Pay Now, Win Later?

When Economist John Maynard Keynes published his General Theory in the 1930s, Franklin Roosevelt and his New Dealers saw it as philosophical justification for their much-disputed strategy of pulling the nation out of the Depression through heavy Government spending and big budget deficits. The Ford Administration, which has prepared a bold energy policy built around sharply higher prices for oil and natural gas, may get a similar boost from a new study by the Paris-based Organization for Economic Cooperation and Development. The OECD, a research-oriented group whose members are 24 of the world's leading industrial nations, concludes in a two-volume study published this week that in the long run, today's high oil prices are really best for everybody--especially for the U.S.

Calculating future world supply and demand, OECD economists have developed models showing the purely economic effects of keeping oil at three different price levels: $10.80 per bbl., which is roughly the current world price as dictated by the Organization of Petroleum Exporting Countries; $7.20 per bbl., a rate regarded as "fair" by many Western economists; and $3.60 per bbl., which is what the cost might have been today if OPEC had not been raising prices unilaterally since the 1973 Middle East war. Among the projections:

> The U.S., in continuing to meet the $10.80 price, would be able to reduce imports from around 6 million bbl. a day now, to zero by 1985 and actually export a domestic-oil surplus of 1.35 million bbl. a day. The assumption is that high prices would spur a 114% rise in U.S. oil production over a decade while depressing consumption, thus enabling the U.S. to stop importing oil altogether. In this area, the OECD researchers are even more optimistic than the Federal Energy Administration; in its Project Independence Blueprint published last fall, the FEA foresaw imports still hovering at 3.5 million bbl. a day in 1985, even in a high-price situation. A price drop to $7.20, the OECD continues, would leave the U.S. still importing 5.1 million bbl. a day by 1985, while a return to $3.60 oil--which is improbable, to say the least--would throw the country back into a cheap-energy binge that could double the current import level.

> Western Europe, which is far more dependent on OPEC supplies than the U.S., would shave imports by only about 8% (to 13.3 million bbl. daily) if oil stayed at $10.80. Yet lower prices would vastly increase its reliance on foreign oil. At $7.20, Europe's oil imports would rise another 21%, to 16.7 million bbl. daily; at $3.60, they would zoom by 71% to 23.8 million bbl. a day in 1985.

> OPEC producers would feel a gradual squeeze in a world of $10.80 oil, as users gained increased self-sufficiency. Total demand from the industrialized countries would drop by at least 10% in ten years. By the late 1970s, the 13-nation cartel would have to consider deep cuts in production--and perhaps in prices as well. But by that time, the consuming countries would have a vested interest in high-cost oil, seeing it as permanent insurance against further extortion by the oil producers.

To Americans, who are paying historic high prices for energy, and could soon be paying even more under the Administration's energy program, the OECD's projections are about as comforting as January's bill from the local gas and electric company. Yet the OECD conclusions are in line with the arguments Ford has been hearing in recent weeks that a "floor" price of about $11 per bbl. of oil would be the most effective way to reduce imports and increase self-sufficiency. Still, the costs will be steep, perhaps impossibly so for those countries that, unlike the U.S., have only limited energy resources.

The OECD estimates that the tab for near self-sufficiency--in terms of higher oil prices, slower growth and investment in new production and alternate energy sources--could add up to $2 trillion between now and 1985 for the industrial nations. Its report dryly observes that some governments might decide that the sacrifices involved in achieving absolute energy independence "may be undesirable." In the end, all governments will have to balance the need for self-sufficiency against other national priorities.

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