For many years, most oil-market "experts" peddled poor advice and analysis: OPEC was in control, they said, and could exact whatever toll it pleased from a petroleum-dependent society. Oil, which costs only pennies per barrel to produce, sold at $2 a barrel before 1973 and skyrocketed to $34 a barrel in 1979-80. The common wisdom was that $75 or $100 a barrel was not out of reach.
Any effort to depress the price would only result in an OPEC decision to keep the oil in the ground, where it would gain in value, the experts said.
But now the OPEC cartel is in tatters, its effort to protect a $26 price a failure. The consuming world learned a lesson from OPEC's repeated oil "shocks," and wisely resorted to conservation and substitution. And OPEC's extortionate prices stimulated new exploration for oil all over the world.
Today the oil market is dominated by a glut and falling prices, despite the fact that OPEC producers have drastically cut production, and despite the inability of warring Iran and Iraq to pump and market all that they would like to.
Philip K. Verleger Jr. of Charles River Associates said in recent testimony before a House Energy subcommittee that the real question is whether the slide in prices can be stopped at $20 a barrel or even $10. Oil, he says, is now a commodity like any other, meaning that prices can oscillate from levels below $10 to levels over $40 a barrel, and that there is very little that any government or cartel can do to stabilize it.
Meanwhile, many businesses and banks that bet on the bad advice they got from experts over the past 10 years -- a one-way, upward oil spiral -- have already failed. And those that continue to have a vested interest in keeping prices up beg for a gentle, rather than precipitate, slide. (They were never bothered, to be sure, when oil prices jumped by $15 a barrel in one year between 1979 and 1980.)
The latest slick argumentation against declining oil prices is that there is a risk that conservation and exploration will slacken off, cheaper oil will be substituted for other energy sources, and pretty soon OPEC will be back in the saddle -- this time never to yield its power.
But Verleger points out that the world has traveled a long distance from the time when the "Seven Sisters" among the oil companies combined with OPEC in a series of preferential agreements to control prices and supply. And some of the new industrial conservation practices and substitutions are probably irreversible.
As Prof. Eliyahu Kanovsky of Tel Aviv University and Queens College (one of the few who have been consistently right on oil) pointed out in an interview, almost everyone connected with the oil industry has vastly underestimated the extent of new oil discoveries.
Only a handful, including Verleger, Kanovsky, Morris Adelman of MIT, Fred Singer of George Mason University, and Washington consultants Lawrence Goldmuntz and Joseph Lerner, have analyzed oil issues clearly. But mostly they were and are voices in the wilderness.
Unaccountably, those who get attention are those who had it wrong before. Thus, in a New York Times op-ed piece a few days ago, Daniel Yergin, president of Cambridge Energy Research Associates, said: ". . . Unless there is a major technological development, at some point the reduction in energy investment will come back to haunt us, and market realities will again give way to geological realities -- the concentration of oil reserves in OPEC and in the Middle East. And that will eventually put the era of surplus behind us."
Yergin is one of those who did not foresee the oil glut and the accompanying dramatic decline in prices. In a widely quoted book, "Global Insecurity: A Strategy for Energy and Economic Renewal," which he and Martin Hillebrand edited in 1982, Yergin cited two alternate price scenarios:
The optimistic one, with things going well for new discovery of oil, predicted a 2 percent annual increase in prices -- from $30 in 1980 to $45 (in real terms) in the year 2000. But if things did not go well -- zero growth in energy supplies for the OECD countries, for example -- prices would bulge by a 4.5 percent average to $75 a barrel.
Yergin's abililty to puzzle out the oil market should be considered flawed, on the basis of the record. In any event, he is in good company, including those who advised governments, commercial banks and the World Bank, and who wrote for prestigious establishment journals such as Foreign Affairs.
It seems to me that it's high time for editors to pay attention to the Singers, Kanovskys and others who have been right on oil. They tell us that the risk that lower oil prices would weaken the resolve for conservation and substitution can be offset by import taxes. And OPEC's power could be diminished if we continue to stockpile oil in the strategic petroleum reserve.
In short, a continuing decline in the price of oil provides enormous benefits for the world economy, and will vitiate OPEC's power to hold the world hostage to political aims. The name of the game should be to try to perpetuate that situation, not throw in the towel.