Is it oil-import dependence that matters most when crafting energy security policy? To be sure, oil-import dependence -- involving reliance on potentially uncertain, unstable, or unfriendly suppliers -- can't be treated casually. Yet really, the anxiety over oil imports should be seen as arising from their effect on the level and volatility of oil prices, those price shocks, in turn, threatening the macroeconomic health of the United States. But because upheavals on the international oil market govern oil prices both here and throughout the world, even a magic transformation into oil self-sufficiency wouldn't ensure U.S. immunity to such shocks, though recourse to the Strategic Petroleum Reserve can cushion the effect of short-term disruptions. In the 1970s, we tried -- out of desperation but with disastrous results -- to decouple the domestic from the international oil market. And just as we can't insulate ourselves against what happens in fuel markets outside our borders, so the outside world can't avoid repercussions of what happens here: ask European drivers, hit in their wallets by recently escalating U.S. gasoline imports.
Consideration of policy options arising from the security dilemma deserves a prior reminder of energy demand and supply factors. On the demand side, the foremost key to insulating ourselves against world oil-market gyrations (including the exercise of market power by OPEC members or others) is simply using less oil. Indeed, U.S. oil intensity -- the ratio of oil consumption to GDP -- has declined about 50 percent over the last three decades. Further significant declines in oil intensity should help make us more energy-secure.
Of course, to the extent that there's a prospect of genuinely large discoverable and producible oil supplies that would serve to discipline the world market and rein in the price, the supply side deserves consideration as well. Moreover, that disciplining and price-moderating role can result from exploratory success both in the United States and other -- preferably secure -- parts of the world. With respect to the United States, some see promise in greater exploitation of offshore oil, conceivably stimulated by a lifting of coastal drilling moratoria. Others look to Alaska, where proponents of ANWR development join the debate with passion. (Authority for ANWR development was not contained in the recently enacted Energy Policy Act of 2005; that authority faces consideration as part of the congressional budget process.) But note: the best-guess estimate of ANWR output is for a volume of about a million barrels a day a decade from now. With world oil consumption then expected to hover at a level of around 100 million barrels/day, that increment translates into not much more than a penny per gallon at the pump -- scarcely a magic wand. So, whether one is for or against ANWR, the notion of a bonanza that will any time soon markedly enhance U.S. energy security is very likely an illusion.
The urgency of lowering oil intensity thus holds up. Almost by definition, that goal means a combination of more efficient use of oil and the development of liquid energy sources that replace conventional crude oil. What are some cost-effective pathways in which public policy could play a decisive role in the pursuit of that twofold goal? Numerous economists -- not just ones suspected of an interventionist bias -- argue the merits of a tax on oil consumption. At a magnitude of, say, $5/barrel (or 12 cents per gallon of gasoline), such a tax would reflect the estimated exposure of the U.S. economy to international oil disruptions. (A part of that $5 embodies the fact that, as the world's biggest oil importer and consumer, U.S. "monopsonistic" demand itself puts upward pressure on world oil prices.)
In transportation, whose automotive fuel component accounts for around 45 percent of nationwide oil use, some increase in the federal gasoline tax -- no different in real terms today from what it was in 1960 -- would moderate oil consumption and modestly help slow greenhouse gas emissions. (The federal gas tax stands at 18 cents per gallon; state taxes add, on average, another 22 cents.) But a rise in the federal gas tax -- even one less than the 50-cent increase frequently proposed -- has zero appeal to congress, even if the increased revenue were recycled to low-income motorists or used to reduce other taxes. Even a second-best recourse --significantly strengthened CAFE standards -- faces chronic political opposition.
So, with market-efficient incentives and other oil-conservation measures largely stifled, policy attention shifts to other means -- some laudable, others questionable -- of addressing our vulnerability to internationally instigated oil shocks. The Energy Policy Act of 2005 contains a number of such initiatives. (I ignore energy efficiency measures and resource options in electricity generation, not now or prospectively a significant user of oil.) On the plus side of this year's legislation, there are policies designed to displace oil in uses still in early stages of research and technological development -- applications for which some measured degree of government assistance is clearly merited. Development of a hydrogen-based automotive fuel cell, promotion of cellulosic ethanol fuels, and strengthened momentum for production of U.S. hybrid vehicles are examples. (The law's coal provisions earmark some funds for liquefaction and hydrogen production with potential application in transport.) None of these initiatives offer near-term relief to the oil-intensity dilemma; indeed, the president, when signing the energy bill in August, cautioned against the expectation of quick energy fixes. But they do highlight and address at least some important long-term energy R&D challenges.
The more dubious aspect of the law has less to do with this largely sound technological menu and more to do with the magnitude of subsidies and the decided stamp of political favoritism. To illustrate: An ethanol mandate in the law guarantees, for some time to come, a program that serves largely to benefit farmers and grain processors using corn as a feedstock; it thus continues what is in effect an agricultural policy disguised as an energy policy. Mind you, that's aside from tax relief provided to ethanol users. If ethanol deserves serious consideration as a liquid fuel source, then what deserves equally serious consideration is that the world's preeminent, cost-competitive producer -- Brazil -- faces severe protectionist barriers as it seeks entry into the U.S. ethanol market. With domestic automakers having to play catch-up with imports, a new hybrid tax credit in effect subsidizes sales of larger domestic models. The law includes a generous expensing provision for refinery investments in capacity expansion. (What does make sense in the refinery context is a policy review of problems stemming from the so-called "boutique fuels" dilemma. Clean-air requirements that dictate a variety of gasoline blends for different urban areas probably exacerbated regional distribution bottlenecks and shortages several years ago and may do so again.) And are there really compelling arguments for other hefty financial breaks for the fossil-fuel industry?
All in all, what seems missing is a sense of programmatic priorities and rationality in the public-private funding burden. It's surely not the case that private-sector players are incapable of independently and actively pursuing efforts that can help mute reliance on conventional oil supplies. As just one cautiously optimistic example -- optimistic, at least, on economic and technological grounds -- consider the ongoing work on subsurface retorting (in effect, distillation) of oil shale. Described in a recent report by the RAND Corporation, it is an endeavor whose ultimate success could help to at least give pause to those advancing a global "running-out" scenario (which Alberta's tar sand production -- approaching a third of Canada's oil output -- may even now throw into doubt). I know: the mere reference to synfuels prompts derision from folks who remember or who have read about the many decades during which these resources have patiently waited in the wings, without ever becoming the hoped-for showstopper. As recently as the 1980s, a federally created, but rapidly jettisoned, Synthetic Fuels Corporation predicted an output of several million barrels of crude oil-equivalent -- by 1992 no less! Still, maybe it's best to never say never.
Of course, whether these and other technologies will be able to deliver not just cost-competitive BTUs but also to meet applicable environmental standards can't simply be an afterthought. Synfuels illustrate that dilemma as well. Alberta's tar sand exploitation makes substantial demands on land area and creates "spoils" that are large relative to the volume of liquids produced. And shale oil extraction in the U.S. West could pose threats to water quality. (With CO2 releases at both the extraction, as well as normal "downstream," stages of the fuel cycle, each of these synfuels might be disproportionately constrained by any greenhouse gas emissions restrictions, in comparison to the effect of such restrictions on conventional crude oil.)
My final, somewhat gloomy thoughts concern the fact that, no matter how enlightened our energy policies, there's no way we can totally guarantee our resilience against energy-related developments outside our borders. Here, the term "security" takes on a broad and significant geopolitical dimension. Suppose we can largely wean ourselves away from oil -- "winning the oil endgame" in Amory Lovins' catchy formulation. With some foreign oil producers continuing to have commanding -- perhaps even increasing -- influence over supply and price, the channeling of oil revenues to militantly hostile causes can't simply be wished away. In that sense, energy security poses a long-term challenge quite apart from the economic vulnerability I've stressed here. It's bound to test our worldwide political relationships, involvement, and resolve long after we're all driving Toyota Priuses and getting what liquids we need from Colorado shale deposits.
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Joel Darmstadter is a Senior Fellow at Resources for the Future. This web feature is based on a presentation at the RFF Briefing "Taking Measure of U.S. Energy Policy: A Review of the Energy Policy Act of 2005," Washington DC, Nov. 2, 2005.
RFF is home to a diverse community of scholars dedicated to improving environmental policy and natural resource management through social science research. Resources for the Future provides objective and independent analysis and encourages scholars to express their individual opinions, which may differ from those of other RFF scholars, officers, and directors.
