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While falling oil prices are picking up the world economy, they are shaking it at the same time. Developing countries from Mexico to Indonesia, which had built their economies and their dreams on oil revenues, now watch in anguish as those hopes of prosperity evaporate. The repercussions could go well beyond economics as those countries express their resentment toward consuming countries, many of which are rich industrial lands. The crisis could inflame tensions in the Middle East, in particular, where oil revenues have dropped from $237 billion in 1980 to an estimated $110 billion last year. Last week Israeli Prime Minister Shimon Peres, who visited the U.S. to confer with Secretary of State George Shultz, called the oil plunge a threat to peace in the Middle East and urged Western countries to begin a modern-day Marshall Plan to aid the region, using some of the money saved by lower oil prices.
The U.S. has a sore spot as well. The oil-patch states of Texas, Oklahoma and Louisiana have been so severely affected that their troubles could spoil the rest of the country's party, at least in the short run. Bankruptcies and layoffs plague the oil business and nearly every industry connected with it. Though the Labor Department announced last week that U.S. unemployment dipped to 7.2% in March, down a notch from 7.3% in February, the jobless rate has stayed unexpectedly high at least partly because of the oil- patch slump. Unemployment in Louisiana has reached 13.2%.
For most Americans, the question that gnaws like an engine knock is how much time they will have to enjoy cheap oil. Will it give the U.S. a long, easy journey or just a nostalgic joyride? The highly volatile price of oil could jump several dollars a barrel in only a few days, or it could lie low. Many energy experts have begun warning that oil prices below $10 per bbl. will set up the U.S. for another oil shock in the future. In fact, when adjusted for the inflation that has taken place over the years, today's oil price is virtually as low as it was in the pre-oil-crisis days of 1973, when crude cost about $4 per bbl. If prices stay at this level, U.S. producers could be devastated, and the country could return to the dreaded dependence on foreign oil that it has largely escaped. Says M.I.T. Economist Lester Thurow: "At this price level, we will probably shut down a lot of our wells, so that instead of importing about a third of our oil needs, we will end up bringing in about 40% to 45%."
President Reagan so far has extolled the benefits of cheap oil and avoided talking about the dark side. But last week the Administration showed the first signs of concern about the disruption of domestic oil production. Speaking to reporters on Monday, Energy Secretary John Herrington laid down a warning to Saudi Arabia, the country that helped start the current price war by drastically boosting its output. The kingdom's strategy has "created severe problems for the American petroleum industry," Herrington said, and could have "political implications" for the Saudis if they continue it.