In a ritual dating from the energy crisis era, the White House will soon transmit to Congress a national energy-policy plan—the seventh since 1977. Previous energy-policy plans have run the gamut from the highly prescriptive "National Energy Plan" drafted by the Carter administration to the laissez-faire "Energy Security Report" issued by President Reagan at the end of his second term in office. The most recent plan, the Bush administration's "National Energy Strategy," straddled the energy-policy ground with a professed adherence to both free markets and federal intervention to reduce the country's perceived overreliance on Middle Eastern oil. While energy-policy plans have varied in the extent to which they called for manipulation of the energy sector by the federal government, they all have reflected a costly preoccupation with energy security or, more precisely, with reducing U.S. oil imports. Will the Clinton administration's plan break new ground?
In December 1993, Hazel O'Leary, secretary of the U.S. Department of Energy (DOE) provided a clue. In launching what she called the "Domestic Natural Gas and Oil Initiative," O'Leary declared that the administration's energy goal was to "develop new and expanded opportunities for jobs in the domestic gas and oil industries, while fostering a climate which will increase production from domestic resource bases and reduce our reliance on foreign oil." The emphasis given energy security here is clearly a throwback to energy policymaking of the 1970s.
Energy security—or fear of reliance on imported oil—entered the lexicon of American public policy in the wake of the Arab oil embargo of 1973. Rooted in the conflict of the Middle East and linked to the vast petroleum supplies of the Persian Gulf, security considerations have dominated U.S. energy-policy thinking for two decades. The security dimensions of energy policy have profoundly complicated the otherwise legalistic, technological, and economic debate about the transformation, transportation, trade, and use of energy. In short, security considerations have saddled energy policy with highly unstable political baggage.
In the elusive and costly search for energy security, federal and state governments have for two decades experimented with a wide array of regulations, programs, taxes and subsidies, and research and development initiatives in an attempt to reverse what is essentially a geologic and political reality: the oil wealth and weak governments of the Persian Gulf.
The failure of these efforts points to two conclusions. First, the United States cannot, now or in the foreseeable future, meet its petroleum requirements without importing oil from the Persian Gulf. Second, energy policy in and of itself is unlikely to alter substantially the nation's insecurity about this fact of life.
Considerations about energy security have saddled U.S. energy policy with highly unstable political baggage.
The review of U.S. energy security policy presented here reveals that the evolution of that policy owes much to successive administrations' rhetoric of wounded national pride in the wake of the 1973 oil embargo by a few Arab members of the Organization of Petroleum Exporting Countries (OPEC). As the review further shows, the ensuing energy crisis—largely self-inflicted—led to an obsession with U.S. dependence on all imported oil, from secure and insecure sources alike. This obsession has resulted in large federal investments that have not measurably enhanced the nation's energy security. Despite the high cost of these investments, fear of OPEC's potential power to curb oil supplies and to significantly raise oil prices haunts U.S. energy policy. In short, OPEC's influence, which is actually minimal in present-day oil markets, continues to distort this policy. For this reason, the Clinton administration should contemplate two proposals that might exorcise the ghost of OPEC from U.S. energy security considerations.
Energy security in the 1970s
Security concerns about petroleum can be traced to the U.S. Navy's decision in 1904 to convert its ships from coal power to fuel oil. But these concerns did not rise to national prominence until 1973, when a few Arab members of OPEC embargoed oil exports to the United States. President Nixon responded to the embargo by imposing energy price controls and ordering large federal investments to produce domestic substitutes for imported oil. He even advocated the use of nuclear weapons to stimulate natural gas yields from tight-sands formations. By characterizing the oil embargo as a "blow to American pride and prosperity" and "a turning point in our history," Nixon made energy policy a pivotal issue in the success or failure of his and future administrations. He presided over the most significant expansion of the federal energy bureaucracy since the New Deal and set the pattern for obsessive energy policymaking.
In 1975, President Ford declared that "Americans are no longer in full control of their own national destiny, when that destiny depends on uncertain foreign fuel at high prices fixed by others." He proposed a sweeping federal investment program to produce energy from domestic coal and uranium; to build pipelines, power plants, railroads, and ports; and to suspend environmental regulations that might impinge upon these efforts.
President Carter devoted the better part of his term in office to the energy crisis created by the 1979 revolution in Iran. He alternately cajoled and hectored Americans to enter "the battlefield of energy to win for our Nation a new confidence, and to seize control again of our common destiny." Surprisingly, his battle plan comprised a Republican-spirited energy-price deregulation policy. But it also included extensive government control of energy end-use sectors, prohibitions on the use of natural gas and oil in electricity generation, preprinting of gasoline rationing coupons in expectation of the next oil crisis, and creation of the ill-fated $75 billion Synthetic Fuels Corporation.
Carter characterized his quest for energy security as the "moral equivalent of war," thereby creating the image of an epochal struggle for national survival. As late as 1982, former Secretary of State Henry Kissinger was moved to write, "Since the first price explosion of 1973, we have learned that the energy crisis is not a mere problem of transitional adjustment; it is a grave challenge to the political and economic structure of the free world."
The facts behind the energy crises of the 1970s
It seems improbable, in retrospect, that political leaders should link the fate of the nation to hydrocarbons and electrons and that a topic as technical and utilitarian as energy should inflame human passions. Energy is, after all, neither created nor destroyed, but transformed by mechanical processes invented and managed entirely by humans. For most of human history, access to energy supplies has been easy to gain, and any constraints resulting from unexpected growth in energy demand generally have been overcome with new and better technology. The "security" of energy has never been a problem, even allowing for the overwrought social environment in which the term "energy security" was first popularized. When Arab OPEC members embargoed oil exports in 1973, the United States had plenty of coal, natural gas, uranium, hydropower, and geothermal resources, as well as oil. In retrospect, the energy crisis was fundamentally a crisis of policy—specifically, federal oil policy—rather than a national, systemic failure. And yet the embargo precipitated a crisis of national confidence on a par with that of the Great Depression.
By the early 1980s, the energy crisis was perceived to be a socioeconomic conflict involving a global scramble for strategic advantage.
This reaction seems surprising, given that the embargo was neither a plan to capture the international oil market nor an effort to harm American interests; it was not even a strategy to maximize profits. Arab governments conceived the act almost entirely as a means of influencing U.S. foreign policy in the Middle East. It was their response to U.S. rearmament of Israel during the Yom Kippur war with Egypt. The embargo was, in fact, a diplomatic rather than an economic act. Oil, coincidental to the purpose, was used as an instrument of foreign policy because the Arab governments involved had no other credible means of expressing displeasure at U.S. Middle-Eastern policy.
The U.S. government viewed the embargo as the perhaps inevitable price of ensuring the survival of the state of Israel. What ensued was not, as might reasonably have been expected, a U.S. engagement to address Arab grievances by means of foreign and security policy. Rather, a diplomatic confrontation was transformed initially into a national obsession with U.S. dependence on all imported oil, and subsequently into a tool for social engineering. The temporary oil embargo of 1973 and the more prolonged oil-supply disruption of 1979 inexplicably provoked a moral crisis over the foundation of Americans' use of resources. Energy itself became the enemy, the degree of its use a measure of civic virtue or vice. The oil-supply disruptions also gave credence to the then-popular theory of limits—limits on the sustainability of natural resources, on economic development and growth, on the creation of economic wealth, and, significantly, on human ability to manage human affairs.
Too high a price
In the name of energy security, the much-abused federal budget was made to absorb subsidies for otherwise uneconomic domestic oil wells, investments in uncompetitive coal liquefaction and gasification, financial support for the shale oil industry, and perennial subsidies for the ethanol industry. In addition, Congress extended tax subsidies to producers of high-cost unconventional gas, even as overproducing conventional gas suppliers were seeking in vain for customers. And it provided financial support to makers of every conceivable renewable energy system.
Energy security considerations also ensured the survival of the civilian nuclear power industry and were instrumental in federalizing research for the development and demonstration of a new generation of coal-burning electric power plants. Notably, neither nuclear power nor coal-fired electricity plants had any practical relevance to energy security, an issue that, despite the broadness of the label, has always centered on U.S. dependence on oil imports from the Persian Gulf. Nuclear and coal research subsidies have remained on the federal budget books (below the line, in the deficit category), even as oil use in the electricity generation sector served by these fuels has declined to an insignificant level—less than 700,000 barrels per day of the seventeen million barrels consumed daily by the entire U.S. economy.
The U.S. government withdrew from the oil business in 1981, leaving the field to spot and futures markets such as the New York Mercantile Exchange, where energy futures and options are traded. The efficiency of these markets has rendered the acts of governments increasingly irrelevant
The cost of energy security has been high. In the twenty years spanning the first energy crisis and enactment of the Energy Policy Act of 1992, the federal government spent more than $100 billion on programs to enhance energy security. It built the Strategic Petroleum Reserve and invested yearly in research and development of nearly every energy supply and demand technology that could possibly contribute—cost competitively or not—to the goal of reducing American reliance on foreign oil. Notwithstanding the broadly competitive structure of the U.S. energy industry, one half of the annual budget for DOE is devoted to research and development, demonstration, and commercialization of energy technology. To these explicit budgetary expenditures one can add the cost of less obvious subsidies from the U.S. treasury to the energy sector, which the Energy Information Administration estimates to be $5–10 billion per year. These investments have not measurably altered the energy security of the nation. Instead they have engendered recurrent costs without dividends.
But dividends have flowed from the consequences of a single, cost-free change in U.S. policy: decontrol of the oil industry. The benefits of decontrol were especially evident in 1986, when, unconstrained by government meddling, the market drove the price of oil down to $9.00 per barrel. The market's performance stood in sharp contrast to the expectations of federal policymakers, who throughout the 1970s had forecast that oil prices would reach $60–100 per barrel in the 1980s. Decontrol was a victory of common sense over common fear, of free trade over protectionism, an of private competition over government direction and control. It was also a victor over OPEC.
The policy that defeated OPEC—government's liberation of the oil market—emerged fully only after forty-six years, the period between enactment of the Connally Hot Oil Act of 1935 and issuance of the executive order that accomplished full decontrol of oil prices in the first month of the Reagan administration. The U.S. government's withdrawal from the business of oil in 1981 left the field to spot and futures markets. The efficiency and transparency of these markets has rendered the acts of governments, even of possibly colluding governments, increasingly irrelevant. Ironically, Congress debated oil price controls for six years before finally enacting a phased decontrol policy, but had created the counterproductive Synthetic Fuels Corporation in a single session and in less than six months.
The ghost of OPEC
Energy security policy continues to be haunted—at least within the halls of government—by fears of OPEC's potential ability to curb oil supplies to the United States or to unexpectedly raise prices to economy-damaging levels. Although ineffective as a cartel operating in global, generally free, oil-trading system OPEC continues to exert (mainly psychological) influence in excess of its market role. Industry observers regularly seek OPEC "reactions" to market-price movements, and organizations such the International Energy Agency report these reactions as meaningful. In addition, OPEC's production quotas, which in a practical sense are unconnected to actual oil production in OPEC member states, are still factored into oil trader decisions during periods of abnormality such as labor strife at oil-producing fields, emergency shutdowns of operating wells, or acts of war or natural disasters that impede deliveries of expected oil supplies.
In spite of OPEC's notorious internal conflicts, its members—which are, after all, governments and not private businesses—remain prone to collusion for political purposes The last such instance occurred at the outset of the Iraqi war, when OPEC's governing board waited twenty-five days before releasing its members from production-quota obligations and "allowing" them to bring excess production capacity online. In this race, the OPEC decision might have been merely a political cover for members who were waiting to discover which countries would support or oppose Iraq. But the delay served to postpone the market's price adjustment to the loss of Iraqi and Kuwaiti oil production, and it earned OPEC members income unwarranted by actual market conditions.
Because OPEC's continued existence skews the energy policy debate in the United States and in other oil-consuming countries, and because it complicates otherwise constructive relations between the United States and the Arab world, the Clinton administration should confront OPEC and America's energy security concerns directly. In its forthcoming energy-policy plan, the administration could declare the abolition of OPEC to be a goal of U.S. foreign and trade policy. The dissolution of OPEC is justified on the ground that its existence and purpose are contrary to the objectives established by the international community in the General Agreement on Tariffs and Trade (GATT). Since OPEC members are GATT signatories and benefit from free-trade rules, they should be compelled to reevaluate the role of their cartel—one of the world's remaining few—in an international community made free to trade. The governments of OPEC members might well find the idea of competition liberating. Competition might even be a stimulus to the members' economic renewal, as well as a catalyst for their democratization.
As a countermeasure, U.S. energy policymakers should abandon the inflammatory frame of reference of energy security. No practical purpose has been served domestically or internationally by adherence to a policy that in the end has simply raised the economic cost of a vital commodity. The federal government has more pressing, and more explicit, security concerns than those that have come to be associated with access to oil supplies. Crises may continue to be a part of the world of oil. But they need not, indeed should not, instigate a return to the security obsessions of the past. In any case, and if history is any guide, future turmoil in the Persian Gulf will probably not be resolved, mitigated, or otherwise affected by U.S. energy policy. The time is ripe to abandon the rhetoric and policies of the long-past era of energy crises and instead commit to mutually beneficial free trade.
Vito A. Stagliano, a visiting scholar at Resources for the Future, served as deputy assistant secretary of energy for policy planning during the Bush administration. He also directed the development of the Bush administration's "National Energy Strategy."
A version of this article appeared in print in the May 1995 issue of Resources magazine.
A version of this article appeared in print in the May 1995 issue of Resources magazine.
