Our most recent “policy” came into effect with the 1986 oil-price collapse. It was simple: import more oil. In fact, it wasn’t a policy at all, but the result of inattention and complacency. From 1985 to 1989, imports grew by 63 percent–from 4.9 million barrels a day to 8 million barrels. By 1990, America’s dependence on oil imports was back to levels not seen since the late 1970s–and on a course that would have us importing 60 percent or more Of all our oil by the end of this decade.
The rapid growth in imports resulted :from a modest growth in demand, combined with a rapid falloff in domestic U.S. oil production. Between its 1986 peak and last year, America’s domestic-oil output fell by 2 million barrels a day. That’s greater than the total pre-invasion production of such major oil exporters as Kuwait and Venezuela. It was as though a major oil-exporting country had simply been snuffed out.
Some would say that it doesn’t matter how much petroleum the United States imports. Japan and Germany import all their oil and do fine, thank you. But a little perspective is required. Those two countries can finance their oil imports with exports. We can’t, at least at this juncture, and rising imports only undercut our efforts to reduce the U.S. trade deficit. The overall volume should also be kept in mind. In absolute terms, the United States imports more oil than Germany and Japan combined. Indeed, the growth alone in U.S. imports between 1986 and 1990 was greater in volume than Germany’s total oil consumption today.
The rise in U.S. oil imports was one of the main factors–along with rapid economic growth in the Far East and the fall in Soviet oil production–that were leading to a tighter world oil market even before Kuwait was invaded. Had Saddam waited two years, there would probably not have been a “security margin” of" unused production capacity around the world, and the economic impact of his invasion would have been much greater.
Now that the gulf crisis has pushed the question of energy policy forward, there’s talk of a need for new initiatives that will “capture the imagination” of the American people. Yet when it comes to energy policy, the record of the “dramatic” is not all that good. In November 1973, just weeks after the Arab oil embargo, President Richard Nixon unveiled Project Independence, with the promise that the United States could, with a vast and expensive program of investment, be independent of foreign energy sources by the year 1980. His advisers told him that it was highly impractical–and it was. The program never came close to meeting its goal. In 1979, as the public fumed about gas lines, the Carter administration came out with a dramatic synthetic-fuels proposal. Ultimately it, too, simply faded away as oil became cheaper again.
The 20-year effort to formulate energy policy offers some important lessons for the future. One is to concentrate on the pragmatic, even if it does not have the drama of a man-in-space program or a Manhattan Project. Another is to resist highly regulated programs, in which the government tries to do the job of the market. The over-regulated programs of the 1970s proved immobilizing, self-defeating and a great waste of time and effort. They did much more for the legal profession than for reducing our dependence on foreign oil.
Perhaps the most important lesson of all is the need for an “ecumenical,” rather than a “sectarian,” energy policy. By this, I mean a policy that can garner a broad coalition of support. America’s energy economy is huge and complex, and the interests involved–of regions, producers and consumers–are often conflicting. In Japan, everybody is in the same boat when it comes to energy. Not so in the United States.
So no one approach will be sufficient. In the past two decades, there has been an endless, almost religious and certainly fruitless struggle over the “correct” approach-production versus conservation, conventional versus renewable sources. Yet if we made any progress in the 1970s and early 1980s, it was thanks to a variety of approaches–gaining 2 million more barrels per day by producing oil from Alaska’s North Slope, while saving the equivalent of 2 million barrels per day with automobile fuel-efficiency standards. Without an ecumenical approach, all the wasteful political battles will be waged again, and immobilization will once again be the likely result.
What should be the elements of an ecumenical approach? Here are some starting points:
Promote the use of natural gas. Supplies are abundant here in North America, and opportunities to expand usage are plentiful, especially if pipeline development is expedited.
Reignite conservation efforts. It is often said that America “failed” or “gave up” on conservation. That is not true. The record of the American people in this area is impressive. Over the last 15 years, the United States has become 26 percent more energy efficient and 31 percent more oil efficient. Yet the conservation curve has flattened out since the 1986 price collapse, and there is still more room for technological improvements in energy use. One example: utilities’ new focus on “demand-side management”–helping their customers become more efficient in their use of electricity.
Seek to slow the decline in U.S. oil production, in part with financial or tax incentives.
Pursue a diversified program of research and development, looking at everything from renewable energy sources to a “second generation” of newly designed nuclear reactors.
Develop more consistency in government policies–environmental as well as energy–so that companies can confidently make long-term energy investments.
This would not be a big-ticket, expensive program. Still, it raises the contentious issue of energy economics. Some domestic producers and conservation advocates favor a tariff on imported oil, arguing that cheap and uncertain prices undercut investment in new energy sources. Others would like to raise the gasoline tax by 25 to 50 cents a gallon over some specified time period–and spend the proceeds on the Strategic Petroleum Reserve, research and development, and stimulating conservation and domestic energy production. The tariff proposal is sure to draw cries of protectionism, and voters will reflexively reject any proposals for new taxes.
Yet here, too, perspective helps. Right now, the tax on U.S. gasoline is only about one tenth of the average in major Western European countries. Motorists in Germany pay $3.48 for a gallon of gasoline; in Japan, $3.85; in France, $4.47, and in Italy, $5.26! Moreover, gasoline in America is not only cheap but has actually gotten cheaper. On an inflation-adjusted basis, the least expensive gasoline that the American motorist has seen since World War II was not in the 1950s and 1960s but in the period from early 1988 until August 1990 (chart). And in the last few weeks, prices have been easing again. In real terms, the prices from what many motorists remember as the halcyon days of the 1950s and early 1960s would be around $1.40 to $1.50 per gallon today.
There are other obstacles to a consensus on energy policy today. In the 1970s, the biggest confrontations were over price-between producers and consumers, and between regulators and the free market. The central clash in the 1990s will be different–between preserving the environment and meeting the energy requirements of our economy. The question is, will this conflict be resolved only on a case-by-case basis, the outcome depending on the constellation of political forces and passions at any given time? Or can we find some overall framework for resolving these disputes?
We need to learn a fundamental lesson that was apparent long before the oil shocks of the 1970s. It is a precept that Winston Churchill enunciated some 78 years ago, on the eve of World War I, when he converted the British Navy’s fuel from coal to oil in order to gain four knots in speed over the German Navy. Churchill knew he was running a great risk, for Britain did not produce oil. The Royal Navy would depend not on safe, secure Welsh coal, but on oil from distant Persia, riven even then by conflict between the mullahs, the modernizers and the shah of the day. Churchill’s answer to this security problem? Diversification. “On no one quality, on no one process, on no one country, on no one route and on no one field must we be dependent . . . ,” he declared. “Safety and certainty in oil lie in variety and variety alone.”
The case for diversification in energy was overwhelming at the beginning of the 20th century–and the gulf crisis shows that it is even more vital as we head into the next century.
