Oil price hikes may help South - someday. It will take a `real resurgence' in prices to lift oil state economies
Tensions in the Persian Gulf and rising oil prices should be starting to tip the balance of prosperity from the northern United States to the South. After all, increases in oil prices in the 1970s brought a boom to the energy-producing states in the South and bust to the energy-poor states in the North, especially in New England. And falling oil prices since 1985 contributed to a depression in Texas, Oklahoma, Louisiana and neighboring states and resurgence to New England. Thus, one would expect the doubling of oil prices in the last year to tilt the see-saw back in favor of the South.
In another year, that may happen. But for several reasons - the development of alternate sources of energy, adjustments by energy-poor states, even tax reform - it isn't true today.
Speculators are putting the price of West Texas intermediate at $22 a barrel, nearly double the $11.60 of July 1986. Imported crude oil sells for $19.50 versus $10.91 a year ago. Motorists have certainly noticed the change, as gasoline prises have been going up for the past six months and now average just over $1 a gallon.
But today's oil prices ``are fueled by war speculation,'' says Tony Profitt at the Texas Comptrollers Office. Contract prices - those affecting a consumer's bill and an oil company's profits - are $2 to $3 lower than spot prices. And these are still lower than they were before prices plunged last year.
Consequently, ``New England is still benefitting from declining prices,'' says Michael Smolinski, director of fuel price service at Data Resources Inc., a Lexington, Mass. consulting firm.
And lower prices are still hurting Texas. ``There's a little more optimism by companies that haven't gone broke that they're going to survive,'' says Mr. Profitt. ``But it hasn't touched the average person one iota ... and no one is rushing out to invest in oil rigs.''
Mr. Profitt says it will take ``a real resurgence'' in oil prices for the South's economy to get back on its feet. But that may be a while in coming. Today, oil producers and users are playing by a different set of rules from the 1970s.
For one thing, there is a glut of oil keeping the long-term price down, and even nasty noises from Iran's Ayatollah Ruhollah Khomeini won't change that. Saudi Arabia can pump 17 million barrels per day; it's currently pumping 4 million. In the 1970s, British North Sea oil wasn't a factor; it is today.
Moreover, more areas are relying on alternative energy sources like nuclear power and natural gas. And that is expected to increase, especially in energy poor areas. In New England, nuclear power provides 29 percent of the electricity; by 1990, it's expected to provide 44 percent. Oil use is projected to drop from 37 percent to 16 percent by 1990.
Energy-poor states have made structural adjustments to their economies. After energy prices skyrocketed in the '70s, Mr. Smolinski says, the New England region ``got out of anything involving high energy use,'' like metal working and shipbuilding, ``and went to low-energy industries like light manufacturing and high-skilled manufacturing,'' including computers and aerospace products.
Even industries that use a great deal of energy - chemical manufacturers, for example - appear to be unaffected by the recent oil price rises. At Airco Industrial Gases, the third largest manufacturer of industrial gases, energy comprises 70 percent of the company's costs. But Airco, which is based in New Jersey and has some 200 plants across the country, has long-term (10- to 15-year) contracts with its utilities.
When Airco decides to open or expand a plant, it considers what kind of deal it can strike with the nearby utility. Spokesman Ted Sikorski says this is a common practice among large industrial companies, and utilities, which often have underutilized capacity, are eager to comply to get the new customer.
``As a result of the energy situation in the 1970s,'' he says, ``a lot of industries used more strategic planning about their plant locations and distribution centers.'' (Higher gas prices at the pump can increase costs if a company needs to transport its products a long distance.)
``But any company that wanted to make money would have done that sooner or later anyway,'' he adds.
Tax reform is also holding down costs for consumers. Utilities historically paid high tax rates, and when the maximum corporate tax rate was lowered last November, utilities got a windfall. Now states all across the country are pushing through rate decreases.
The good news for the North is fragile, however. For one thing, New England is ``eliminating options for the future,'' Smolinski says. Of the nine nuclear power plants operating or scheduled to come on line, three of them may not open because of financial difficulties or public opposition.
New England, which is three times as dependent on imported oil as the nation as a whole, is as worried about events in Washington as in the Gulf.
The House of Representatives is considering an oil import fee, though it is not expected to make it into law. Still, New Englanders worry that legislators trying to close the budget deficit may find an oil import fee too tempting to resist in the future. In the next few days, Texas oil producers will file a petition for trade protection with the International Trade Commission; if protection is granted, that would set a $25 floor price on every barrel of oil.