the summer of 1973, there was great fear of an Arab-inspired cutoff of oil. National magazines and television fanned this panic with scare stories about oil shortages. When an embargo was finally declared, after the October 1973 war in the Middle East, it made a huge psychological impact but didn't succeed in keeping oil away from the United States. Being fungible, Arab oil was simply swapped out for non-Arab oil with some minor shifts of tanker cargoes.
Much to everyone's surprise, however, the price quadrupled as the structure of the world's oil market changed from a more or less competitive market, with production controlled by oil companies, to a more or less monopolistic market in which half of the world's production was controlled by members of OPEC. The price went up for everyone, of course -- not just for us -- and produced its greatest damage on the poor countries of the Third World.
Long after the start of the embargo, lines developed at gasoline stations in many American cities. The public linked these "shortages" to the Arab oil embargo, but they were actually caused by misallocation of gasoline. In the absence of a free market that could allocate by means of prices, the government was forced to set up complicated and inefficient alternatives. Countries without price controls and government involvement in the oil market had no lines at gasoline stations.
Following the fall of the shah of Iran, Iranian oil production declined. Again, a buying panic developed, driving up oil prices by more than a factor of two. Again, government attempts to allocate oil products caused long lines at gasoline stations and great hardship. And again, the public somehow connected these events with the actions of Arab oil producers.
In reality, Arabs were not to blame for the long lines, although they did play their part in producing a price increase. But all attempts to explain these facts seemed to fall on deaf ears. The public, and much of the leadership of the United States, remained enthralled by Arab oil power.
Now, for the first time there is hope of changing public perception in a fundamental way -- as a byproduct of the current temporary glut in the world oil market. Seeing the price of oil weaken is making the public more receptive to logical arguments, which show that the Arab "oil weapon" is essentially non-existent.
If further proof is needed, we should recall that in November 1979, following the occupancy of our embassy in Tehran, Jimmy Carter announced that we would no longer purchase Iranian oil -- a self-imposed embargo. If Khomeini had declared such an embargo, panic would have occurred. As it was, nothing much happened.
More recently, when we kicked the Libyan diplomats out of Washington, Libya was careful not to unsheathe its "oil weapon" -- for fear that the sheath would be shown to be empty. (Ironically, many oil companies must be hoping that Libya will cut us off, since they are contractually obligated to buy Libyan oil at $41 per barrel but can only sell it for less.)
The public now seems willing to believe that OPEC power is dwindling, and many publications are echoing this theme. In fact, OPEC power as popularly conceived never existed. Yet a recent feature store in Business Week has it that the Arabs could direct an embargo against the United States in case of another Middle East conflict. It just cannot be done. It is also disconcerting to read there that OPEC no longer has it within its power to raise prices "at will." It never did. Prices can rise now only if at the same time oil production is reduced. But who would be willing to sacrifice his oil income while his fellow OPEC members benefit from higher prices? The most recent OPEC meeting did not settle this vexing question.
In the past, Saudi Arabia and some of the Arabian sheikdoms have been willing to adjust their oil production to keep the price at a level that is optimal for hem and will enable them to make the greatest profit over the long term. But this scheme broke down in 1979 when the price of oil doubled. Saudi Arabia made a strategic error in allowing that price to rise. The Saudis could have controlled it, but they didn't. The result of this miscalculation -- as they themselves must now realize -- is the destruction of their future oil market and a threat to their internal stability, when their oil income declines below the expectations of their population.
Because of price, oil consumption is falling in the major consuming nations.
In the United States, it has dropped by 13 percent in only three years. Oil imports have declined by 30 percent in the same period. This appears to be the beginning of a long-term downward trend, as oil consumers everywhere are conserving, increasing efficiency of energy use and substituting cheaper energy sources for oil wherever possible. Most of the world's oil is used to make heat and steam, something that can be done at less cost with coal, gas, nuclear energy, geothermal or solar energy where appropriate. Long before these substitutions are fully carried out, many regions of the world, including North America, will be essentially self-sufficient, and the market for OPEC oil will have shrunk by a large factor. Competition within OPEC must eventually result in substantial price cutting. But by then, the consuming nations. having made investments in other energy sources, may no longer be willing to return to imported oil -- even cheaper oil.