Looking ahead--oil.

NEW YORK, AUGUST 12

RAYMOND J. LEARSY has written a book memorable in the sense that nightmares can be memorable, but also useful. If the nightmare is that you died of a drug overdose, and the memory of it causes you when in command to draw back from the marginal dose, then the nightmare has served a purpose. Learsy writes (his book is called Over a Barrel: Breaking the Middle East Oil Cartel) about what could happen if we continue to go as we are going. The price of gasoline today is 60 percent higher than it was a year ago. Such data require extrapolation.

After 200 pages of history and analysis, telling the story of the founding of OPEC, of manipulations and broken promises and extortion and opportunism, Learsy acknowledges OPEC's success. Sixty-dollar-a-barrel oil is certainly a success, but the body on which it feeds does not expand, pari passu, with the successes of OPEC. It does not matter how much you consume, if the supplies are inexhaustible and your capacity, insatiable. But here is what we might be facing if oil rose to $100 per barrel.

I quote from the author. Commuters suddenly forced to pay $2.50 or more for a gallon of gas began to brown-bag their lunches, inching away from restaurants. Americans who could afford a vacation went on shorter trips, putting a dent in the tourist industry. Trucking companies hauling everything from wines to furniture imposed a hefty surcharge on shippers, who passed it on to their customers, who then passed it farther down the line to the retail buyer if they could.

The crunch forced many independent truckers to sell their rigs, playing havoc with shipping. Higher fuel costs sent the U.S. Postal Service deeper into the red and threatened the survival of FedEx and UPS. With the break-even point for airlines a distant memory at $31 a barrel, sharp fare boosts were the only option. Traffic spiraled into a tailspin, and one airline after another declared bankruptcy.

But of course, oil is vital to everything from plastic picnic forks to printer's ink. Manufacturers raised prices across the board, and potholes went unfilled in city streets. Municipal and factory employees were laid off or fired. Foodstuffs of every kind reflected the higher costs incurred by growers and shippers.

Runaway prices on just about everything took the Federal Reserve Board by surprise. Determined to keep interest rates low, the Fed's governors were ill-prepared for the economic crisis. The Fed belatedly boosted interest rates 2 percentage points. The heretofore unheard-of move jammed on the economic brakes so swiftly that you could almost smell the stink of burning rubber. Higher mortgage rates stopped would-be home buyers dead in their tracks. The real-estate market crashed, wiping out billions of dollars of paper profits and putting holders of adjustable-rate mortgages and home-equity loans in peril. Foreclosures and tax-default auctions became common, consumer spending dried up, and soon the entire world was in a recession.

The rise in oil prices is not a fancy of Ray Learsy, and the unpredictability of that rise manifestly requires self-protection. How?

Again, quoting from the author. First, we must cut back energy usage by taking steps to control demand (just as OPEC works to control supply). Second, we must become energy self-reliant.

We should use the Strategic Petroleum Reserve (700 million barrels) to douse incendiary shoots of inflationary fire. Those uses of national oil would be loans, not grants; repayable in kind, when the price of oil had stabilized.

We will need to encourage alternative energy sources while adopting a voucher-based gas-distribution program. For the duration of the emergency, gas users would have access to magnetic debit cards in which were embedded a national quarterly target of per-consumer gasoline. Drivers whose allotted amount of gas didn't meet their needs could buy part or all of someone else's allotment. For the average driver, this distribution plan would not increase gasoline costs. A consumer would pay the same out-of-pocket cash per gallon, and the government wouldn't get its hands on any more of the taxpayers' dollars. It is a more efficient way of distributing energy because it employs market incentives to allow heavier gasoline users to get what they need without increasing overall consumption of energy.

It was 20 years ago that the Saudis and the U.S. arrived at a deal. The Saudis would set prices so as to protect the U.S. oil industry. And the U.S. would protect the Saudis' independence. We regret that, and should make the Saudis regret it also.

--UNIVERSAL PRESS SYNDICATE