Gas lines again?

Gas Lines Again?

WITH OIL PRICES about half what they were in 1981, it is only natural for Time magazine, among others, to revive the old story that expensive oil would really be cheaper. Cheap oil shuts down domestic production, they say, so the U.S. ends up importing more oil. OPEC then slashes production, leaving Americans waiting in line for $2 gasoline. The solution, of course, is to place a big tariff on imported oil, making Americans pay more now so they don't end up paying more later.

This story rests on short memories. Gas-station lines had nothing to do with "shortages,' and everything to do with price controls and allocating fuel to where it wasn't needed. Around 1980, many seemingly sophisticated studies of soaring world consumption and omnipotent Arabs were used to predict that oil would sell for $60 by now. Since then, the world has made big investments in saving energy, and nobody is pulling the insulation out of his attic just because oil prices went down. Nor has anybody, except the United States, slowed down on nuclear-power programs. OPEC countries made big investments in their own petrochemical plants, which would have to lay off workers if the same cartel that couldn't keep the price of oil from falling could somehow make it rise.

The effort to bring back the "energy crisis' is based on a theory that oil prices depend on how much of the oil consumed in this country is supplied by imports. Yet the U.S. is already importing a larger percentage of its oil than in 1981, when the price was twice as high. In reality, the oil price depends on how many dollars the whole world is willing and able to offer for how many barrels of oil. Since the economies of Europe, Japan, and Latin America have been very weak, they neither need nor can afford much oil. Oil is no different in this respect from cotton, copper, lumber, or other raw materials. Commodity prices began soaring in 1972 and 1978, and falling in 1981 and 1985--long before oil prices.

Every price is a ratio of quantity to dollars, such as barrels of oil per dollar and ounces of gold per dollar. When dollars get too cheap, the barrels and ounces become costly. A falling dollar makes oil cheap in terms of other currencies, so Japan and Europe buy more, driving the dollar price up. Oil producers become less eager to trade oil for dollars that buy less, so they cut production. For these reasons, prices of oil and gold tend to rise and fall together. But all this depends on the dollar falling because of inflation in the U.S., not deflation in Japan and Germany. The fact that gold is still selling for about the same price as it did three years ago, while many other commodity prices are actually much lower, does not portend a serious inflation of oil prices. Maybe that explains why those who stand to benefit from $35 oil have to advocate a big tariff to make their forecasts of high oil prices come true. Now, if they could just explain how having the highest energy costs in the world is supposed to make U.S. industry competitive.