Taking Power Over Oil By PHILIP K. VERLEGER JR. EWPORT BEACH, Calif. -- The cost of oil is rising again, and the conventional wisdom in the industrialized countries is that prices can only come down if OPEC increases oil production. President Clinton, meeting with the Saudi crown prince, Abdullah, last week in New York, followed this line, cautioning the prince that high oil prices threaten the global economy. The finance ministers of European Union nations echoed his warnings and called on OPEC to pump more oil.

Listening to these politicians or to spokesmen of the American oil industry, one might conclude that the entire problem is the fault of the Organization of Petroleum Exporting Countries. OPEC did, indeed, cut production in March 1999, when oil prices were around $10 a barrel, and in reaction to the reduced supply, prices more than tripled. But the West is not powerless in the pricing of oil.

For decades, American strategy has been dictated by the assumption that only OPEC could bring oil prices down. Time and again Americans are treated to the spectacle of our officials prostrating themselves before officials from Saudi Arabia, Mexico and Venezuela to beg for more oil. These officials seem less like leaders of the free world than like Oliver Twist pleading, "Please, sir, I want some more."

Not only is this approach to oil diplomacy humiliating, but it is also completely unnecessary. We can keep prices down on our own.

The world's leading industrialized countries hold more than 1.2 billion barrels of oil in their strategic reserves  stockpiles created 25 years ago in reaction to the Arab oil boycott. Nearly half of this oil is owned by the United States, and Energy Department officials have outlined a creditable plan to use the stocks to moderate prices this winter: The government would lend up to one-third of its crude reserve to refiners before demand reached seasonal peaks, on the guarantee that the refiners would return the crude later in the year.

If Washington were to do this today, crude prices would be likely to fall by at least 15 percent and possibly by 20 percent, which might prevent heating oil prices from rising to $2 a gallon this winter.

Moreover, instead of asking refiners to return the same number of gallons of oil in the spring, the government could require them to return oil with an equivalent dollar value. Because spring crude futures can be bought at relatively low prices, refiners would end up returning more oil than they borrowed, at no monetary loss. This would mean a larger strategic reserve for the future.

A similar plan to release some of the strategic reserve was advocated last fall by Senators Charles Schumer, Democrat of New York, and Susan Collins, Republican of Maine. Yet nothing was done, and consumer heating oil prices soared above $2 a gallon in New England.

Why does our government choose to beg rather than act? There seems to be a combination of reasons. One is the predictable governmental fear of upsetting a status quo, especially one involving the geopolitically sensitive nations of the Middle East. Another is an ideological hesitancy to have the government interfere with the free market (as though the OPEC-dominated oil trade in any way resembled a free market). Also, we are under pressure from our allies in Europe and Japan, who seem timid about upsetting Saudi Arabia.

The American failure to tap into the reserve is part of a larger bankruptcy in energy strategy. For example, the government advocates increased use of clean fuels like natural gas, low- sulfur diesel fuels and reformulated gasoline. However, it opposes steps that would actually increase production of these fuels, such as leasing more offshore land for exploration or loosening environmental regulations that make it hard for companies to overhaul their existing refineries.

Likewise, the government pushes the deregulation of electric utilities, yet little has been done to break the monopolies that traditional utilities have over distribution grids. When monopoly practices cause prices to rise, the government's standard response is to blame consumers for excessive consumption.

As for tapping into the oil reserve, there is a perfect model for using government power to bring sanity to the market: the success of the Federal Reserve in using monetary policy to keep the economy on an even keel over the last two decades. One hopes that President Clinton and Energy Secretary Bill Richardson will realize that they have the same types of tools used by Alan Greenspan. They only need to decide to use them.

There is no need to go to OPEC on bended knee.

http://www.nytimes.com/2000/09/13/opinion/13VERL.html

-- Martin Thompson (mthom1927@aol.com), September 13, 2000