Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, December 26, 1993 TAG: 9312210253
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: By BOB DEANS COX NEWS SERVICE
DATELINE: WASHINGTON LENGTH: Long
As the year wound to a close, Americans were rudely awakened when a young Saudi sheik named Ahmed Zaki al-Yamani announced two days before Christmas a doubling of world oil prices.
Life was about to change, and Washington couldn't do a thing about it.
"The industrial world will have to realize that the era of their terrific progress and even more terrific income and wealth based on cheap fuel is finished," Shah Mohammed Riza Pahlevi of Iran crowed from Tehran. "They will have to find new sources of energy and tighten their belts."
Twenty years later, oil prices have collapsed under market pressures that show no signs of abating. The term "energy crisis" is seldom heard, and big cushy cars once again rule the road.
And yet, only now is it clear just how prophetic the Shah's admonitions were.
Yamani's pronouncement changed the world, draining the United States and its wealthy allies of hundreds of billions of dollars over the coming decade and ushering in an era of high influence and startling wealth for members of the Organization of Petroleum Exporting Countries - OPEC.
What followed was nothing less than a global reordering of the strategic, political and economic facts of life, a reordering that reached deep into the lives - and pockets - of every American, rich or poor.
Consumers learned that everything they bought, from tires to tomatoes, required oil either to produce or to deliver, or both; and as OPEC's prices rose, so did inflation at home.
Yamani, the Saudi oil minister, became a household word, as news reports fixated on the meetings and machinations of OPEC. American reliance on "foreign oil" became a national security buzzword.
While gasoline lines, heating oil shortages and an unnatural proliferation of subcompact Japanese cars on interstate highways quickly came to symbolize the new order, the actual changes OPEC forced were even more profound.
International oil companies and U.S. drillers saw the value of their crude oil holdings soar. Oil industry profits doubled to $10.7 billion in 1974, and from there quadrupled to $39 billion by 1981.
The boom renewed drilling and exploration activity across the United States. It sparked a real estate and building boom in the Texas-Louisiana-Oklahoma oil patch, fueled construction of the trans-Alaska pipeline and sent oil companies plunging to previously unimagined depths from spindly offshore rigs across the oil-rich North Sea.
But OPEC's precipitous rise would soon lead to world recession, an epic financial collapse and, eventually, a war that pitted half a million U.S. troops against Iraq after Baghdad invaded Kuwait following a long oil-centered dispute.
From the shape of geostrategic alliances to the energy-efficient homes, factories, cars and light bulbs largely taken for granted today in a world once again flush with cheap oil, it's hard to imagine almost any aspect of modern life that wasn't affected by OPEC's rise.
"The international order had been turned upside down," energy analyst Daniel Yergin wrote in "The Prize," his award-winning history of the international oil industry. "Those who seemed to control oil prices were regarded as the new masters of the global economy . . . OPEC's members would determine if there was to be inflation or recession. They would be the world's new bankers."
For a time, at least, they were also its villains, blamed for high unemployment, curtailed growth and double-digit inflation across the industrialized world.
"In a sense, it's only now, in the mid-1990s, that we're finally overcoming the problems that were associated with the oil price shocks of the 1970s," said John Lipsky, chief economist for the New York investment firm Salomon Brothers.
As OPEC states flooded the financial centers of New York, London and Tokyo with petrodollars, banks went on a lending spree across the developing world. That laid the groundwork for a Third World debt crisis that would later cost those banks billions of dollars.
The unforeseen oil price drops of the mid-1980s helped send real estate values tumbling, which in turn triggered the half-trillion-dollar savings and loan collapse, a nightmare for lenders who had believed oil prices would forever defy gravity.
"I, among others, can remember when institutions as serious as the World Bank were making plans based on assumptions of $100-a-barrel oil prices," Lipsky said. "Projects financed on that basis did not have a happy fate."
For more than a decade, OPEC thoroughly bedeviled Washington.
President Jimmy Carter blamed "the skyrocketing cost of OPEC oil" for driving inflation to 13.3 percent - a 33-year high - during his term.
Carter was so caught in OPEC's grip that by 1977, less than a year after being elected, he warned the nation that "strict conservation" was needed or "we could use up all the proven reserves of oil in the entire world by the end of the next decade."
Today, the world is awash in oil that, adjusted for inflation, fetches roughly one-fifth what it cost when Carter left office. His dire prediction that, "Unless we act, we will spend more than $550 billion for imported oil by 1985," turned out to be high by a factor of 10.
World crude-oil prices now hover near $15 per 42-gallon barrel, well below OPEC's official target price of $21. Many analysts believe the price could fall even lower.
"The drop has put dollars into consumers' and business's pockets," reported Salomon Brothers. Indeed, cheap oil is the main thing that's kept inflation, hence interest rates, from rising in recent months, despite increasingly bright economic activity in the United States.
Barring a surprise spike in oil prices, the New York investment house Merrill Lynch & Co. reckons inflation through early next year will be roughly 0.4 percentage points lower than it would have been if oil were bringing $21 a barrel.
But if cheap oil is a boon, it may also pose a danger. Twenty years ago, Americans bought one-third of their oil from abroad. Today that portion has risen to one-half, making the United States even more susceptible to the whims of foreign oil suppliers than it was in 1973.
"We're going to be overly dependent on foreign energy, in particular oil, making us vulnerable as the remaining superpower," said oil analyst Dale Steffes, who heads Planning and Forecasting Consultants in Houston.
Low oil prices, said Steffes, are only encouraging an increasing U.S. reliance on imported crude. "It's going to be 66 percent of [U.S.] oil in the year 2000."
by CNB