The Seven Lean Years

By Christopher Byron

There is no quick fix for the Everything Crisis caused by energy prices

Once more the stage is set, the actors are in place and the grimly familiar ritual is preparing to play itself out. The price of oil is rising once again. Like a waking nightmare that seems never to end, the energy crisis of leaping prices, dwindling supplies and multiplying miseries goes on and on.

In all the sweep of postwar history, no event, no issue, no political or social process has more profoundly shaken the established world order, or brought about more rapid and tumultuous economic change, than the end of the era of cheap oil. This change has been called the energy crisis, but the term is too limiting. Rather than being merely an ongoing trauma over oil, the energy debacle has become a crisis of economics, of politics, of the very balance of power in world affairs. In short, it is an all-embracing, mesmerizing Everything Crisis.

The immediate focus is Bali, Indonesia, where the jet-about oil ministers of the 13-nation Organization of Petroleum Exporting Countries are gathering this week. The occasion will be OPEC's 59th ministerial meeting since the cartel was founded in 1960. Looming over all other discussions: whether to push up the cost of oil beyond the $30 Saudi benchmark price and the $37 per bbl. ceiling price set in June.

Seven lean years have passed since OPEC, in a few short weeks of 1973 and 1974, began radically manipulating worldwide petroleum prices by increasing the cost of a barrel of crude from $2.41 to $10.95. Since then, oil-consuming countries have paid the oil producers a staggering $370 billion for the precious black product that is essential to industrial survival. Saudi Arabian Oil Minister Sheik Ahmed Zaki Yamani warns that oil could easily rise to as much as $60 per bbl. in the foreseeable future (see box).

Until recently, bulging worldwide inventories in the oil-importing nations acted as a brake on rising prices. But the war between Iran and Iraq, which has cut total OPEC production by about 3.5 million bbl. per day, has created pressure for higher prices. Repeated bombings and shellings have reduced to rubble the refineries and export facilities in the two countries, and experts believe that it would take up to a year after hostilities ended before normal export levels could be resumed.

With the supply outlook clouding over, oil companies have become reluctant to draw down their inventories. As a result, prices have begun to rise for both crude and a variety of refined products like heating and diesel oil and gasoline. The little oil now being sold on the spot market is commanding about $40 per bbl. The price of heating oil on the East Coast is expected to increase from about $1 per gal. to perhaps $1.25 per gal. by early next year. Those rising prices are themselves encouraging cartel members to seek crude oil increases, thus intensifying the vicious circle of spiraling prices.

Though OPEC seems invariably to profit from the suffering of its customers, the organization has hardly engineered the crisis from which it is benefiting. Instead, the group has merely been a catalyst, if a particularly jarring one, for economic changes that were bound to come. Petroleum prices have been going up because worldwide demand for oil has been increasing relentlessly while supplies have fallen. The cartel's policies have been designed to exploit the opportunity and earn a higher profit from petroleum sales.

In the U.S. the tumult of soaring prices and unpredictable supplies has played havoc with the economy for years. Since 1973 there have been two recessions, and as energy prices have soared they have helped propel inflation to one of the highest sustained levels in the nation's peacetime history. The U.S. now stares at the possibility of perhaps a decade of 10% or higher annual inflation. The lives of Americans, from the clothes they wear to the cars they drive, have been profoundly altered.

In other developed countries, the damage has been equally severe. The rising cost of crude has flooded international banks with billions upon billions in petrodollars, and strained the world monetary system to the breaking point. Nations everywhere now confront the prospect of a long period of slow growth. France's recently released five-year economic plan for the first time makes no growth predictions at all. Rather, it says darkly, "tomorrow will be worse than today."

In the oil-thirsting nations of the Third World, the skyrocketing price of petroleum has threatened the virtual bankruptcy of whole economies, destabilized political systems, and even toppled governments. At one extreme, the social unrest that led to this year's military coup in Turkey was fueled, to a considerable extent, by the inability of that nation to maintain normal economic growth in the face of ever higher prices for imported oil. The Iranian revolution, on the other, was spurred by precisely the opposite problem: a far too rapid, and socially disruptive, industrial development that was made possible by inflated oil prices.

Diplomatically, the need of Western countries for petroleum imports from Arab suppliers has strained relations with Israel and among members of the NATO alliance. A pessimistic study titled Energy and Security, which was published last week, warns that only dramatically strengthened energy security programs can protect oil-importing nations from the shocks and chaos of supply interruptions.

With oil costs soaring, the hunt for alternatives to OPEC petroleum has become a global obsession. To bolster conventional sources of crude, oilmen are drilling more and deeper than ever before. Often they are going to depths of 15,000 ft. or more, and frequently in storm-tossed seas that not even a seasoned mariner would care to navigate. A record 60,000 new oil and natural gas wells are expected to be dug in the U.S. this year, as compared with 27,602 in 1973. Meanwhile, engineers are racing to find new and more effective methods to recover the estimated 75% of oil that remains in the ground after conventional pumping is completed.

As the energy squeeze has tightened, nations have begun returning to the fuels of an earlier age. With the expanded use of nuclear power now stalled in the U.S. by concerns over safety and waste-disposal problems, Washington has instead been pushing a program to boost the nation's use of coal by perhaps as much as 50% within the coming four or five years. Coal is by far the U.S.'s most plentiful fossil fuel, but it is difficult to mine and transport and dirty to burn. According to a study released last week by the 23-member International Energy Agency in Paris, the potential use of coal by the U.S. or other nations during the 1980s might be badly exaggerated.

As oil reserves have been slowly depleted, intensive efforts have begun to develop and exploit solar power, as well as the energy that is contained in the movement of wind and waves, and other even more unusual renewable fuel sources. In New Mexico, Massachusetts and elsewhere around the U.S., homeowners are already receiving electricity generated by large-scale windmills. In the research labs of numerous countries, scientists are struggling to bring down the manufacturing cost, and improve the efficiency, of so-called photovoltaic cells that convert sunlight directly into electrical energy. Research has quickened on the development of everything from alcohol-powered cars to vehicles that run on natural gas and even compressed air. In New England, long-abandoned dams built for the region's early industrial age are being refurbished as small-scale hydroelectric plants.

Meanwhile, energy conservation has become a preoccupation. Climbing fuel prices have forced people to change from energy wastrels to power misers. In New England, a woodstove in the living room has become as fashionable as a Duncan Phyfe table in the dining room. In the Sunbelt states, homeowners are installing ceiling fans and switching off air conditioners. In offices and factories around the country, architects and energy experts are retrofitting and redesigning buildings to capture and re-use the waste heat thrown off by everything from human bodies to computers.

The roots of the American energy problem trace back to the earliest days of the postwar era, when unimagined torrents of cheap oil gushed from the oilfields of the U.S. More than anything else, it was the U.S.'s policy of cheap and abundant oil that shaped the nation's destiny. Japan and Western Europe, which lacked domestic petroleum supplies, kept the price high for the precious fuel. But the U.S. went ahead pumping, refining and burning oil as if it were a magic elixir.

Cheap energy provided enormous benefits. The U.S. was able to substitute machine power for manpower, and resulting productivity increases more than doubled the American standard of living during the two decades before the start of the energy crisis. Yet in the process, tens of millions of Americans became prisoners of low-cost crude. Oil-heated homes, gasoline-powered cars, plastic packaging for food, synthetic fibers for the garment industry, and fertilizers used by farmers--all these were silent, and largely ignored, reminders of the nation's addiction to Demon Crude.

The carefree attitude persisted even after overall domestic oil production began to tail off in 1970. Heedlessly, the nation slipped into the bondage of foreign suppliers. By 1972 the U.S. was importing upwards of 4.7 million bbl. daily, or about 25% of its total consumption. Since 1972 the cost of imported oil to the U.S. has leaped from $4.7 billion per year to a projected $79 billion for 1980. The figure for 1981 could well exceed $100 billion, making OPEC now, in effect, the second biggest tax burden on the American people after the U.S. Government itself.

The experience since 1973 proves that there is simply no quick fix to the problem of surging energy prices and unstable supplies. In fact, both conditions are likely to grow worse as the decade progresses. Yet the cumulative effect of hundreds of minisolutions and conservation efforts--from the development of fuel-efficient cars and homes to the accelerated burning of coal by electric utilities and industry--does offer real hope for a long-term easing of the energy squeeze. As the saga of the past seven years shows, the world is not running out of energy per se, but only out of cheap oil. The outlook for years to come is one of continuing turmoil as people everywhere learn to husband precious energy and find new sources of power. In the end, that alone will be the solution to the Everything Crisis.

--By Christopher Byron. Reported by Richard Hornik/Washington and Bruce van Voorst/Brussels

With reporting by Richard Hornik/Washington, Bruce van Voorst/Brussels

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