Secretary of State George P. Shultz said the United States has ruled out any effort to persuade Saudi Arabia to cut oil production.
Shultz said government attempts to interfere with the current oil price decline would be a "catastrophe." He said such intervention would be just as bad as the situation in the 1970s when "the U.S. government became heavily involved in the control of the energy industry in this country."
In an effort to clarify confusing signals from the Reagan administration on oil-pricing policy as a result of a recent visit to Saudi Arabia by Vice President George Bush, Shultz said in an interview Thursday night that "the last thing in the world the vice president wants to do is to get ourselves into some sort of producer-consumer cartel arrangement. I've heard absolutely no notion of that at all."
Prior to his trip to the Persian Gulf, Bush called for "stability" in oil prices, which had plunged from about $32 a barrel last November to just under $10, before rebounding after his statements.
The vice president added that cheap energy prices, overall, were in the United States' best interest, but that a "free fall" could damage the domestic oil industry, which is predominantly in Texas and other southwestern states.
White House officials had tried to put some distance between themselves and Bush's remarks, but at his press conference Wednesday night, President Reagan, while re-affirming his own commitment to the free market, aligned himself with Bush's concern over the possible impact of cheap oil. "We must keep our eyes open to make sure that no one plays tricks for some kind of illicit future gain," Reagan said.
Shultz said the president has confirmed in private conversations that he still firmly opposes an oil import fee or tax to bolster prices. Congressional support for such a fee has increased as oil states such as Texas, Louisianna and Oklahoma have been hard hit economically by the recent sharp drops in oil prices.
Financial market observers have expressed confusion over the administration's intentions, and some interpreted the presidential statement as opening the way to reconsideration of an oil import fee or tax. Asked if that was what the president meant, Shultz replied: "I don't think so. He was very explicit on that not long ago, and I've heard him talk privately on the same subject. His view is consistent."
Shultz, a former Treasury secretary and budget director, maintains a keen interest in economic issues, especially those with international political ramifications. He and Treasury Secretary James A. Baker III will be the president's key advisers at next month's economic summit in Tokyo, where the worldwide impact of declining oil prices will be a major topic.
Shultz denied that Bush had intended to suggest a "production holdback" by the Saudis to brake the oil price slide. He said the vice president had only wanted to call attention to the problems created in a generally "beneficial" situation.
And Shultz rejected as too simplistic the notion that the recent price collapse can be traced to the Saudis' decision to increase production as an effort to force higher-cost producers here to shut down. "The reason they increased production is that, with the high prices, oil was coming on stream from many sources, OPEC's market share was declining and the Saudi market share within OPEC was declining," Shultz said.
"Here they are, the country with the biggest reserves by miles, in a secondary position as far as market share is concerned. And the production overhang -- I think the capacity to produce is now something like 25 percent or more greater than the rate of consumption. So, that is a situation in most markets where there's heavy pressure on price. And that's exactly what has happened.
"So, I think that we see almost a classical breakdown of the cartel, and one of the features of that breakdown is the increase in production by Saudi Arabia. It would have happened a great deal sooner, as you well know, if it hadn't been for the Ayatollah [Ruhollah Khomeini] in the first instance, and then cutting back the Iranian flows and then the Iran-Iraq war."
Shultz said he recognized the fear of many analysts that cheap oil might generate increased consumption and eventually throw the United States back into dependence on a revived OPEC cartel. But he argued in the interview that the way to prevent the United States from being over-dependent on imported oil "three, four or five years from now" is to start using more coal, to deregulate natural gas and to "get the nuclear power [industry] back on track so that [an] economic and environmentally benign form of power once again [can] come out in this country."
He acknowledged that it is difficult to find substitutes for oil in automotive transportation, but said that much of the efficiency yielding more miles per gallon of gasoline over the past decade would not be drastically reversed.
"If there's a lesson to be learned from this, [it's] don't try to regulate this complicated, big, important, immense industry. It works well when the market is allowed to be the fundamental regulator," Shultz said.
He conceded that the drop in oil prices would affect "some banks in some regions, but the problems have been handled and can be handled." "I think the banking system is not in any danger," he said.
And to those who have suggested that an oil/banking crisis might topple the stock market, he declared: "I don't think the stock market is at big historic highs," after allowance is made for the impact of inflation on stock market indexes. As a self-described "market-is-always-right type," Shultz said he believes a good test of current stock market values is that they are "way below the valuations" established by those seeking to acquire companies through mergers.