As Oil Prices Rise, Clinton Reaps a Tactical Windfall

WASHINGTON — The Clinton administration is following a simple rule for the politics of oil prices. Find out what President Jimmy Carter did. Then do the opposite.

That means no cardigans. No grand phrases about an energy crisis being “the moral equivalent of war.” And, above all, a studious avoidance of that word “malaise” that hung around Carter’s neck like a rotting albatross.

In short, when faced with a sharp jump in oil prices, presidents should not panic. The first thing to do is to work out what kind of an oil crisis they are dealing with. And there is, in America’s institutional memory, enough of a data base to define at least three different kinds.

In the wake of the 1973 Yom Kippur War, the oil price rose because the Arabs and their allies in the Organization of Petroleum Exporting Countries made a political decision to cut supply and force up the price. After the fall of the shah of Iran in 1979, supplies were interrupted and OPEC forced the price up again.

Those were two non-military and political challenges, which the United States and the West absorbed and eventually overcame by non-military means. Or rather, the West watched Iraq and Iran go to war and break the OPEC production limits by pumping vast amounts of oil to finance the fighting. In 1985, the oil price finally collapsed, from more than $35 a barrel to $18, and has hovered roughly around that level ever since.

In 1990, the oil price spiked up again, toward $30 a barrel, because Saddam Hussein invaded Kuwait. That was a military challenge, and the United States and the West went to war to defeat it.

What we see now is different. There has been a relatively small rise in the price of gas in the United States, from an average of $1.12 for a gallon of unleaded regular on Feb. 9, to $1.28 on April 28.

Although in some markets, like California, the price jump has been sharper, gasoline in the United States is still cheap by world standards, even by U.S. historical standards. In constant 1973 dollars, Americans were paying almost the same for a gallon of gas last week as they paid in 1965--before OPEC had been heard of.

Moreover, there is no political decision behind this latest modest increase. There has been no OPEC resolution, and no new revolution in the Middle East. There have, instead, been a series of market forces at work. And as the White House astutely realized, there is little that presidents can do about market forces.

Still, the White House knew a political fuss was coming, and got ready. The first, ranging shot was fired by Sen. Phil Gramm (R-Tex.), suggesting the 4.3-cent-a-gallon tax increase of President Bill Clinton’s 1993 budget should be scrapped to help U.S. motorists.

The White House gathered its data and waited for the first salvo from the only Republican they worry about, Sen. Bob Dole. They prepared the political equivalent of those radars that plot the precise source of enemy gunfire from the trajectory of the incoming shell.

As soon as Dole spoke--to say Gramm had a good idea, and maybe the “Clinton gas tax” of 4.3 cents should go--the White House guns opened up. The problem was not the 4.3-cent tax, but the earlier 10-cent-a-gallon tax that Dole had voted for. Which tax did Dole want to cut?

And if something had to be done about sudden shortages in the oil supply, the White House was ready. The decision to sell 12 million barrels from the strategic oil reserve was not going to flood the market. In fact, the Saudis pump that amount in 36 hours. But it was enough to reassure an overheating spot market that relief was a presidential-pen stroke away.

It was also, for the voters, the reassuring sight of a president actually doing something that appeared useful. The White House also announced a Justice Department probe into whether the oil companies were guilty of any price gouging. But even before this, it was becoming clear that the oil companies had not passed the full price rise on to motorists.

There are three reasons for this year’s increase. The first was the hard winter, which had oil refineries producing more heating oil than usual, and doing so far later into the season. That meant less refinery capacity for gasoline.

The second reason was Hussein’s dickering with the United Nations over the terms on which he will be allowed to sell oil onto the world market through the United Nations--which will repay him in food and medicine to ease the hardship of sanctions on the Iraqi people.

The market expects $2 billion worth of Iraqi oil to be sold. This is roughly 50 million barrels--enough to depress prices. So while waiting for Hussein to make the price drop, nobody in the oil business wants to buy and store much at the high price. The result was a series of shortages, worse in some markets, like California, than in others. But much of the world hardly noticed. When you pay $3 a gallon as the British do, or $4 a gallon like the Germans, you can overlook a little hiccup of another 20 cents.

But if you are expecting the gas price to start dropping gently back toward a familiar buck a gallon, you have not been paying attention. There was a third reason for the price rise--and this one is the 800-pound gorilla.

There is a new market force that is going to take gas prices back up to $30 a gallon, and higher, within the next five years. The most important economic statistic of the decade was that, in 1994, China ceased to be a net exporter of food and energy and became a net importer. When 1.3 billion people start clambering up the food chain and up the energy chain simultaneously, interesting things start happening to prices.

China in 1994 consumed about five barrels of oil a head (compared with 53 barrels a head in the United States). The lowest estimates for China’s growth now suggest consumption will double, to 10 barrels a head in the year 2000. That means China importing an extra 6 billion barrels a year, or 16 million barrels a day--twice the current production of Saudi Arabia.

There is no need to panic. The market will take care of the shortages and increase the oil-exploration rate to cope. But the world does seem destined for the most dramatic period of commodity-price inflation since the 1970s.

Oil, after all, is only the half of it. To provide each Chinese citizen an extra kilo of pork a year, for example, requires an extra 5 million tons of grain. Since 1978, China’s consumption of pork has risen more than fourfold, and, in 1994, the 30 million tons of pork that China consumed required 120 million tons of grain.

To put this into perspective, total world grain exports in 1994 were slightly more than 200 million tons. No wonder the prices of corn, wheat and rice each rose by one-third last year.

Remember the golden rule: Avoid Carter’s mistakes, and do not panic. Instead, think of the opportunities for U.S. food exporters like Dole’s Kansas farmers, and for the Texas wildcatters who vote for Gramm.

That may offer them some compensation for the way Clinton has cleaned up politically on this oil-price flurry. And when the real Chinese price shock starts to bite, Californians should remember wind-power systems will start to look competitive when oil hits $30 a barrel.*