Anatomy of a Recovery

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So why hasn't the government used the budget process to reduce the deficit? Why has it become necessary for Congress to even consider passing the buck with mandatory budget cuts like those proposed in the late—1985 Gramm-Rudman bill? You see, during the 1970s Washington used a lot of created money and a little debt to finance our recoveries, but that made for some pretty wild inflation (OPEC didn't help). Now Washington has cooked up a new recipe: Mix a little created money with lots of debt.

And the new formula has made for a rather low rate of inflation. Of course, the present world oil glut has also helped keep inflationary pressures low here. Conservation has been one of the major factors contributing to the present oversupply of oil, and Americans are to be commended for their efforts to conserve energy. The worldwide recession of the early 1980s also helped to create the oil surplus, as countries in recession tend to use less oil. However, some of the other factors involved in the oil glut indicate that we could be headed for big trouble if we don't take action soon.

In the 1970s, anticipation of higher oil prices fueled a buildup of inventories, which only served to increase demand, which drove up prices, etc. In the early 1980s, there was a complete turnaround in market psychology. Anticipation of lower prices led to a continued depletion of inventories, thus constraining demand and driving down prices. It's now time to exercise a little caution, though, because a drastic decline in oil prices could easily rekindle the currently smoldering international debt crisis-particularly for such high-debt oil producers as Mexico, Indonesia, Nigeria, and Venezuela. The international debt problem is one of the greatest threats to the stability of our economy.

It now looks as if recent oil trends are once more doing an about-face. Our commercial inventories of crude oil and gasoline are at their lowest levels in ten years. The 8% increase in U.S. crude oil and product imports in 1984 reflected revived domestic consumption, which exceeded domestic production. About one-third of our oil supplies now come from outside the U.S., the same portion as before the 1973-74 energy crunch. Continued economic growth will most likely increase our demand for foreign oil. Many energy specialists are warning that there may be trouble again in as little as two to four years-especially if events in the Middle East take another turn for the worse.

Back in the 1970s, OPEC controlled about 75% of the world's oil output. Nowadays it controls less than 35%, and its ability to determine prices has diminished accordingly. But, as nice as it would be, it doesn't look like OPEC is about to go away and leave us alone. The members of the cartel are more than willing to play a waiting game, because they know that the less of their oil we use now, the more we'll need from them later. Unless we invest in alternativeenergy resource development right now, we may well be sowing the seeds of our next oil shock. And once the price of oil starts rising again, it will become much more difficult for us to control inflation.

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