Enjoy Now, Pay Later

By Barbara Rudolph

To everyone who has bitter memories of the oil shocks of the 1970s, when the Organization of Petroleum Exporting Countries drove oil prices to intolerable heights, today's bargain-basement values seem like sweet vengeance indeed. The U.S. has learned once again to love cheap energy, and why not? Gasoline and home-heating fuels are in plentiful supply. Inexpensive oil helped keep * inflation last year at its lowest level in 25 years, sent interest rates to nine-year troughs and aided in sustaining a four-year-old economic expansion.

But the thrill of cheap energy may prove perilously intoxicating. As U.S. energy consumption increases, imports are reaching alarming levels. At the same time, depressed oil prices have caused U.S. petroleum production and exploration to dwindle dangerously. This means, experts caution, that America is setting a time bomb. The scary possibility is that by the mid-1990s, as the U.S. becomes dependent on foreign oil for more and more of its consumption, OPEC could suddenly and steeply raise prices, throwing the economy into chaos. Warns Interior Secretary Donald Hodel: "OPEC is being placed back in the driver's seat. The U.S. is being set up for a majoroil-price shock."

Hodel is not the only Government official expressing concern. Next week the Department of Energy will release a 400-page report that will examine America'svulnerability to another major energy crisis. National Security Adviser Frank Carlucci will assess the possible security threat posed by a weakened U.S. petroleum industry. At stake also is the stability of Europe and the rest of the oil-consuming world. Since oil is traded in one global market, rising U.S. imports could create a worldwide crunch.

These days, though, tales of future shocks seem like distant fantasies. OPEC remains a cartel held together by the loosest of links. Three months ago the group agreed to cut production by 7%, to 15.8 million bbl. a day, and prices later jumped by about $4, to more than $19 per bbl. But OPEC's continued weakness soon surfaced. Last month certain members were reported to be cheating on the cartel's production accord, and prices fell below $15 per bbl. Even as Saudi Arabia worked last week to keep the production agreement intact, causing prices to rise about $2, to $18 per bbl., many traders doubted that the pact would ultimately stick. Few OPEC watchers believe that the cartel will be able to push prices higher than $20 per bbl. in the next two years.

Still, OPEC is expected to regain its strength sooner or later, and the U.S. is doing little to defend itself against a revitalized cartel. American oil production, which had held fairly steady since the late 1970s, declined last year. Total output fell by 3%, or 300,000 bbl. a day. The Department of Energy projects that U.S. oil production will fall by an additional 440,000 bbl. a day through 1987.

As domestic production faltered last year, imports rose by 900,000 bbl. a day, a 28% increase. The U.S. now depends on foreign producers for 38% of its supplies. In 1973, when oil prices surged in the wake of the Arab embargo against the U.S., Americans relied on foreign producers for 35% of their oil. As in the halcyon days of the 1960s, Americans believe they ought to be able to buy big cars if they feel like it or turn up the thermostat at every chill.

For the moment the worldwide oil glut enables the American public to indulge its taste for imported energy without driving up prices. Excess capacity totals some 12 million bbl. a day, about 75% of which can be found in the Middle East. But the glut may vanish within five years, as growth in non- Communist economies soaks up the surplus. Says Daniel Yergin, president of Cambridge Energy Research Associates, a Massachusetts-based consulting firm: "We expect the world oil market to look radically different in the early 1990s."

One striking difference will be the falloff in British oil production from the North Sea. Last year 2.56 million bbl. a day were produced. By 1992 the output is expected to drop below 1.7 million bbl. a day, making Britain a net importer of oil for the first time since 1980. While Mexico's reserves should last well into the 21st century, its production is expected to stay flat for the next few years. Because of the shaky state of the Mexican economy, Pemex, the state-owned oil company, will probably be unable to make the investments needed to bolster oil production.

When the glut is gone, OPEC will be a formidable force again. Predicts Dallas Energy Consultant Ed Vetter: "Once the OPEC countries got us backed into a corner, they could raise their price with impunity and we would have no way to respond." A recent report by the National Petroleum Council, an industry group that advises the Department of Energy, asserts that by 1990 OPEC will be producing at 80% of its capacity, as compared with 66% today. Historically, whenever OPEC has reached the 80% threshold, it has succeeded in imposing -- and sustaining -- oil-price hikes. The report estimates that the U.S. could be dependent on foreign supplies for 60% of its consumption by as early as 1995.

Of course, since energy forecasting is often as accurate as gazing into a crystal ball, the National Petroleum Council report could turn out to be wrong. A more optimistic outlook is offered by the Energy Information Administration, a division of the Department of Energy. It estimates that oil will sell for less than $20 per bbl. for the next five years and that not until the year 2000 will the U.S. be dependent on foreign supplies for about 55% of its consumption.

Whenever the moment of truth arrives, it would seem, the beleaguered U.S. petroleum industry will be in no position to respond to a resurgent OPEC. Fully 75% of all U.S. drilling rigs now stand idle. A total of 806 rigs are currently operating in the U.S., down from 4,530 in 1981. The oil is there for the taking, of course, but it is simply too expensive to get out of the ground. While Middle East producers can find and lift a new barrel of oil for about $1, U.S. companies spend an average of more than $17.

Investment in exploration has fallen dramatically. Last year oil firms spent an estimated $16 billion in exploration and production, down from $33 billion in 1985. Says L. Frank Pitts, head of Dallas-based Pitts Oil: "Our industry is being dismantled at a rapid rate."

That is a trend that may not be easily reversed. Rigs are being taken apart and sold for scrap. Stripper wells, which produce less than 10 bbl. of oil a day, are getting plugged up. Once a stripper well is closed, it becomes as expensive to reopen as it is to drill a new well. Petroleum engineers are abandoning the industry, and college graduates are avoiding careers in oil. Meanwhile, alternative sources of energy, such as solar heating and synfuels, are not being developed rapidly because of their high cost.

How can a new energy crisis be avoided? One controversial proposal is for the Government to impose an oil import fee. By making energy more expensive, such a surcharge would cut down on consumption. One industry study estimates that the surcharge would trim imports by 26% by 1990. It would have the added salutary effect of raising federal revenues and reducing the budget deficit. On the other hand, higher oil prices would hurt energy-intensive industries like petrochemicals, making them less competitive in world markets.

Another way to strengthen the U.S. energy industry would be to open up more federal lands to oil exploration. Interior Secretary Hodel is eager to develop part of the 19 million-acre Arctic National Wildlife Refuge in Alaska. On the refuge is a 1.5 million-acre plain that may contain the largest untapped onshore oil reserves in the U.S. Says Hodel: "If we close this off, it would be like putting up a sign saying 'We're incapable of helping ourselves.' " Hodel also wants to allow drilling off the coast of California. Environmentalists oppose both proposals, offering the argument that oil drilling would endanger wildlife.

Many energy experts favor bolstering the Strategic Petroleum Reserve. It was established in 1975, when the Government decided to set aside supplies of oil to prepare for a shortage. The reserve contains 515 million bbl. of oil, located in huge salt caverns along the Gulf Coast of Louisiana and Texas. Those supplies represent about 100 days' worth of imports. While the original goal was to put 750 million bbl. in the reserve, some experts believe the target should be raised to 2.5 billion bbl. The Reagan Administration, though, has proposed slashing the rate at which the reserve is filled, from 75,000 to 35,000 bbl. a day. Cutting back on oil purchases would reduce federal expenditures, a relatively painless way to trim the budget deficit. Adam Sieminski, an energy expert at the Washington Analysis group, says such a policy reflects a "clear case of myopia."

The national debate over how the U.S. can best stave off a future energy crisis is just beginning. Peter Beutel, an analyst with Elders Futures, a major Wall Street oil-trading firm, believes that despite America's current infatuation with cheap oil, most people can readily recall what it means to suffer through an energy shortage. Says Beutel: "We were caught napping twice. We would have to be extraordinarily foolish to fall into the same trap again." Maybe so. This much is certain: the oil shocks of the 1970s came as a complete surprise. The next one will not.

CHART: TEXT NOT AVAILABLE

Credit: TIME Chart by Cynthia Davis

Caption: PUMPING LESS . . . BUYING MORE

Description: U.S. oil production in millions of bbl. a day, 1985 and 1986. Oil imports, 1985, 1986.

With reporting by Jay Branegan/Washington and Raji Samghabadi/New York