Flirting With Energy Chaos
A decade ago nearly 50% of the oil consumed in the United States was imported, an all-time high. Then came the revolution in Iran, soaring oil prices, massive inflation and the staggering need to recognize once again--the Arab oil embargo of 1973-74 had provided the first occasion--how vulnerable the nation’s economy is to overseas energy suppliers. Never again, policy-makers vowed, and indeed by 1986 oil imports had fallen to a tolerable 31% of U.S. consumption. But the policy-makers were wrong. Last month U.S. oil imports reached an eight-year high, with foreign crude and petroleum products accounting for 43% of U.S. consumption. As the output of domestic oil continues to decline, dependence on foreign oil will inexorably rise. Americans seem once more to be rushing down an oil-slickened slope toward a new economic shock.
The single most important reason for this looming crisis is that oil has become too cheap. Because oil prices have fallen, consumption has risen at an accelerated rate. Because oil has become too cheap, American oil production has dropped and will probably continue to do so. Part of the problem is that producers have been forced to shut down marginal wells that could no longer be operated efficiently. Another is that lower oil prices have slashed investment devoted to developing new energy sources.
In less than three years domestic oil output has declined by more than 1.1 million barrels a day, mostly because thousands of small wells that were producing only 5 or 10 barrels have been abandoned. When oil prices were higher, these wells could be operated at a profit. That’s no longer the case. Cheap prices similarly take away the incentive to search for new fields to replace those that are steadily being depleted.
At the same time, there has been a slackening in the energy-conservation ethic. Major gains have been made over the years in conservation--through better building insulation and more fuel-efficient cars, appliances and machinery--but the urgency that was once applied to the problem no longer prevails. Under the Reagan Administration, for example, automobile mileage standards have been allowed to slip while incentives have been withdrawn for investment in alternative fuels and more efficient energy processes. All this has helped put the country where it is today, with imports of crude oil and refined products now averaging a shocking 7.6 million barrels a day. Paying for those barrels of course contributes to the trade deficit and weakens the value of the dollar.
The problem is by now familiar. Oil consumption has to be cut. The remedy is familiar as well. The fastest way to reduce demand is by raising energy costs. An increase of, say, 25 cents a gallon in the price of gasoline--which would still leave the cost at the pump below what it was when oil was at its peak price--would be a disincentive to wasteful consumption and an important source of revenue to reduce the federal deficit. The writing on the wall is clear: American dependence on foreign oil is destined to grow unless firm action is taken to discourage the rate of growth in energy demand. Americans can take action themselves, or they can have it forced on them one day by events beyond their control.
