The politics of oil pricing is beginning to look familiar. It is reverting to the pattern of the years before the first great leap in 1973. Up until then, the nightmare of the oil industry was a collapsing price. Oil is highly vulnerable to it, since the heavy costs in the business lie in exploration and drilling. Once the well is sunk and the oil is flowing, it's very cheap to keep the pumps running. A falling price doesn't immediately reduce production. On the contrary, production rises as companies and countries frantically pump faster to try to restore their revenues.

To avoid that nightmare, here in the United States oil production was carefully regulated by state conservation agencies beginning in the 1930s. In the 1950s, when foreign oil began to affect American prices, the federal government put quotas on imports. For the next 15 years or so, to the early 1970s, the United States acted as the great balance wheel of the worldwide oil market. When prices rose, the state commissions lifted production. When prices fell, they cut back. The system was further supported by the international oil companies, and their habit of holding their production to the volumes that they could sell. The exporting countries bitterly resented the companies' limits, and kept pressing them to take more. But it wasn't until the late 1960s that the OPEC governments--led, incidentally, by the Shah of Iran--began to wrest production decisions away from the companies.

In the early 1970s, an extraordinary thing happened. The worldwide demand for oil had been growing enormously fast, and the American wells were operating at full capacity. Slowly the Arab states of the Persian Gulf began to realize that the only spare production capacity in the world was theirs--which meant that power to set prices had shifted from the United States to them. The events that set off the 1973 surge in prices were political-- the Arab-Israeli war of that autumn, and the Arab embargo of the United States. But the economic setting was high demand and a market in which the old constraints had vanished.

Demand has now fallen, in response to high prices and the recession. But the decline in sales has been absorbed by the OPEC countries alone and, within OPEC, mainly by the Persian Gulf states. If oil sales rise again with economic recovery, things will begin to look like the early 1970s again.

Oil prices are inherently and radically unstable. The old control machinery is gone forever. It depended on the dominance of the American market and American policy. The devices that held oil prices almost constant for 25 years after World War II, to fuel an unprecedented industrial expansion, are gone and have not been replaced--certainly not by a divided and quarreling OPEC.

A falling oil price is good luck for most of the world. But as you applaud, keep it in mind that it is not necessarily moving toward a predictable and steady equilibrium. Experience suggests precisely the opposite.