In a development so absurd and perverse that it borders on the unbelievable, the highest administration officials are trying to talk Saudi Arabia into raising -- raising! -- oil prices.
Energy Secretary John Herrington got things started on Monday by saying that the Saudis had pushed prices down too far. And now Vice President George Bush, after averring his faith in the market ("Our answer is market, market -- let the market forces work") is headed to Saudi Arabia to urge a bit of market manipulation. In Saudi Arabia, Bush will be "selling very hard" the notion of price "stability." In an environment of Saudi-induced free falling prices, "stability" means getting the Saudis to cut production to raise prices.
What is going on here? The recent drop in oil prices has broken inflation, lowered interest rates and rekindled a flagging economic expansion. (Because of lower oil prices, the IMF has just boosted its growth projections for the world economy.) Bush wants to reverse that?
An oil price cut is just about the best kind of windfall the industrialized world can enjoy. Oil analyst Philip Verleger says that the recent price cut has been "like a $400 billion tax cut for the free world." This administration made a religion of tax cuts that take money out of Washington. Now it wants to repeal a cut that takes money out of OPEC.
Why? Because Bush and Herrington are worried about the effects of falling prices on the domestic oil industry. Indeed, it has been hard hit. Production is down. Drilling has dropped sharply. Related industries, and now the banks, are being affected. The oil states are reeling.
Okay. Let's save Texas. Asume that the pain suffered by the oil- producing states outweighs the gain to the rest of the country. Assume that something must be done immediately to help the domestic oil industry. Assume that it needs a price of, say, $18 a barrel to keep marginal wells in production, the drilling rigs working and the industry alive.
Today's market price is roughly $10 a barrel. Let's guarantee American producers their $18. There are two ways to do it.
One way, Bush-Herrington, is to go to the Saudis, cap in hand, and ask them to please cut their production to raise the world price to $18. (In earlier years we went cap in hand to beg them to lower oil prices. Some habits are hard to break.)
The other way is to keep the world price at $10 and slap on an $8-a-barrel oil import fee. That would raise the domestic American oil price to $18. Then, when you buy a barrel of oil, if it is Texas oil, the Ewings get the $18. But if it is Saudi oil, Sheik Yamani gets only $10. The U.S. Treasury gets the other $8.
Under Bush-Herrington, however, Yamani gets it all. We know that in the Reagan world view the U.S. Treasury is a kind of predator on good, hard-working Americans. But it does contribute more to American life -- Social Security, aircraft carriers, vice presidential limousines -- than does the Saudi treasury. That $8 sent to Washington could do much. It could be left in the Treasury to reduce the deficit. It could be refunded to consumers in the form of lower tax rates. Or it could be reinvested in the United States in, say, the strategic petroleum reserve or the building of another space shuttle.
An $8 "save Texas" oil import fee would raise $12 billion a year. That is enough to avert a lot of Gramm-Rudman anguish. Or build five space shuttles. Or cover Mexico's entire debt service, if it ever comes to that. Or save any bank in trouble in Texas or anywhere else. Why donate this colossal windfall to OPEC? For services rendered?
Both Bush-Herrington and an oil import fee would solve the problem of the domestic producers. But the import fee has two virtues. 1)It requires no groveling before Sheik Yamani. The fact is that the United States does not need Saudi Arabia to set a floor under domestic American oil prices. With a tariff, we can control the price ourselves. And 2)while an import fee raises the income of domestic producers, it doesn't raise the income of foreign producers: we keep that "tax" at home. With an import fee, we, not the Saudis, set the price. And with an import fee, we, not the Saudis, keep the windfall.
The vice president has a fondness for Texas. And the president has an aversion to taxes. Both sentiments, in moderation, have merit. But in excess and in combination, they threaten to produce a policy -- taking from the U.S. Treasury and giving to oil producers abroad -- of extraordinary stupidity.
I have been told that Bush is acting on his own, and that his is not official U.S. policy. If that is so, and if Bush is merely reacting to political pressure from his friends in Texas, why is he going to the Gulf? And what about Herrington? He is the secretary of energy.
The administration must do better than Larry Speakes' to-and-froing "clarification" of Bush's remarks. "Certain portions" of Bush's remarks, said Speakes, "could have led to a misunderstanding." Like the portion where Bush says of his trip to Saudi Arabia, "My plea will be for stability" and "that we not just have a continued free fall" in oil prices?
The markets understood Bush perfectly well. On Tuesday, within minutes of his remarks, oil futures shot up by $1.50 and interest rates on bonds by one-fourth of a point. On Wednesday, reports The New York Times, trading in oil futures on the New York Mercantile Exchange opened "in a euphoric mood." As they say in the commercials: Thank you, Bush-Herrington.