Posted on 05/04/2002 11:19:05 AM PDT by Pokey78
The key to a sound energy policy is a strong military.
OUR POLITICIANS have never shown their best side when confronting energy policy issues. In recent weeks Iraq's Saddam Hussein cut off his nation's oil exports to show solidarity with the Palestinians whose families he pays to strap suicide bombs to their children. Saudi Arabia, for its part, warned the New York Times that it was considering using the "oil weapon," because the ruling family could "no longer defend our relationship [with America] to our people." And the Venezuelan "street" trumped the nation's generals by returning control of Venezuela's oil industry to Hugo Chavez, an America-hating Castro clone. Those countries are our sixth, second, and fourth largest suppliers of oil, respectively, together accounting for almost one-third of our imports.
In response, the Senate showed its steel by voting to make poultry farmers a tiny bit richer (by subsidizing the use of chicken, er, droppings as fuel for electricity generation) and to make Iowa and other corn-state farmers, along with Archer Daniels Midland, the famous price fixer, a lot richer (by requiring a huge increase in the use of costly corn-based ethanol in motor fuel). But the Senate wouldn't even consider a House-passed provision to increase domestic oil supplies by drilling in an insignificant corner of the vast wastelands that comprise the Arctic National Wildlife Refuge.
Perhaps it's best not to complain, since the senators could have done far worse. They declined, after all, to impose higher gasoline efficiency standards that would force Americans into dangerously smaller and lighter vehicles. In the end, they ladeled out a mere $14 billion in subsidies for various conservation measures, to encourage the production of renewables such as solar and wind power, and, of course, to increase the availability of more exotic energy sources (see chickens above). Even when we add to that the $10 billion the Senate voted in loan guarantees for an Alaska natural gas pipeline--a liability that, Enron-style, will not appear on the government's balance sheet--the Democratic Senate remains a piker compared with the Republican House. The House version of an energy bill emerged bearing $33.5 billion in gifts to energy producers of various sorts.
The Senate-House conference to resolve differences in the two bills will be more contentious, however, than a simple game of $14 billion bid, $33.5 billion asked. The president and his Republican allies generally favor subsidizing the development of indigenous energy resources; Democrats see subsidies for conservation and renewable sources of energy as the main way to go. Even though the Senate also throws some money at producers, and the House at environmentalists, the difference in philosophy is so large that an impasse looms. But, as Jeff Bingaman, the New Mexico Democrat who was floor manager of the Senate bill, reminds us, "There's no requirement to have an energy bill this year."
That raises the prospect that the nation's lawgivers will follow Ronald Reagan's famous dictum, "Don't just do something, stand there." Not a bad thing. William Hogan, an energy policy expert at Harvard's Kennedy School, reminds students and colleagues that if you ask the wrong question, you get wrong and often quite silly answers. And our politicians continue to ask themselves the wrong question: "How can we become independent of foreign oil?" Successive presidents have asked that wrong question, and, predictably, come up with wrong answers. They have looked to price controls and increased domestic production "to meet our own energy needs without depending on any foreign sources" (Nixon); subsidies for massive coal liquefaction projects, auto fuel efficiency standards, and a strategic petroleum reserve with no policy for its effective use (Ford); a new Department of Energy and woolly sweaters (Carter's moral equivalent of war, or MEOW); sucking up to the Saudis and sending aircraft carriers and half a million men to drive Saddam out of Kuwait (Bush the first); and drilling in the not-so-oil-rich Arctic wildlife refuge (Bush the second). Alone among these White House occupants, Bill Clinton stands blameless. Having been too distracted by other matters to pay much attention to the national security issues raised by our reliance on oil imported from an unstable and frequently hostile region of the world, Clinton left the matter to his vice president, who expanded the list of demons from whom we must seek independence to include "big oil" and energy wastrels who drive SUVs of the sort used to transport Al Gore to important meetings.
The simple but unpleasant fact is that there is no way we can expand domestic production or curtail our consumption sufficiently to enable us to become independent of foreign oil. We can punch lots of holes in Alaska, and probably find enough oil to meet a small part of the growth in gasoline use we will experience in the next decade; we can beat corn into ethanol, and still find that we have added only a few days to our supply of gasoline; we can impose tighter efficiency standards on new cars, but will still have to slake the thirst of the existing stock of generally well-built and durable automobiles and trucks for years to come. And many of the measures being proposed to increase the efficiency with which we produce and use electricity, even if adopted--an expensive move, in many cases--are irrelevant to the question of oil imports, since very little oil is used to generate electricity, which now comes primarily from coal or natural gas-fired plants, and from nuclear stations.
As Hogan puts it, "Even the small changes we can make at the margins are too costly and too difficult politically. The big changes are harder still." There may be reasons to remove uneconomic restrictions on domestic production, and to institute conservation measures that make sense when subjected to a cost-benefit analysis, but pursuing "energy independence" is not among them.
We are a great big country, with thousands of miles separating factories from markets, children from parents, vacationers from resorts. That means comfortable cars with plenty of room for the kids, lots of flying, and lots of 18-wheelers. We have substituted energy for muscle, making ours the world's most productive and richest manufacturing and agricultural industries. That means millions of gallons of diesel fuel. We refuse to follow the European model and allow the government to levy gasoline taxes that would shoehorn us into tiny (read: unsafe) cars. That means using gasoline, and lots of it. And, since we have less than 3 percent of the world's oil reserves, that means importing a lot of crude oil to keep our refineries producing the gasoline we need.
Nothing can change that, least of all the Senate bill. Its emphasis on conserving electricity is irrelevant; its approach to the problem of reliance on foreign oil is hypocritical, costly, and counterproductive. Start with ethanol. The Senate bill mandates an increase in the use of this corn-based fuel additive (it makes gasoline burn cleaner), from its current level of just under 2 billion gallons per year to 5 billion gallons by 2012. By that time, we will be consuming about 160 billion gallons of gasoline each year, reckons Howard Gruenspecht, a resident scholar and energy expert at Resources for the Future, the think tank that is the acknowledged nonpartisan authority in these matters. So whatever ethanol may do for the environment, if we achieve the Senate's goal we will replace only a bit more than 1 percent of total consumption. That is unlikely to have the oil princes cutting back on their shopping trips to Harrods and Harry Winston. The Senate bill is primarily about farm-state votes, not Arab oil.
There is worse. The Senate also voted to phase out the use of MTBE, an additive that is also used, like ethanol, to make cleaner burning gasolines. The stated reason is that MTBE (methyl tertiary-butyl ether) gets into ground water, which is true. But, says Gruenspecht, because there has been no serious cost-benefit analysis, we don't know if the environmental benefits of a ban on the stuff justify its cost. What we do know is that eliminating this alternative to ethanol will make an already tight refinery capacity situation worse, driving up gasoline prices. Score one for the oil companies and the corn growers.
The best performance was put on by the senators from California and New York. Hillary Clinton and friends bowed to the environmentalists by voting to phase out MTBE, and then pandered to consumers in their states by voting against the ethanol mandate, on grounds of cost. But Gruenspecht estimates that about 8 cents out of the probable 10-cent increase in the cost of a gallon of gasoline that we will face if the Senate bill becomes law will be due to the MTBE restriction, which the California and New York senators supported, and only two cents to the ethanol requirement, which they opposed.
Hard on the heels of the New York and California four came Michigan Democrat Carl Levin, responding as politicians are prone to do, to a recent rise in gasoline prices that has taken the national average all the way up to $1.39 per gallon, 23 cents below where it stood last year. Last week he convened the Senate's Permanent Subcommittee on Investigations to beat up on the oil industry. At a time when economists are hoping that business profits rise so as to induce the investment needed to sustain the current economic recovery, Levin & Co. are appalled at oil company profits, which they attribute to willful withholding of gasoline supplies and to the wave of mergers that the oil industry has experienced in recent years. Every one-cent increase in gasoline prices, Levin announced, adds one billion dollars to oil industry profits. Which may be true. But surely this is grist for Al Gore's emerging run at the Democratic party's presidential nomination, and not of great use in shaping a meaningful energy policy.
So there you have it. America is increasingly dependent on foreign oil, much of it from an unstable part of the world, and our politicians think that an energy policy consists largely of corn, chicken droppings, and oil-company bashing. Bush and his allies in the House, to their credit, would add incentives to increase domestic production, but even they won't admit that if they got all they are asking for, including the right to drill in the Arctic wildlife refuge, the oil that might be found isn't enough to make a jot of difference in the broader scheme of things. We would still need imports to meet more than half of our demand for crude oil.
A COOL APPRAISAL of what we should do about that fact of economic life begins with an assessment of the risk to which our reliance on foreign oil subjects us. The worst nightmare--a total, coordinated cutoff of supplies to America in response to Arab unhappiness with our support of Israel--is most likely to remain just that, a bad dream. Oil is a fungible product, and it is impossible to deny any one country supplies of anything that is loaded into the hold of a tanker. The oil, with more or less subterfuge, would continue to be unloaded in whatever market it is most profitable to supply. Sheikh Zaki Yamani, one-time Saudi oil minister and now a consultant in London, today allows that the 1973 embargo "did not imply that we could reduce imports to the United States. . . . The world is just one market. The embargo was more symbolic than anything else." So embargo advocates either have to close down the entire industry, or watch a good portion of whatever oil they do export flow to America. The oil weapon, if it exists at all, is a shotgun, not a rifle.
Besides, oil producers are not very likely to be enthusiastic about cutting off supplies. Saddam may threaten periodic interruptions of the flow of his oil to world markets, but those interruptions are mitigated by the oil he smuggles out to evade the U.N. embargo, and are in any event only temporary. Venezuelan sources point out to me that their country has always honored its supply contracts with the United States, even during the days of Arab oil embargoes. Mexico may restrict supplies a bit to accommodate the OPEC cartel and raise prices, but is in no position to participate in an embargo that might damage the American economy, on which it depends as a market for its goods and a haven for its unemployed emigrants. Canada, our largest supplier, can certainly be counted among the most dependable.
And now we have a new, or at least bigger player in the world oil markets. Russia, challenging the Saudis for the title of world's number one producer, is playing its own game, and needs the foreign currency that oil sales bring if it is to continue to improve the living standards of its people and maintain the popularity of its president. It is clearly in Russia's interest to position itself as the reliable supplier, the one on which America can count regardless of developments in the Middle East. Vladimir Putin's reforms have made investment in developing Russian reserves less risky, and both domestic and foreign firms are pouring billions into developing oil (and gas) fields in Siberia and other parts of Russia.
Which brings us to Saudi Arabia, home of the world's largest and least costly oil reserves, and probably the only country with sufficient excess capacity to step up production quickly should Saddam or some other dictator attempt to roil markets by withholding supplies. Despite the warning to Bush, delivered through the obliging New York Times, the Saudis have made it clear that they would indeed open the spigots wider if supplies become too tight and prices so high as to threaten America's economy. "Oil is not a weapon. Oil is not a tank," said Adel al-Jubeir, a Saudi foreign policy adviser who accompanied Crown Prince Abdullah to Bush's Crawford, Texas, ranch in late April. If Iraq did indeed continue to withhold its 2 million barrels per day of U.N.-approved oil, "Saudi Arabia and OPEC will make up any shortfall due to any reason--political, military or natural disasters," the country's oil minister, Ali al-Naimi, announced.
But in Saudi Arabia things are never quite what they seem. Just as the kingdom's cooperation with us in the war against terror does not include cutting off the flow of funds to terrorist organizations and hate-mongering mullahs, so the promise to increase the flow of oil does not necessarily mean that the Saudis are pumping more oil. BusinessWeek reports that immediately after Naimi's statement, several oil companies with contracts to take Iraqi crude asked the Saudis to make up for the supplies lost as a result of Saddam's 30-day cutoff, and were turned down. One Arab oil industry executive said, "Naimi basically said Saudi Arabia can make up for lost supplies. He didn't say it will. It's not automatic."
Still, the Saudis desperately need all the revenues they can get to support their welfare state and keep their restless young merely sullen, but not mutinous, to support the lifestyles of the thousands of princes who feed at the public trough, and to protect the value of the billions they have invested in the American and other industrial economies. So sell their oil they will.
All in all, it is not a cutoff that America need fear should it continue its support of Israel, or decide to move against Saddam without the support of Arab nations. Nor need we worry about a reduction in supplies sufficient to cause prices to rise, even to peak levels of the past. As Richard Haass, now director of policy planning at the State Department, told a Senate committee in March of 2000, higher prices--within limits that we are not approaching--do not "constitute a national security problem."
True, higher oil prices transfer income from American consumers to Arab sheikhs, only some of which funds return here in the form of increased exports to producing nations. And that undoubtedly has a negative effect on economic growth, which we must reckon as a cost of anything we do in the Middle East that causes oil prices to rise.
But here we have to return to William Hogan's dictum: Let's ask the right question. Surely, that question is not: "Is there a cost to forcing regime change in Iraq?" Answer, "yes." Easy, but of no significance. The right question most certainly is this: "Is the cost to our economy of an attack on Saddam worth the benefit of eliminating an aggressive and hostile dictator who possesses and has used chemical weapons, and has or is on the verge of getting even more horrible weapons of mass destruction?"
Most people of a certain age remember the horror of gasoline lines, and days on which only drivers with even- or odd-numbered license plates could fill their tanks. A high price was paid in inconvenience and economic cost--but, we have learned, an unnecessary one, due more to ill-conceived price controls and rationing schemes than to any physical shortage of crude oil. No one in government would repeat that error.
Others remember the long period of disruption--think Jimmy Carter, 17 percent interest rates, high unemployment, a soaring misery index (the sum of inflation and unemployment rates)--that followed the 1970s upheavals in oil markets. Worry not. That trauma was also due more to policy errors than to any problems the oil producers were able to create.
In those days it was thought that a major increase in oil prices would trigger inflation. From that it was an easy jump to the conclusion that the monetary authorities should raise interest rates to offset the inflationary effect of the oil price rise. The result was a double whammy. Consumers were having money extracted from them by producing countries, reducing the income they could dispose of in America. And, simultaneously, the decision to raise interest rates was driving mortgage prices up and the housing industry down, increasing the cost of consumer debt, and discouraging new business investment by making capital dearer. Result: that terrible combination of inflation and recession that we came to call stagflation.
There is no reason to believe that an oil price spike circa 2002 would have the same effect as those earlier ones. For one thing, our economy is less oil- and energy-intensive than it once was. For another, even if a regime change in Iraq were to disrupt supplies from that country, other countries can fill the gap: immediately, if the Saudis keep their word not to use oil as a weapon; soon, in the likely event that the Russians put the health of their economy above the interests of their Iraqi allies.
Most important, we have learned from past policy errors. The monetary authorities know that they did exactly the wrong thing at precisely the wrong time when they raised interest rates in the 1970s. As Greenspan's Fed demonstrated when prices shot up from a $10 per barrel low in 1999-2000, the effect on economic activity can be minimized by accommodating that increase--keep interest rates down and monetary policy easy.
Such a policy cannot, of course, completely offset the effect on consumer purchasing power and on business costs of an oil price increase. There is no question that the spike in oil prices that is likely to follow the initiation of action against Iraq will slow our economy. Analysts at Goldman Sachs estimate that if the disruption were isolated to Iraq, prices would likely reach $40, a significant jump from the current $26 per barrel level. That spike would, they estimate, cut "a rather modest" one-half of a percentage point off our GDP by 2003. In a $10 trillion economy, that would come to $50 billion in lost output--not exactly chopped liver, but hardly devastating. And certainly not as costly as a terrorist attack using the weapons of mass destruction that Saddam has available.
SO WE ARE FACED, first, with the question of whether we are willing to risk a very modest drop in GDP in order to eliminate a major threat to our safety and the independence of our foreign policy. History suggests we are. A bit over 200 years ago an agent of French foreign minister Talleyrand demanded a bribe of $50,000 in order to receive an American delegation protesting French attacks on U.S. shipping. Our minister to the French Republic, Charles Cotesworth Pinckney, replied, "Not a sixpence, sir." He was perhaps taking his cue from one Robert Goodloe Harper, a native Virginian who served as a representative from South Carolina and a senator from Maryland. A year before Pinckney refused to hand over the $50,000, Harper, rising to toast John Marshall, proclaimed, "Millions for defense, not one cent for tribute." We've had a bit of inflation since 1798, so millions are now billions. But we are also a bit richer. As the kids were once wont to say, "no sweat." After all, $50 billion is merely the net worth of one American, Bill Gates, or a small fraction of Bush's long-term tax cut, and not much more than we plan to spend every year on what is called "homeland defense."
Unfortunately, our policy problems do not end with the relatively easy answer that the benefits of regime change in Iraq far exceed the likely cost. We face another, and more difficult question: "What do we do if bin Laden or his ilk attempts to unseat the Saudi royal family?" Even if we immediately do all of the things we should be doing--conserving, drilling, diversifying supply sources by investing in Mexico (if they allow us to do so), and reconciling with Iran--a hostile takeover of Saudi Arabia would be a threat to our economic security.
The kingdom sits on 25 percent of the world's known oil reserves, and could easily add to its store of black gold by drilling in a few places where geologists know there is a lot more oil under the sand. The potential availability of its shut-in capacity, estimated at about three million barrels per day, keeps oil prices at levels that, although far above those that would prevail in a competitive market, are not entirely inconsistent with American prosperity during periods of tight supply. Whatever else we may think about the royal family, we can count on its greed and need for money to keep its oil flowing into world markets.
But bin Laden's followers prefer caves to palaces, and are driven by an ideology that would permit them to cut off their noses--and those of Saudi subjects--to spite American faces. Those who agree with the Taliban terrorists are, in the words of Princeton's Bernard Lewis, on "a downward spiral of hate and spite, rage and self-pity, poverty and oppression," which will culminate "sooner or later in yet another alien domination."
Although Lewis doesn't list America as one of the potential new dominating powers, he might well have. The United States simply cannot allow the rich, low cost (less than $5 per barrel to find and produce, compared with about $18 for Russian oil) reserves of Saudi Arabia to come under the control of a group set on this nation's destruction. In the long run we may be able to rely on the fuel cell to power our cars and trucks, or on some as yet unknown or uneconomic technology, or on a combination of Russian oil and oil from yet-to-be-discovered resources. But in the here and now we need gasoline. And that means crude oil. And that means we need the Saudi royal family, or some other U.S.-friendly regime, in control of the oil fields and their revenues.
That, in turn, means military power sufficient to maintain--or to install--such a regime. We used that power to keep Kuwait's oil out of the hands of Saddam, and Kuwait has only one-third of the reserves already known to exist in Saudi Arabia. We didn't have to love the rulers of Kuwait, quaking in their suites in London's Dorchester while we liberated their country. We simply had to retain access to their oil, and to make the easy choice between the ruling al-Sabah dynasty and Saddam Hussein to justify sending half a million men and women into Desert Storm.
American soldiers marched off to World War II singing "We did it before, and we can do it again." That tune may become appropriate once more should any hostile group make a grab for power in Saudi Arabia. Our energy policy for the foreseeable future, says Hogan, must deploy a combination of military and diplomatic tools. I would put the emphasis on the former. In the end, our aircraft carriers are the principal instruments of our energy policy, and will remain so for many years to come. If Congress wants to support a sensible energy policy, it should give the military what it needs, and leave the fate of corn farmers to the free market.
Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of regulatory studies at the Hudson Institute, and a columnist for the Sunday Times (London).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.