Step on The Gas, Pay the Price

By Barbara Rudolph

"We're really living with a false sense of security," warns George Mitchell, an independent Houston oilman. "We're heading for deep trouble." What provokes Mitchell's dire prediction is the shriveled condition of the U.S. oil-drilling industry, which he believes has made the country seriously vulnerable to a future energy emergency. "We're losing ground faster than we might have predicted even a few months ago," he says. Adds John Watson, another Houston oilman: "All the people have left, rigs have been dismantled, the financial industry has turned its back on oil and gas. It would take an all-out crusade to come back."

Not everyone is quite so gloomy, but the current brisk run-up in oil prices serves as a reminder that the U.S. energy supply is increasingly under the influence of outside forces. During March commodities traders bid the price of oil above the $20-a-bbl. threshold for the first time in 17 months. Last week the futures price of West Texas Intermediate, the benchmark U.S. crude, reached $20.15 a bbl., up some 50% since last October. The rally largely reflects an unexpectedly successful campaign by members of the Organization of Petroleum Exporting Countries, along with several non-OPEC countries, to curb their output and reduce the world's oversupply. Since early January, OPEC production has fallen about 3.5 million bbl. a day, to some 19 million.

While the price of petroleum is still a long way from its $35-a-bbl. peak in 1981, the U.S. is sliding back to a level of dependence on foreign sources not seen since the oil-shock days of the 1970s. January petroleum imports averaged 8.1 million bbl. a day, up almost 21% from a year ago and surpassing domestic production (8 million bbl.) for the first time in more than a decade. The import surge has hampered efforts to shrink the U.S. trade deficit, and rising prices have aggravated inflationary pressure.

As if the 1970s were only a bad dream, consumers have been content to step on the gas. Sales of light trucks and four-wheel-drive vehicles, which generally guzzle more fuel than autos, have set U.S. sales records for four of the past five years. Small wonder: the price of gasoline, adjusted for inflation, is at its 1965 level. Among customers choosing a recreational vehicle, says Bill Jocoy, a salesman at Northwoods RV Supermarket in Lansing, Mich., mileage per gallon ranks only fifth or sixth among their priorities, after color and floor plan.

The long stretch of low oil prices during the 1980s has discouraged U.S. exploration and consumption. Only 740 drilling rigs were operating in the U.S. / last week, down from 943 a year ago and a far cry from the 4,500 functioning rigs in late 1981. Exxon's spending on domestic drilling dropped nearly two- thirds from 1985 to 1987, to $333 million. Oil experts estimate that prices will have to stabilize at no less than $25 a bbl. to encourage a drilling resurgence in the U.S. Many American oil companies have boosted their exploration overseas, where finding oil typically costs $1.50 to $2 less per bbl. than in the U.S.

What would happen if foreign producers cut off the U.S. supply of crude, as OPEC did in the 1970s? In the short run, the U.S. would not experience dire shortages. A Commerce Department study found that in the event of war, the country's demand for fuel could be met by domestic production and the Strategic Petroleum Reserve. Created 13 years ago, the reserve is now up to 515 million bbl., equivalent to about three months' total consumption, stored in salt caverns along the Gulf Coast of Texas and Louisiana.

The Government study concluded, however, that if foreign supplies were cut off oil prices would quickly skyrocket, inevitably sending the economy into a tailspin. Because production takes years to gear up, the U.S. petroleum industry could not fully make up the slack of the lost imports. Says John Boatwright, Exxon's chief domestic economist: "It's not a garden hose you can turn on and off."

Washington is showing renewed interest in measures that would encourage oil companies to produce more and consumers to use less. One proposal is to increase incentives to the oil industry, which has moved its production overseas partly because tax breaks for U.S. drilling have declined in recent years. Another resurgent idea, which appeals to legislators primarily as a means of cutting the budget deficit, is to increase the 9 cents federal gasoline tax by anywhere from 5 cents to 50 cents.

Opening up more federal land to oil exploration would be another way to bolster the energy industry. Earlier this month the Senate Committee on Energy and Natural Resources approved legislation to allow drilling in Alaska's Arctic National Wildlife Refuge. Experts believe the field may hold enough oil to supply U.S. needs for about 20 months. But the bill will face fierce opposition from conservationists who argue that drilling could destroy caribou, polar bears and other wildlife. Opposition could be bolstered by last week's Alaskan oil spill.

Even if the Arctic Refuge is developed, the U.S. will remain in the position of a hungry consumer with a relatively small larder. The Persian Gulf now holds two-thirds of the world's proven oil reserves. The U.S. share is less than 3%, while its annual consumption has reached nearly 30% of worldwide usage. Those sobering figures are reason enough for the U.S. to avoid gas- gulping habits that would bring on another painful awakening.

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CREDIT: TIME Chart by Cynthia Davis

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With reporting by Gisela Bolte/Washington and Richard Woodbury/Houston