In some cities, gasoline at the pump has already slid under $1 a gallon. And as the oil price war gains momentum-- as it surely will--and the oil industry's shrill complaints rise in crescendo--as they surely will--it is best to step back a minute and gain perspective.
The first thing to observe is that many of the world's economic problems of the past 10 years are a direct result of huge price increases triggered by the OPEC cartel. "If higher OPEC prices were so bad, why should lower OPEC prices not be helpful now?" asks economist Otto Eckstein of Data Resources, Inc.
That's the basic question, and beware of anyone who can't give you a straight answer to it. As no less an authority than Secretary of State George Shultz told the Senate Foreign Relations Committee last week, a 40 percent drop from the official $34 per barrel price to $20 would help set the world on the path to recovery.
It would be "the mirror image," as New York financial market analyst Robert Stovall puts it, of the recession effect of the two huge oil price increases of the '70s.
Walter Heller has likened a $10 per barrel reduction to a $55 billion cut in excise taxes--and one that doesn't add to the budget deficit. It would cut the average homeowner's energy bill by about $170 a year.
Yet the newspapers and TV channels are already being flooded by a high-powered propaganda campaign against a big decline in oil prices. Mexico will go broke, we are told. The international monetary system will collapse. Banks will go belly-up. Conservation will be stopped dead in its tracks.
Most of this comes from those who have something to lose --the major producing countries, the banks that made stupid (and irresponsible) loans on the anticipation of an ever-rising price for oil, and highly paid "advisers" who counseled that OPEC's political power was unassailable.
By and large, these are the same folks who for the past two years argued that there was no real oil "glut," just a temporary surplus reflecting recession. These arguments were a denial of reality, intended to cover up a single-minded, vested interest in high oil prices. For example, last year, as Arlon R. Tussing, writing in The Public Interest, reminds us, Occidental Chairman Armand Hammer and others were still predicting $100-a-barrel oil within 10 years.
Now, as the OPEC cartel begins to fracture, and oil prices enter a long downward slide, the permanent nature of the oil surplus can no longer be denied. Some producing countries with heavy debt burdens--notably Mexico and Venezuela-- will be hurt by lower oil prices. But against that, all the oil-importing countries, after suffering 10 years of extortionate oil prices that sucked their economies dry, will do better.
The United States, Europe and Japan will be enormous beneficiaries. Brazil, the biggest Third World debtor country, would see a $3.3 billion improvement in its balance of payments from a $10-per- barrel drop in oil costs, according to David Ernst of Evans Economics, Inc. South Korea would show an improvement of $1.8 billion; Taiwan, $1.5 billion; and Thailand, Turkey and the Philippines around $1 billion each.
Even the big losers--Mexico, whose export earnings would be reduced by $6.2 billion; Venezuela, by $6.6 billion; Nigeria, by $7.1 billion; and Indonesia and Algeria by $4 billion each--would see partial offsets to a $10 price decline in terms of lower interest rates easing their debt burden, and in greater overall export opportunities that would come from global recovery.
In his Senate testimony last week, Shultz said there would be the following "catalytic impact" over a two-year period if oil went down to $20 per barrel:
Real growth rates in the United States and Europe would increase 1 to 1.5 percent annually, while the depressed Third World economies would shoot ahead 2 to 2.5 percent, their exports rising by 3 percent.
Inflation rates everywhere would decline 1.5 to 2.5 percent.
The oil import bill in the industrial countries would drop by $90 billion, and by $9 billion in the Third World.
The industrial nations, which taken together have a balance of payments deficit of $17 billion, would instead show a surplus of $18 billion.
It is hard to reach any conclusion but that the global economy would benefit from a sharp drop in oil prices. The $20-a-barrel number Shultz used is a nice one to think about. Sara Johnson of Data Resources, who did a study concluding that the benefits of an oil price decline clearly outweigh the costs, calculated for me that in deflated 1972 terms, $20 oil would be equal to $9.38 a barrel, still 4.5 times what it was before OPEC touched off its costly escalation.