Oil Imports Fuel New Energy Fears

Energy security is back on the priority agenda in Washington for the first time since the early 1980s. Two major new reports--one last week from the U.S. Department of Energy--warn about energy dangers down the road. The specter of shortages and interruptions and vulnerability is raised anew.

“The crisis in the domestic petroleum industry . . . is taking an enormous toll and is creating serious problems for the future,” said Energy Secretary John Herrington in submitting his 350-page report to President Reagan.

And the National Petroleum Council, in its 240-page report, said: “The United States and other consuming nations face the serious threat of a repeat of the energy crisis of the 1970s.”

Proposals are mounting on Capitol Hill for various kinds of “oil import fees” (otherwise known as tariffs) to protect domestic U.S. oil production and for the revival of tax incentives to encourage domestic oil drilling.

Were the early and middle 1980s only a holiday from a grimmer reality? Why, after several years of increasing self-confidence--some would say complacency--is energy security coming back so strongly to the fore?

There are two reasons, one having to do with the oil market and the oil industry, the other with geopolitics.

The price collapse was not the only oil shock of 1986. It was clear during 1986 that U.S. oil production was starting to decline--after several years of small increases--but only toward the end of the year did the U.S. Department of Energy recalculate the decline and come up with numbers that took many people by surprise. Between the end of 1985 and 1986, U.S. oil production declined by 8%--850,000 barrels per day.

Before 1986, high prices stimulated a lot of activity that is no longer economic when oil is $10, $15 or even $20 a barrel. Companies stop drilling, exploration budgets are slashed and slashed again, well-owners postpone “work-overs”--maintenance--on their property, and investors find other things to do with their money. The count of active drilling rigs--the measure for industry activity--dropped to a quarter of the level reached during the feverish peak year of 1981. The U.S. domestic oil industry, which in 1981 looked as buoyant and fat as Wall Street does now, is today battered and demoralized, preoccupied with restructuring and survival.

With production falling in 1986, U.S. oil imports, which had been dropping substantially through much of the 1980s, suddenly shot up--23% higher in 1986 than in 1985. This rise has renewed the issue of energy security. The import share of total U.S. oil consumption has risen from 32% in 1985 to 37% in 1986, and in January stood at 38%--higher than the level before the 1973 embargo, but lower than the late 1970s when, just before the second oil shock, it neared 50%.

The general view is that production will continue to decline this year and oil imports to rise--though perhaps not at the rate of 1986--and that this will be a longer-term pattern, meaning, some say, that the energy respite of the early 1980s is over. Both the Department of Energy and the National Petroleum Council suggest that the United States will hit the 50%-import level in the 1990s.

The 50% threshold is coming to be called the “peril point.” In a recent congressional survey, a majority of respondents told our firm that imports above 50% pose a threat to the United States. Alarm about imports is reinforced by the Administration’s Iran- contra imbroglio and by the 6 1/2-year-old Iran-Iraq War. The war has rekindled fears about Iranian domination over the entire gulf region, which holds 63% of the non-communist world’s proved oil reserves.

Yet it is important to note that in the aftermath of the two oil shocks, many changes have taken place that contribute to greater security. Many more diversified sources of oil have been tapped around the world; today the United States is importing oil from countries like Britain and Mexico, with additional oil and gas reserves being developed. The U.S. strategic petroleum reserve holds an amount equivalent to about 100 days of imports at current consumption levels. A system for sharing supplies among industrial countries, thus dampening panic buying, has been established by the International Energy Agency, to which oil-importing countries belong.

But two key bulwarks of new oil production may start to decline in the next two years--the British sector of the North Sea and Prudhoe Bay in Alaska. The latter will prove highly symbolic in the United States--Prudhoe Bay’s development was only given the green light in the worried days of the 1973 embargo.

In the next few months there will be increasing focus on tax incentives aimed at stimulating new efforts to find oil, or on imposing tariffs meant to do the same thing. The new Administration study is negative on a tariff, more interested in tax incentives. Interior Secretary Donald P. Hodel recently suggested funding these incentives by a small addition to the gasoline tax. Congress will see renewed efforts in conservation and renewable energy sources as essential to any long-term strategy.

But there remains the question about new U.S. reserves. There is general pessimism about the ability to make major new finds in the 48 contiguous states. As Lawrence G. Rawl, the new chairman of Exxon, said recently, most of the United States is a “mature” oil province. “We’re a high-cost country now, not only in terms of oil production costs, but also exploration costs,” he added.

The question may be not one of whether U.S. production declines, but of what measures will slow the decline. U.S. producers “can’t find and produce oil for the price that it is going back down to,” the President said Thursday at his press conference. “It was only the high price that could keep them in business.” Both the Department of Energy and National Petroleum Council studies argue that with prices around $20 a barrel, U.S. production would decline 25% to 40% by 1995.

Further declines in U.S. oil production and rising imports could make energy security an issue for the 1988 presidential election. In our survey of Congress, 66% responding said they thought Congress would not “enact legislation imposing an oil import fee during the 1987 session.”

Then we asked an additional question: Would a further “decline in U.S. oil production combined with a further rise in imports increase support in Congress for the enactment of a tariff?”

Eighty percent answered yes.