It Can Be Solved in the Marketplace

THE world--and especially the U.S. --is in the midst of one of history's great oil gluts. The U.S. is swimming in oil, with excess stocks of 781 million bbl.--65 million more than last year. Oil production in Texas and Oklahoma has been chopped back drastically; Venezuela, which sends 20% of its crude production to the U.S., has been forced to reduce production even more. Canadian oil sales are in bad shape, and refinery runs of Alberta crude, which comprises 90% of Canada's oil, are at a new low of 271,958 bbl. daily. Only in the Middle East is production still climbing; even there economists fear that oil companies out for quick profits, and Arab rulers anxious for heavier royalties from the wells are pushing production far beyond demand. As one Canadian oilman says, "There are simply not enough markets for the oil."

Oil's problem is a classic case of too big a supply for too small a demand. During the Suez crisis, oil producers outside the Middle East expanded by leaps and bounds to supply Europe with oil. When Suez was over, they failed to cut back rapidly enough, were caught with overproduction in the face of markets that did not grow as fast as expected. In Europe, the Middle East's biggest oil market, oil consumption will climb only 4% or 5% this year instead of the forecast 6 1/2%. At home, the U.S. recession will cut the increase in oil consumption to 2%--less than half of what oil companies expected for 1958. To pinch oilmen even more, natural gas, which accounts for more than 25% of the U.S. power supply, is growing increasingly popular as a fuel, cuts deeply into oil's traditional markets.

Aside from overproduction, the industry has also compounded its problem by continued overpricing. The general advance in oil prices that accompanied Suez has still not been adjusted downward to normal markets. Though refiners have cut some petroleum products (e.g., gasoline, kerosene), they are in no position to cut prices enough to spur consumption so long as basic crude prices remain high. The price of domestic crude in the U.S., for example, has jumped from $2.84 per bbl. in 1956 to $3.16 today, and producers make no bones about the fact that they prefer to cut production rather than drop prices sharply in a wholehearted campaign to increase sales.

Many U.S. oilmen cry that the greatest single reason for the U.S. oil glut is foreign oil imported into domestic markets (TIME, Aug. 12). Last week the pressure grew so strong that the U.S. Government pulled in another notch on its voluntary import quotas, cut back imports for the U.S. east of the Rockies by 8.8% (from 782,900 to 713,000 bbl. per day) and ordered Government agencies not to buy oil from importers who fail to comply with the quotas.

Foreign oil accounts for about 12% of the U.S. market, deprives U.S. producers of barely 2 bbl. per well daily. But many economists argue that quotas are unfair to a large and growing segment of U.S. business; from a mere handful of companies in 1946, there are now more than 100 firms operating overseas that contribute hundreds of millions of dollars to the U.S. economy each year.

The import quotas cause all sorts of ruckus abroad. Though the U.S. consumes 55% of the free world's oil. it has only 15% of the free world's reserves, enough to last a dozen years at current production rates. As consumption rises, the U.S. must depend increasingly on foreign oil if it wants to maintain even that slim ration.

The import restrictions cause hard feelings among the very nations to which the U.S. must look for future supplies--the Middle East, Canada. Venezuela. The pro-U.S. revolutionary junta in Venezuela begged the U.S. not to reduce quotas, lest Venezuelans take it as a sign of U.S. disapproval: Import restrictions force such nations to look for new markets that they may not be willing to give up if and when the U.S. needs more foreign oil.

Oilmen, who are legitimately optimistic, feel that the glut will eventually solve itself in both U.S. and world markets. Oil demand in the U.S. alone is expected to rise from about 8.5 million to 14.3 million bbl. daily by 1966; the same men compute free-world demand by then at 28.5 million bbl. daily. In 20 years, says William L. Naylor, senior vice president of Gulf Oil Co., the demand for petroleum should increase at least 80%, and perhaps as much as 100%. Yet before oilmen can enjoy this long-term prosperity, they must first solve their short-term problems. The solution is not so much to caterwaul about imports, or even slack production schedules, but to return to the old-fashioned virtues of a free marketplace in which supply and demand set the price of petroleum products. What the oil industry needs more than anything else is some sharp price cuts to encourage more people to buy more oil.

This file is automatically generated by a robot program, so reader's discretion is required.