(FORTUNE Magazine) – A YEAR OF Texas-size swings in the price of crude has turned the oil patch into the trenches. Like the survivors of Verdun after the shelling stopped, the U.S. petroleum industry is spooked. True, the Organization of Petroleum Exporting Countries has apparently agreed to hold the price of oil at $18 a barrel, but the cartel has tried to agree on prices before and the troops are suspicious. Says E. H. Clark Jr., chief executive of Baker International, the giant oil field services company in California: ''We're all afraid to stick our necks out of the trenches to see if the war is really over. But there's optimism. Maybe we have seen the worst.'' Maybe they have. A surprising consensus has developed among petroleum experts worldwide that the benchmark Saudi light crude will sell in a range of $18 to $20 a barrel (measured in 1987 dollars) for several years to come. Prices will bob, more likely down than up, owing to the vagaries of commodities markets and the notoriously wavering discipline of the cartel members. In late February, for example, prices were slipping toward $17. But barring the outbreak of a major new Middle East war or revolution, there should be no repetition of gut-wrenching gyrations such as those of last year when oil that sold for $27 a barrel in January was fetching $10 by summer and then shooting up to $18 at year-end. Prices should be steadier than that until the early 1990s, when they will rise as world demand for crude approaches the capacity of the producing nations to supply it. The perception that underlies this ideal view is that a mature OPEC has finally mastered the principles of basic economics. Recent years taught the cartel that insisting on top dollar for its product cost it business and hastened a market collapse. High prices really did curtail demand: The Carter Administration in 1978 foresaw petroleum use in the non-Communist world growing from 51 million barrels a day to 60 million by 1985. In fact, demand shrank to 46 million barrels a day in 1985. Moreover, the high prices that OPEC maintained for oil made exploiting new fields in Alaska, Mexico, and the North Sea extremely profitable. Production in non-OPEC countries grew 28% from 1979 to 1985, topping out at 25.6 million barrels a day, a quantity nearly equal to OPEC's entire capacity. Most petroleum economists and industry executives believe that Saudi Arabia is resolved for the time being to keep oil below $20 or $22 a barrel by flooding the market if prices begin to rise. It did just that in 1986 with disastrous consequences for OPEC. Yet another lesson learned the hard way was that if cartel members sell their oil without restraint, as Nigeria, Algeria, and others are wont to do, prices crater exactly as the economics textbooks predict. Cartel discipline may well lapse again, causing prices to plunge briefly to as low as $10 a barrel, but the recidivists are likely to reform faster in the future than they did last year. Says William M. Brown, director of energy studies at the Hudson Institute in Indianapolis and a prescient oil observer: ''The experience of 1986 was a real shocker to every OPEC country, bar none. They saw that $8 oil, $7 oil, even $6 oil is possible.'' In January, Ecuador, an OPEC member that derives 70% of its export earnings from oil, failed to pay the interest due on its $8.1 billion of foreign debt. One of the few less developed countries that have made a point of paying their bills on time, Ecuador has been mired in economic problems resulting from the oil price collapse in the first half of 1986. At $18, oil is high enough to sustain a profitable U.S. petroleum industry -- but barely. The picture of oil that emerges in the years ahead is of an industry reduced in size, roustabout lean and rattlesnake mean, and cautious about committing huge sums for exploration and drilling. Gone will be the Rocky Mountain mobile-home boomtowns, the gaudy Texas gaucherie of Rolls- Royces converted to pickup trucks, and the fly-by-night operators drawn to oil fields by the gold rush prices of the early 1980s. The challenge for most companies will be simply to hang on for better times. Those better times will be long in coming, however, unless the nation seriously addresses energy policy. The problem with low prices is that they encourage consumption while they discourage domestic production by rendering it uneconomic. Thus, the U.S. ultimately becomes dependent on foreign countries for its oil. The government's task should be to stimulate domestic production, encourage conservation, and spur the development of alternative sources of energy. The real beneficiary of today's cheap oil is the U.S. economy. Although $18 a barrel is an increase of 80% from oil's summertime low, consumers will continue to get a break on their gasoline and heating bills; manufacturing costs will stay low, helping put a lid on unemployment; and the gross national product will get a healthy fillip. However, the warm narcotic of cut-rate crude is blinding the nation to the serious problem of steadily rising foreign imports. Already the trends are apparent. From January 1986 to January 1987, U.S. crude production declined by 680,000 barrels a day, a huge 7.5% drop. Meanwhile, U.S. consumption increased by 400,000 barrels a day, growing at a faster rate than the gross national product for the first time in nine years. As a result, imports spurted by more than a million barrels a day. The American Petroleum Institute estimates that if the price stays at $18 a barrel, imports will rise from 39% of total U.S. consumption last year to more than 50% in 1991. By comparison, at the time of the first Arab embargo in 1973, imports amounted to 35% of consumption; by 1979 they accounted for 46%. Although the U.S. tries to import most of its oil from such near neighbors as Canada, Mexico, and Venezuela, in a global market, shortages and price rises affect everyone equally. And of all the oil that countries export, fully 40% comes from just five Mideast producers. Warns Chevron Chief Executive George Keller, who is the chairman of the API: ''Once again our country is confronted with the possibility of a major energy crisis.'' IT IS DIFFICULT to predict the exogenous event that would touch off such a crisis. The Iranian revolution, which provoked the 1979 shock, caught everyone flat-footed, as did the Arab oil embargo of 1973, which followed the Yom Kippur war. An Iranian victory in the Iran-Iraq conflict, however, could presage yet another oil price jolt. Iran is a price hawk. Like several other OPEC members with limited petroleum reserves, it cares little about nurturing a long-term market and a lot about forcing up prices now. A victorious Iran, with its kamikaze army and highly exportable fundamentalist religion, could easily intimidate nearby Kuwait and Saudi Arabia into cutting production to push up the price or to humble the Satan residing in the White House. Economist Alan Greenspan and others believe Iran is already pressuring the Saudis to do just that. Says he: ''OPEC is now Iran-Saudi Arabia.'' Tight markets increase tensions. Right now, demand in the non-Communist world for oil is about 47 million barrels a day; that's about 12 million barrels a day less than world capacity to produce it. Two-thirds of that excess capacity resides in the Middle East. But in three to five years, economic growth in the West as well as in Third World countries will sop up that surplus. Then, even the slightest Middle East contretemps that closes some spigots could seriously disrupt the economy of any nation that is highly dependent on the region for its oil. That is what worries Chevron's Keller and other industry experts. THE ACCORD that the squabbling OPEC nations reached last December in Geneva establishes an export quota of 15.8 million barrels per day for all 13 of them. Unfortunately, that level invites cheating by such revenue-hungry members as Iran and Iraq, but the ranks appear to be holding -- sort of. In February, Saudi Arabia and four American oil companies that make up the Aramco consortium signed a five-month purchase agreement at $18 a barrel. By late March or early April, demand for oil traditionally slackens, so this spring will be the first of a series of tests of the $18 mark. Notes Herbert Krupp, an oil analyst at Bankers Trust: ''To maintain $18 a barrel OPEC will need to reach many, many agreements over the next few years, successfully renegotiating their quotas time after time.'' John Lichtblau, head of the Petroleum Industry Research Foundation, believes that if prices sustain a serious fall, OPEC members would meet quickly to readjust their quotas. The longer OPEC can hold the line, the easier doing so will become. That is why so many economists give $18 to $20 oil a chance of prevailing. The price is high enough to provide OPEC nations with enough revenue to satisfy their immediate needs, but low enough to discourage a great deal of new production from non-OPEC sources. At $18 a barrel, oil users will not be tempted to conserve more than they do now, nor would they switch to alternative fuels as they did in the early 1980s. Thus, demand for OPEC oil could grow at about 4% per year, and members' production quotas would gradually inflate. By 1990, OPEC will be producing at 80% of its capacity, vs. 66% today, according to a new report by the National Petroleum Council, an advisory group to the Secretary of Energy. The report notes that historically, when OPEC has reached 80% of its capacity -- as it did in 1973 and 1979 -- the cartel ''has been able to increase world oil prices and maintain them.'' The primary reason: Most of the excess capacity is in Saudi Arabia, Kuwait, and United Arab Emirates, three countries that rarely disagree on policy. Though the hard-earned wisdom of the early 1980s might keep the ''mini-cartel'' from pigging out on prices, they would yield enormous power. ''Eighty percent is the danger signal,'' says George Mitchell, chairman of Mitchell Energy, a large production company in Woodlands, Texas. ''That's when that little mini- cartel will drive you to the wall.'' To a small but significant degree, the U.S. is better able to weather an oil shock than it was in the 1970s. Conservation and the exploitation of coal and other fuels have reduced oil's share of U.S. energy consumption from 47% in 1979 to 43% today. Furthermore, the 500 million barrels of oil sloshing around in hollow salt domes in Louisiana and Texas as part of the Strategic Petroleum Reserve could substitute temporarily for imported oil. But the economic costs of crude shock would still be severe; the 1979 version produced two recessions. And mere vulnerability to a jolt would significantly hamper U.S. leverage abroad. The Reagan Administration might have been hesitant to launch last year's punitive air strikes against Libya, an OPEC member, if world energy markets had been tighter. Indeed, there were reports that the Arab oil producers considered but rejected a boycott. Declining prices have already devastated the U.S. petroleum industry. Last | summer the Hughes rig count, a measure of drilling activity, slipped below 700 for the first time since World War II but it has climbed back to 806. In 1980, when the spot price for the benchmark Saudi light crude was up in the ozone layer at $39.75, there were 3,220 drilling rigs boring into U.S. rock and seabed. Those legendary Texas wildcatters, made Midases overnight with lucky hits, are now drilling only one or two exploratory wells a year, and many have gone out of the business. Typical example: oilman Clayton Williams of Midland, Texas, who now gets more than half his diminished revenues from banking and telecommunications (see box, page 53). NEARLY 300,000 industry workers have been laid off since 1982, 80% of them in the oil field services industry, where four out of ten companies have dropped out of business.''I don't think you can afford to wipe out your staff,'' says Shell Oil Chief Executive John Bookout. ''You may hire the bodies back, but it won't be the same well-oiled team that works together.'' Today geologists step lively as bellhops in Houston hotels, and unemployed drill hands have either drifted into other fields or resorted to poaching game to feed their families. The stream of professionals entering the business is drying up. Last year 192 students were enrolled in petroleum engineering at the University of Texas, down from 1,112 in 1982. E. H. Clark, Baker International's C.E.O., has had to cut more than 10,000 workers from his payrolls. ''It does tear your heart out to see what you're doing to families and lives,'' he says. ''Probably the hardest part is the process of closing down and selling off all the things you've built up and hired people for, and realizing that a whole way of life is going to be changed.'' That change is likely to be permanent. For the sad fact is that U.S. oil production is in a sure decline. In the 80 years after 1859, when petroleum was introduced as an alternative to whale oil -- thereby saving many a whale -- the nation produced fully 64% of all the world's oil. Because drillers always tap the largest, cheapest, easiest-to-get-to deposits first, the ones that remain become progressively smaller and costlier to exploit. Thus, says Arco President Robert Wycoff, ''even $30 a barrel was really not high enough to do anything more than barely keep production in the U.S. at a constant level. At today's prices, production will decline.'' Wycoff's view that this process is inevitable is widely shared. U.S. output started to decline in 1970 and continued through 1977 until Alaskan crude reversed the trend. But even that production will taper beginning in 1989, and estimates of the future slope of decline run in the range of 3% a year. The U.S. is by far the most poked and prodded piece of landscape in the world. Geologists think nothing of plunging pipe several miles into the earth's crust looking for deposits a fraction the size of Spindletop and the great East Texas discoveries of the early decades of the century. As a result, the United States now needs 650,000 wells to pump its daily 9 million barrels of oil -- not including natural gas liquids -- because the average well pumps only 14 barrels a day. Five Mideast OPEC nations also produce about 9 million barrels a day, but those countries need only 3,000 wells to do the job because each pumps an average 3,100 barrels a day. Middle East production costs are less than $1 a barrel, and the cost of finding new oil is negligible. It's a slight exaggeration to say that you could plunge a spoon into those huge deserts and the liquid would gurgle up. By contrast, U.S. production costs are roughly $7 a barrel, and finding costs, though hard to calculate with precision, are about $10, according to Arthur Andersen, the accounting firm. Says George Mitchell: ''We're a high-cost country when it comes to exploration and development. The easy stuff is gone.'' Geology is destiny, and this is the primary reason why an industry that could make money with Saudi light selling at $1.90 a barrel in 1972, the inflation-adjusted equivalent of $4.84 a barrel today, now moans about $18. LOWER PRICES are forcing the industry to make some permanent cutbacks in drilling. For example, more than 90,000 of the nation's 450,000 stripper wells have been shut down since 1982. Stripper wells, owned by major oil companies as well as by tiny independent producers, pump fewer than ten barrels of oil a day and collectively supply 20% of domestic oil. But at $18 a barrel, many of these wells become uneconomic. Their income does not cover the costs of electricity to run the pumping unit, of reading the meters that monitor pressure, and of paying a royalty on the lease. Since oil and the toxic chemicals used in servicing wells can seep into and contaminate underground water supplies, most states require operators to cement up all unused stripper wells within a year. Even at higher prices, drilling through concrete to unplug the pipes, along with other start-up costs, would make reopening most of these wells prohibitively expensive. The loss to U.S. production in the 1990s from shutting them in could run to one million barrels a day. Financing the exploration that must be done today to yield production in two to ten years is difficult. Major oil companies are almost totally dependent on internally generated cash flow to fund their search. Last year, when prices averaged $15 a barrel, industry cash flow declined 44%, cutting exploration budgets by a third, to $26 billion. In addition, the dwindling cash flows of such major producers as Chevron, Phillips, and Unocal must be siphoned off to service high debt loads resulting from expensive mergers or shoot-yourself-in-the-foot tactics to repel raiders like T. Boone Pickens. As a proxy for exploration, many majors are buying existing proved reserves, which is cheaper by a few dollars per barrel than finding new ones. But all they are doing is swapping assets without adding new supplies to the nation's oil cupboard. William Strevig, publisher of the Quarterly Reserve Report that follows such transactions, tracked a 67% run-up since 1984. ''This buying and selling of resources is done by people who want to stay in business and can't justify drilling new wells,'' he says. INDEPENDENT OIL COMPANIES, which drill about 85% of all new wells, and which must raise most of the cash they need for exploration from outside sources, have seen their traditional caches of capital dry up too. Banks, badly burned by energy loans in the past, are chary of making new ones. And the 1986 Tax Reform Act has made investing in drilling funds less attractive; investors cannot use the losses to offset ordinary income unless they have a working interest in the well, which exposes them to unlimited liability. Jeff Sandefer, at 26 a fourth-generation Texas oilman, observes that ''if you take a business as risky as finding oil and gas and add price risk on top, you've given people an awfully good reason not to throw money into it.'' Nonetheless, some companies continue to throw money into exploration and can find domestic oil profitably at $18 a barrel or even $15. Shell Oil, one of the most successful and best-managed U.S. oil companies, was able to replace 20% more oil and gas than it produced in 1986 at an average cost per barrel of less than $5; the company expects to do as well in 1987. Remarks C.E.O. John Bookout: ''I'm not saying I'll like my return at $18 oil prices, but $18 will provide more than enough cash income to carry out the exploration program we have in mind.'' The company's conservative managers now premise all their exploration on selling the greasy stuff for an average of $15 a barrel. Arco, the largest domestic producer, is basing its exploration program on assumptions of $18 to $20 prices. ''We can adapt ourselves to almost any price level, but it means lower profits,'' says Arco's Robert Wycoff. Lower profits, however, meant that Arco had to scale back its program of oil and gas exploration and engage in a $3.4-billion stock buyback program to shrink its capitalization and buoy earnings per share. The irony is that the times have seldom been so favorable for new exploration for operators who can raise the money. Drilling costs, depressed by the industry slump, are half what they were in 1981. With fewer bidders to compete for new leases and drive up the prices, attractive properties are available on better terms. Supercomputers help geologists pinpoint likely hydrocarbon deposits with greater accuracy, cutting the number of dry holes. When prices were high earlier in the 1980s, oil companies pioneered other techniques to detect and extract oil and gas more efficiently. When prices fell, many of these procedures became too expensive, but they could be easily used again if and when it pays to do so. MIT economist M. A. Adelman has compiled historical evidence showing that increasing knowledge about the earth's crust and advances in extraction technology, which enable companies to recover a larger portion of each deposit, have almost continuously offset the increasing difficulty of finding oil. ''We will never run out of oil,'' Adelman says. ''The real problem is the cost of providing the flow of additional reserves.'' Michel Halbouty, a mustachioed Houston wildcatter who seems to have been born with a divining rod in his mouth, believes that technology will be the salvation of U.S. oil. ''You put these new concepts together with the right incentives and higher prices, and I believe this country could be producing ten million barrels of oil a day within ten years,'' he gushes. However, Halbouty's views are far more optimistic than those of most of his colleagues in the industry. PROPER EXPLOITATION of the nation's natural gas reserves could also postpone the effects of a diminishing oil supply. Natural gas takes the rap for being a scarce and declining resource. But discoveries made since the late 1970s suggest that gas resources may be many times those of oil. Although the exploration boom that followed decontrol of new finds created a gas ''bubble'' or surplus of some three trillion cubic feet -- the nation uses 17 trillion a year -- analysts expect demand will grow so long as the price of oil, to which natural gas prices are loosely tied, stays at $18 a barrel or more. Many of the nation's utilities would like to burn this clean fuel and are lobbying for the repeal of restrictive federal legislation (see box, page 56). The Reagan Administration has a decidedly hands-off, free-market approach to energy policy. ''There is nothing we can do as a government to stop domestic petroleum production from declining,'' says Energy Secretary John Herrington, leaning into his words. The industry is still paying for the days of ''obscene'' profits and for its decisions to reinvest those profits in ways that often offended Americans. The government should not be eager to finance further forays into retailing or office equipment. However, from a public policy perspective, the national interest suffers when the U.S. is heavily dependent on foreign oil. Among the proposals that politicians, economists, and industry executives advocate for a sensible U.S. energy policy: -- DROP THE CALL FOR AN OIL IMPORT FEE. Enacting such a tariff on foreign crude is the most widely discussed remedy for too much dependence on imported oil. The arguments for it can be persuasive. Putting a $5 fee -- a commonly cited figure -- on each barrel entering the country would create a higher price for domestic producers and discourage consumption. A Department of Energy study released in April 1986 calculates that a $5 fee would reduce imports by 600,000 barrels per day and result in an extra $3.7 billion for the U.S. Treasury over five years. ''The oil import fee would preserve the domestic industry so that when the price goes up they'll be there to do some extensive exploration,'' says Senator J. Bennett Johnston (D-Louisiana), chairman of the Senate Energy committee. ''If we rely on the invisible hand, we're likely to get the shaft.'' But the costs of a fee are likely to outweigh the benefits. According to the DOE study, raising the nation's cost for petroleum energy by $5 a barrel would over a five-year period boost inflation by 1% annually and reduce the growth in GNP by as much as 0.7% a year, thereby putting thousands of people out of work. More important, a fee would hurt U.S. industries that compete abroad by making them pay more than they do now for an essential raw material. Furthermore, to pass Congress, such a fee would have to have exemptions. Says the top strategic planner at a major oil company: ''You'd get a Canadian exemption, a Mexican exemption, a consumer exemption. The heating oil people in Massachusetts would get preferential treatment. You'd get bureaucracy and it's counterproductive.'' A gasoline tax would be far easier to administer than an import fee, since the government already collects 9 cents on every gallon that is sold. A Congressional Budget Office study concludes that imposing an additional 12 cents a gallon tax would cut oil imports by 100,000 barrels a day, would be less inflationary than an import fee, and would give the Treasury a dandy windfall of $9 billion a year. But such a tax, while salutary, would do nothing to encourage domestic oil production. -- OPEN UP MORE FEDERAL LANDS FOR OIL AND GAS EXPLORATION. The two most promising U.S. regions yet to be explored are the waters off the California coast, where the American Petroleum Institute estimates 3.2 billion barrels of oil could be profitably produced, and the Arctic National Wildlife Refuge, geologically next door to the 9.6 billion of proved reserves at Prudhoe Bay, which currently supply 20% of domestic U.S. oil. Unfortunately, no one can promise significant finds in either area, and environmentalists fear that oil drilling would despoil them. The annals of petroleum exploration are filled with supposed sure things like the Mukluk field in Alaska and the Baltimore Canyon off the Atlantic Coast that turned out to be billion-dollar dry holes. Nevertheless, considering that production from offshore California and the Arctic alone might replace as much as one million barrels a day of imported oil, Congress should give industry a chance to see what it can find. The legitimate concerns of environmentalists can be protected with tough federal regulations. Says Chevron's George Keller: ''Our industry's long experience in Arctic areas has demonstrated that oil exploration and development can be conducted with utmost care and protection for the natural environment.'' So as not to despoil the wilderness spanned by the Alaska pipeline, the builders insulated the pipe heavily to prevent the flowing crude's heat from escaping and melting the frozen tundra. The pipeline was either raised or buried as necessary to preserve caribou crossings. ^ Congress should also improve the terms under which it auctions leases. As it stands now, in order to win a bid on an offshore lease, companies often must pay multimillion-dollar bonuses before they know whether a leased field would yield oil. A more sensible plan might be for the government to agree to accept smaller up-front payments in exchange for a greater share of royalties if a company strikes it rich. -- BUILD UP THE STRATEGIC PETROLEUM RESERVE. The half billion or so barrels of oil now stashed in salt domes exceeds the amount of oil held back from world markets by the Arab embargo of 1973, according to John Elting Treat, executive publisher of the Petroleum Intelligence Weekly newsletter. The SPR's very presence discourages the use of oil as a weapon against the United States. William Hogan, professor of political economy at Harvard, estimates that once the SPR reaches its target of 750 million barrels, its oil could substitute for half of all U.S. imports for about nine months and give a jittery world situation time to sort itself out. The Administration has proposed cutting the fill rate for the SPR in half, to 35,000 barrels a day in 1988. Representative John Dingell (D-Michigan), chairman of the House Energy and Commerce committee, has been urging the White House to keep the reserve acquisition at 75,000 barrels a day and expand the pipeline system to distribute the oil. Dingell is also a strong advocate of better contingency planning for operating the reserve and allocating petroleum in the event of a future energy crisis. ''The Administration has said its policy in the event of a shut-off is to let the market take care of it,'' says Dingell. ''I've told them at the White House that when the shut-off happens and the market doesn't take care of it, any fellow who comes to town with a length of rope, a pot of hot tar, and some feathers will know where to find them.'' -- REPEAL THE WINDFALL PROFITS TAX. Since the last time oil companies had a few extra bucks they were apt to spend them acquiring the corporate equivalent of some very slow horses, the windfall profits tax looked like a good idea when it was passed in 1980. Oil was poised for flight into the $50 and $60 range, so the Congress mandated a tax that at worst could take 70% of the revenues producers earned in excess of $18.50 a barrel. Because prices now are below $18.50, the tax is not generating any revenues for the Treasury and so could be repealed without any loss. ''It's a bad tax,'' says MIT economist Adelman. ''Companies don't invest in development that would otherwise be profitable.'' -- RESTORE THE DEPLETION ALLOWANCE. This tax break permitted drillers to depreciate the value of the oil they pumped by 27.5% as they took it out of the ground. In 1975 Congress took the depletion allowance away from big integrated producers but let independent oil and gas concerns keep it, as well as other natural resource companies like copper miners and forest-product concerns. Says George Keller of Chevron: ''Depreciation allowance is now a dirty word, and yet it makes eminently good sense. I don't know why your tax treatment should be different if you produce 100 barrels a day instead of producing 20,000. The economics are no different.'' Senator Phil Gramm (R- Texas), the balanced-budget advocate, argues that some, perhaps all, of the lost revenue caused by restoring the depletion allowance would be offset by additional taxes on the increased production it inspires. However, before the government starts handing out tax breaks to the industry, it should demand in return that any increased profits are reinvested in energy production. -- ENCOURAGE CONSERVATION. Lower oil prices seem to be dissipating the urgency of conservation. The President has vetoed a bill that set improved efficiency standards for household appliances, although Congress is preparing to override that veto. In 1986 the Administration decided to yield to the auto industry's pressure to roll back the manufacturers' fleet fuel-economy averages from 27.5 miles per gallon to 26 miles per gallon. Congress is debating repeal of the 55-mile-an-hour speed limit, and as a result some states are less determined to enforce it. Cutting down on gasoline consumption is especially important because some 40% of all petroleum is used by motorists, and the percentage is growing. Since there is presently no economic alternative to gas for cars, this is no time to abandon those fuel-sipping engines and a sedate speed limit. The point of U.S. policy is to help the nation muddle through until expanded use of alternative sources of energy can make it energy sufficient -- or nearly so -- in the first few decades of the next century. But, ''until we get to the long run, we're stuck in the short run, where all sorts of things can happen to send prices spiking up and down,'' says Adam Sieminski of Washington Analysis Corp., a research firm. It is also unfortunately true that the best thing for the country in the short run -- low oil prices -- is among the worst things for the country in the long run.

CHART: NOT AVAILABLE CREDIT: SOURCE: PETROLEUM INTELLIGENCE WEEKLY CAPTION: OIL PRICES DESCRIPTION: Annual average prices of Saudi light crude from 1972 to 1987. Illustration of oil barrel.

CHART: NOT AVAILABLE CREDIT: ILLUSTRATIONS BY JOSHUA SCHREIER SOURCES: BP STATISTICAL REVIEW OF WORLD ENERGY AND PETROLEUM INDUSTRY RESEARCH FOUNDATION CAPTION: The U.S. is not likely to produce as much oil in the future as it has in the past. A look at the world's cumulative oil production between 1859 and 1986 makes this obvious. By contrast, Middle East reserves are 2 1/2 times the crude that has already been pumped. DESCRIPTION: Cumulative output of past oil production and proved reserves of what's left for U.S., Latin America, Canada, Western Europe, Africa, Middle East, U.S.S.R. & China and other countries.

CHART: NOT AVAILABLE CREDIT: ILLUSTRATIONS BY JOSHUA SCHREIER SOURCES: CHASE ECONOMTRICS CAPTION: Assuming a price of $20 a barrel, world demand for oil will increase 18% by the year 2000, due mainly to economic growth in industrialized nations. The Middle East will double its production but scarcely take a sip from its vast reserves. DESCRIPTION: Current and future oil production for U.S., Middle East, other OPEC countries, U.S.S.R. & China, and other countries for 1986 and 2000.

CHART: NOT AVAILABLE CREDIT: ILLUSTRATIONS BY JOSHUA SCHREIER SOURCE: ENERGY INFORMATION ADMINISTRATION CAPTION: The conservation ethic really has taken hold in the U.S. Until 1973, GNP growth and energy consumption were entwined: whither one goest, the other went in the same percentage increase. Now GNP is still growing, but the amount of energy needed to sustain it has leveled off. Oil still provides most of the nation's juice, but natural gas is promising and coal is the ace in the hole. The U.S. has an estimated 350-year supply. DESCRIPTION: Two charts: U.S. GNP compared to energy consumption; consumption of oil, coal, natural gas, nuclear electric and hydro-electric power in 1973 abd 1986; illustrations of factory and house.