An Oil Crisis: True or False?

Experts answer almost everything you ever wanted to know about energy

Oil prices are up and supplies are down, but people the world over are confused and skeptical about whether an energy crisis exists. If the crunch is for real, they wonder how bad it is, who caused it, where it is leading, and what should be done to cope with it. For the answers, TIME interviewed at length five leading independent oil experts. They are: Morris Adelman, 62, professor of economics at Massachusetts Institute of Technology; Walter Levy, 68, the dean of petroleum consultants and adviser to governments and oil companies; John Lichtblau, 57, head of the private Petroleum Industry Research Foundation; Arnold Safer, 42, an economist of Irving Trust Co.; John Sawhill, 42, president of New York University and former Federal Energy Administrator. Excerpts from from the interviews:

Is there a crisis?

LEVY: The Iranian revolution triggered a real crisis. The protests against corruption and excessive development will encourage other OPEC countries to slow oil production. There is nothing in sight that would lead to very substantial increases in oil supplies in the immediate or even medium-term future.

ADELMAN: There is no genuine supply crisis. There was an accident, Iran. We are traveling a bumpy road, and will continue to do so as long as OPEC is in charge. There is nothing we can do to make the cartel produce more. We have handed control of world oil over to a small, noncompetitive and irresponsible group.

SAWHILL: I prefer to call it not a crisis, but a problem, arising from our growing dependence for oil on a politically unstable part of the world. We have failed to curtail imports, and in the short term we are completely at the mercy of the Middle East oil suppliers.

SAFER: There are some crude shortages, but there is no crisis of physical supply. In the longer run, there is no shortage in terms of proven reserves or potentially discoverable oil.

LICHTBLAU: We are not going to run out of oil, but we may run out of suppliers who are willing to give us more, even if it is available. Oil can be denied either for political reasons or because a country simply has no economic interest in increasing production. That is the danger

Why are oil prices rising, and what will be the consequences of these increases?

LEVY: A perceived shortage of only 2% or 3% may result in price increases of the order of 20%, 30%, 40%, even before supplies actually run short. So far this year, OPEC has increased prices by about 25%. As a result, the importing world will lave to spend about $35 billion a year more for the same quantity of oil.

SAFER: The problem is not a few cents more for gasoline. The higher cost of oil will drain an additional $35 billion a year from the world's purchasing power, and only about half of this will be recycled back in increased OPEC imports. Economic policy is virtually helpless confronting the simultaneous inflation and recessionary impact of this phenomenon.

In the short term, what can the world do to cope?

ADELMAN: There is not a damn thing we can do. We have no carrots and no sticks. The President should publicly admit that we are in the hands of a group of people, the OPEC cartel, who are at the moment wholly beyond our control.

LICHTBLAU: We should use our surplus of natural gas to fuel industrial plants and utilities. Coal-powered electricity plants in the Midwest could export surplus electricity to the East and replace imported oil. One of our greatest errors was not to build up our strategic oil reserves. Had we done so, the Iranian cutback would have had less of an impact. We should move full speed ahead with the reserve plan now because there will be another crisis some time down the road.

SAWHILL: We do not have the luxury of shifting to alternative energy sources immediately, so we have to reduce imports. Mandatory standards must be set for the heating and cooling of commercial buildings; we ought to regulate outdoor advertising; and we should enforce the 55 m.p.h. speed limit much more aggressively.

What could be longer-term solutions?

SAFER: We must stop allowing some oil companies to deduct from their U.S. income taxes the royalties they pay to OPEC. The companies would then have greater incentive to explore for oil in non-OPEC nations. We should emulate Japan and Germany and set up a program partially funded by the Government to finance the search for new oil finds. Finally, we should impose an import quota on OPEC oil and create a North American free trade zone for energy to encourage deliveries from Mexico and Canada.

SAWHILL: We will never have any influence on OPEC until we develop a positive energy policy and a new generation of energy technology to replace oil. We should create a hemisphere energy policy that provides a tariff on oil imports but gives preferred access into the U.S. for Canadian and Mexican supplies.

LEVY: There is fundamentally no effective solution that could be achieved by any one country acting on its own. The importing countries are afraid to take a uniform position-this is the great failure. Led by the U.S., the importing nations as a group should refuse to admit any oil priced at a surcharge (that is, above the OPEC base price of $14.55 a bbl.). Few traders would then risk paying high prices for oil for which there is an uncertain market.

How can conservation be encouraged?

SAWHILL: Conservation is the one initiative that the American people can accept, understand and do something about. Low prices for oil have sent the wrong signals to people. Higher prices will convince people that we have a problem.

ADELMAN: If the Administration wants to be taken seriously, it must tax the energy that it wants saved. It is a disservice to control prices because you feed bum dope to consumers. When prices go up, people will use less. Seven cents more for gasoline will not make much difference, but the knowledge that prices are going to keep rising will change habits.

What will be accomplished by price decontrol?

LICHTBLAU: When you decontrol and raise the price of oil, less will be consumed. But whether more oil will be found is not clear. There will be some additional production, and more money will be spent to get secondary and tertiary recovery from older wells.

ADELMAN: Companies will get a powerful incentive to search for new oil and recover old oil. But it makes no sense to tie windfall profits to these efforts; the concern over excessive windfall profits is childish. The most important thing is to reassure oilmen that if they put money in the ground now, they will get the market price for the oil. they recover in two or three years' time.

SAWHILL: The important thing is to get prices up to provide the public with an economic incentive to use energy more efficiently and to provide industry with an incentive to look for new oil finds and develop expensive alternative sources, like liquefaction and gasification of coal. All the needed research, along with the expanding development of solar energy and other alternatives, could be supported by a new tax on gasoline.

LEVY: Decontrol will get rid of the most fantastic bureaucratic mess and give companies a greater incentive to search for oil. But this does not necessarily mean we will find more. Despite a very much larger effort in recent years to find oil, we just haven't found it. Incentives, or even disincentives, might be introduced to steer more investment by the oil companies into energy development. The important thing is that the windfall profits be used to cope with the shortage.

How can the importing countries loosen OPEC's grip?

ADELMAN: It is meaningless to talk of breaking the cartel because if it disap peared tomorrow, it would be reconstituted the day after. But the U.S. could and should use its immense buying power to erode OPEC'S power to raise prices. The objective would be to take money away from OPEC treasuries and put it in ours. The only effective counteraction that OPEC could take would be to cut off oil supplies altogether. If they did that we could confiscate their assets and send a couple of destroyers to blockade food deliveries. So if they don't want to send oil, they don't have to eat. If push came to shove, we-the U.S.would win.

LEVY: OPEC is not a normal cartel, and a confrontation is unlikely to work. The U.S. can stand to lose 8 million bbl. of OPEC oil a day for only a very short time, but OPEC could do without the revenues from that oil for several months.

What are the most promising alternatives to oil?

SAFER: My favorite is natural gas; we have a short-term extra supply and good prospects for finding more. The myriad restrictions on mining, transporting and burning coal do not make that a here-and-now prospect. Nuclear, despite the recent Three Mile Island accident, is safe and more efficient.

LEVY: Nuclear is the key. We plan to expand the number of reactors, and nothing must prevent this. The effort of developing new energy sources should remain in the hands of companies, but federal funding should be used to promote projects whose rewards are probably remote, and the costs exceed industry's capabilities, like the direct conversion of solar energy into electricity.

LICHTBLAU: Natural gas has a lot of potential at new, higher prices. There is a lot to be found; we have not really looked for it the same way as for oil because earlier there was no market and later prices were set so low that there was no incentive. We still have to sort out nuclear. It is likely that a number of plants now operating will have to be shut down for a period, and new reactors will be delayed.

SAWHILL: We need a major R. and D. effort to develop new natural gas supplies from conventional as well as nonconventional sources like coal-bed methane and tidal sands. The future for nuclear energy now looks bleak, and I don't think we will return to a coal-based economy. We are going to have to shift to a new base of energy technologies, such as solar energy, nonconventional gas and perhaps shale oil or liquefied coal.

ADELMAN: If we had not been in such a rush, the reactor accident might have been avoided, but nuclear is now back to the drawing boards. We need less regulation and more development of low-sulfur coal. Solar will grow only slowly, but that is where a lot of R. and D. money ought to be put. Energy R. and D. spending won't help solve anything for ten years, but something may come in big and leave us in a better position at the end of the decade.

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