The world is riding the oil-price roller coaster again. This time, unlike in the 1970s, it is plunging down, with the prospect that a $10-a-barrel drop could add as much as $85 billion to real incomes in the industrial nations over the next two years.
Such a price drop would result in a lower inflation rate over that same period, analysts say, and it should lead to lower interest rates as well.
Last year, average world crude oil prices generally ranged between $27 and $28 a barrel. In recent days, they have tumbled below $19 for spot market purchases and the regular prices paid by refiners are falling rapidly, too.
If the eventual drop is as much as $10 a barrel, the effects would help boost economic growth in most developing nations as well as in the industrial nations. The oil-importing developing nations, which greatly outnumber the oil exporters, would be helped because their oil-import bill would go down and demand for their exports would be boosted by the increased economic activity in the industrial nations. These oil-importing nations could see total gains of more than $35 billion, according to some estimates.
The losers, of course, are the oil exporters. Some of them, such as Saudi Arabia and Kuwait, have small populations and huge financial reserves to cushion the blow. Others, with large populations and huge debts -- Mexico, Nigeria, Indonesia and Venezuela among them -- will be hurt badly, losing about $20 billion.
Meanwhile, the lower prices will squeeze many segments of the oil industry in the short run. With less cash coming in and the future of oil prices more uncertain than ever, companies will be making further cuts in exploration and production spending. They likely will continue to close refineries and service stations as well in an effort to streamline their operations.
Banks around the world may find themselves hurt or helped, depending on where their loans are. Brazil, the most indebted of Third World nations, should find it easier to pay its bills. But Mexico may need to come up with another $6 billion this year to offset the impact of lower oil prices on its export earnings.
Domestically, banks that have loans in the "oil patch" have already incurred losses as hundreds of small oil- and gas-related companies have gone under. Those losses are likely to mount and some banks, particularly those with other problems, such as farm loans, could fail.
Lower oil prices will reduce the federal government's receipts from the crude-oil windfall-profits excise tax and those of oil-producing states such as Louisiana, Texas and Alaska that levy oil and gas severance taxes. The price drop also has sparked renewed calls in the United States for some sort of federal tax on oil -- perhaps a fee on imported crude oil and on refined products -- to protect U.S. oil producers and to raise revenue that could help reduce prospective federal budget deficits.
In the longer run, the oil-price roller coaster could head upward again by sometime in the 1990s, many analysts predict. If oil prices stay down, worldwide demand could start to rise again at the same time the cutback in the hunt for oil begins to show up in reduced production.
Many oil experts put the current excess of petroleum production over consumption at no more than 1.5 million to 2 million barrels a day, compared to total demand of about 45 million barrels. A barrel contains 42 gallons.
The excess of potential production is far greater -- at least another 10 million barrels a day. But the members of the Organization of Petroleum Exporting Countries have shown they can keep a very large amount of production capacity idle to prop up prices.
However, there are political and economic limits to OPEC's ability to keep prices high, given the needs of its individual members to earn money from their oil. At $28 a barrel, which is already far down from a high of about $35 in 1981, crude prices were still so high that the prospects were for continued increases in non-OPEC production and for little if any increase in oil demand, analysts say.
The current excess of world oil production over demand is the result of a sharp increase in production by Saudi Arabia last autumn in an attempt to change that long-run outlook, these analysts said. It may take several years, the experts said, but lower prices eventually should lead to an increase in the rest of the world's dependence on OPEC for oil.
"The price of oil was put up too high," a senior Reagan administration oil analyst said. "OPEC had to arrest the decline in their market share. They have to make oil an attractive energy alternative and make production in high-cost areas unattractive . . . and that's what the Saudis are doing."
Pennzoil Corp. chairman J. Hugh Liedtke shares that view.
"I think [the Saudis] are trying to re-establish the fact that OPEC should work and can work and they're going to dominate it," he said.
From $3 a barrel in early 1973, the price of crude oil climbed to more than $11 a year later. Then in 1979, after the Iranian revolution, prices soared again, to an average of $35 a barrel in 1981. Branching Out From OPEC
The price escalation at American service station pumps, through which much of the oil consumed in the United States flows, was almost as dramatic.
For instance, regular gasoline averaged 38 cents a gallon in 1973 and eight years later reached $1.31. A bit of that increase was due to higher taxes, but while other consumer prices were doubling, the cost of gasoline more than quadrupled.
The higher prices led to successful efforts to find and produce more oil in nations outside OPEC. Between 1977 and 1984, crude oil production by OPEC members fell by 14 million barrels a day, to about 17 million. Production outside OPEC in the nations with market-type economies went up by about 7 million barrels a day and it is still rising.
At the same time, consumption was falling in much of the world. In the United States, for example, petroleum use dropped 17 percent, from 18.8 million barrels a day in 1978, the peak, to about 15.6 million daily last year.
As the market for crude oil began to shrink, most OPEC members cut their production. However, the bulk of the cuts fell upon Saudi Arabia, whose output diminished from a peak of 12 million barrels a day to about 2.5 million during part of last year.
Determined to regain some of their lost share of the market, the Saudis turned to a radical new pricing plan that ties the cost of their crude to the prices refiners get for the products they make from it. They quickly found buyers for an added 2 million barrels a day, and in the process, triggered a major break in oil prices.
Since Jan. 15, the price of the most widely traded grade of U.S. crude oil is down by almost $6 a barrel, dropping below the $20-a-barrel level that had marked the low point in most experts' forecasts only a month or two ago. These "paper" barrels of oil, traded on commodity markets in New York and London by oil companies, traders and speculators, have lost one-third of their value since November.
Where oil prices will come to rest is still guesswork, although they were hovering around $20 on commodity markets Friday.
The average price of oil moving through U.S. refineries now to make gasoline and heating oil still remains well above that.
Diamond Shamrock Corp. and Conoco Inc. dropped their price for West Texas Intermediate crude to $24.50 a barrel last week -- more than $5 higher than the commodity market price for the same grade. Consumer Benefits Ahead
Thus far, consumers have seen only small benefits from falling crude oil prices. Average gasoline prices at the pump have dropped by only about a penny a gallon in the past month, said Dan Lundberg, whose Los Angeles-based newsletter publishes nationwide surveys of gasoline prices.
But all the evidence indicates that a period of lower energy prices has begun. Economist Alan Greenspan of Townsend-Greenspan & Co. said that in the short run there is no economic reason that the price of crude oil should not fall below $15 a barrel and perhaps even to $10.
In an entirely free market, that would likely be the price because it costs most oil producers less than that to get the oil out of the ground. In Saudi Arabia, the cost is probably $1 or less, Greenspan said.
The long-run cost is considerably higher because it must cover the expense of finding new fields and building production facilities for them.
But the world oil market is not really a free market. The Saudis and their neighbors on the Persian Gulf have shown themselves willing to curtail production to prop up prices.
At some point, most observers say, the Saudis will have achieved their objective of sufficently lower prices to change the long-run outlook for consumption and non-OPEC production.
It is unclear what that price objective is, but there is little doubt that the Saudis could again stabilize oil prices when they choose to, albeit at well below the old official price of $28 a barrel for Saudi light oil. In the meantime, the price drops will be fueling faster growth in the world's economies.
"On balance, this is good news," said John Sawhill, a former top federal energy official and now a consultant.
"I've never seen an oil price so low that I didn't like it," quipped economist Charles L. Schultze of the Brookings Institution, who was chairman of the Council of Economic Advisers when the second oil price shock hit in 1979.
"On balance, it's positive because it reduces the costs of many basic industries," said the current Council of Economic Advisers chairman, Beryl Sprinkel. "It strengthens our conviction that our forecast [of 4 percent economic growth this year] will be achieved." Response by Governments
Just how favorable an event the oil price drop turns out to be will depend not just on how far the price falls but also on the response to the decline by governments around the world.
If the economic stimulus implicit in the price decline is not offset somehow, a $10-a-barrel drop would, within about two years, lead to about a 1 percent increase in the output of goods and services by the world's industrial economies, according to Edward Fried of the Brookings Institution.
Greenspan and some other analysts put the figure somewhat higher.
Part of the gain would come directly from a decline in inflation, which would leave room for more real economic growth.
At the same time, interest rates should fall, generating more growth. Finally, the trade balances should also improve.
For developing nations, other than oil exporters, the overall impact of such an oil price drop is also sharply positive.
Fried said that oil-importing developing nations that have large foreign debts -- such as Brazil, Argentina and Korea -- should gain about $15 billion directly from a $10 price drop.
Secondary effects from lower interest rates and a boost in demand for the developing nations' exports, which results from faster economic growth in the industrial nations, would be worth another $20 billion, Fried estimated. Debtor States Will Lose
The handful of heavily indebted oil exporters -- Mexico, Nigeria, Indonesia and Venezuela -- will lose about $25 billion as a direct result of lower oil prices.
But they, too, benefit from some of the secondary effects, which Fried puts at about $5 billion.
Thus, the larger oil-importing developing nations benefit by about $35 billion and the oil exporters in this group lose a net of about $20 billion, according to these calculations.
"The gains of the winners are somewhat greater than the losses of the losers" among developing nations, Fried said.
How long will oil prices stay down?
There is no agreement among analysts on that point, although they do say they expect prices will have to stay down for several years at least to alter the trends in production and consumption that caused the Saudis to precipitate the current sharp decline.