Refueling OPEC

By Charles Komanoff and Michael J. Smith

(Published in The Washington Post, February 23, 2000)

For the first time in almost 10 years, crude oil prices have risen above $30 a barrel. Heating oil, a vital fuel in the Northeast, is at $2 a gallon, double the price of a year ago, and gasoline could top $1.75 by summer. What's going on?

The simple answer is that for the past six months, the member nations of OPEC have constricted supply by several million barrels a day. Inventories are shrinking fast and sellers have the whip hand.

But that's only half the picture. The oil equation has a demand side as well, although we prefer to ignore it. Supply is sexy and subject to exciting quick fixes, such as draining the strategic petroleum reserve or sending soldiers to tap the barrel with bayonets. Demand appears, at first glance, less tractable; it is the sum of small actions by millions of drivers and householders.

But these individual choices are shaped by how our vehicles are engineered and how our destinations are scattered across the landscape. Demand is a thing that policy has created, and it is something policy can change, though not overnight. It is undeniably a disagreeable subject, however, because to look closely at it is to confront some unpleasant realities about the "American dream."

The great economic expansion of the '90 was, metaphorically, built on boxes. The box that grabbed all the attention was the personal computer. But other, bigger boxes played their part as well.

The big box on wheels - the sport utility vehicle - pumped an infusion of cash into the American car industry. The big-box stores sweetened the profit margins of the retail sector. And with these two came yet another wave of suburbanization, this one strewing millions of new big-box houses around the outer metropolitan fringe. And these big houses have big, fuel-guzzling furnaces.

Driving all those big vehicles back and forth between home and shopping and work takes a lot of gasoline. In just 10 years, from 1990 to today, U.S. gasoline consumption jumped by 25 percent, or well over 2 million barrels a day. Half the increase is because we're traveling farther, and the other half is because SUVs and other "light trucks" are exempt from car fuel-economy standards.

The combination has contributed as much to the supply-demand imbalance as the OPEC cutback has. In fact, it is our drunkard's thirst for gasoline, more than any other single thing, that gave OPEC its opportunity. Unlike other oil producers, the OPEC nations have considerable spare production capacity; thus, when demand increases, their share increases more rapidly.

Last year, for the first time since the Gulf War, the cartel's share of world production approached 45 percent, the level it has traditionally needed for market dominance. U.S. motorists have put OPEC back in the driver's seat.

Is there a happy ending? It depends. In one scenario, the price of crude settles at $30 a barrel, and consumers learn to live with it. Once stability returns to oil markets and the opportunity for speculation and price gouging is eliminated, gasoline and heating oil should settle at around $1.50 a gallon - a new high but still affordable for the politically crucial middle class. Prices at this level might promote somewhat less wasteful patterns of use.

Or, OPEC could fracture again. Just a few member states cheating on their quotas would be enough to reverse market psychology and send prices plunging. Our decades-long oil-fueled booze-up could then continue a while longer, with predictable consequences for our social health.

We haven't quite reached the point of delirium tremens - yet. But the headaches we've had over the last few weeks are trying to tell us something. A lifestyle based on the hugely disproportionate consumption of oil will take its toll; and all our big boxes will sooner or later put us in a very uncomfortable box indeed.

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