VIEWPOINTS : U.S. Could Do a Lot More to Cope With Oil Crises

I raq’s invasion and annexation of Kuwait and the subsequent disruption of world oil supplies raises the long-term question: Does the United States have a coherent energy policy? If not, what should it be?

For a discussion on energy policy issues, free-lance writer Sharon Bernstein interviewed Philip K. Verleger Jr., an economist with the Washington-based Institute for International Economics, who specializes in energy issues.

What does the embargo of Iraqi oil mean for world crude oil supplies?

The impact of the embargo is a little unclear right now. The world has lost 5 million barrels of oil per day, which is the production of Iraq and Kuwait. Such a loss in the absence of offsetting increases elsewhere could cause significant price increases. It could push the cost of oil to $40 to $50 per barrel, up from $15 in June.

But there is uncertainty because there are several alternative sources of supply. Venezuela can expand production by 500,000 to 700,000 barrels a day, and Saudi Arabia by 2 million to 2.5 million barrels a day. The United Arab Emirates can raise production by 500,000 barrels a day at least.

Can the U.S. government take steps to minimize the impact of the potential shortfall?

The policy response of the Department of Energy has been as inept as it could be--in sharp contrast with a very able performance by the national security agencies. The military services seem to have rapidly and successfully deployed enormous amounts of firepower to the Persian Gulf area in a very quick period of time, so far without a serious hitch. And the President has managed to negotiate an incredible tough set of sanctions against Iraq and got tremendous support by the community of nations.

By contrast, the Department of Energy doesn’t seem to recognize that there is a shortage and seems to totally misunderstand the workings of the free market that it so strongly champions.

There was a policy that has said we would use our strategic oil reserve early in a crisis. In fact, the Department of Energy has always maintained that just the announcement of their intention to hold an auction would be sufficient to depress the cost of oil. And now they’re saying they won’t do that.

Does the United States have a coherent energy policy?

No. The entirety of our ability to respond to an emergency is our strategic reserve. The implication from the government’s action is that there is no problem, there is no shortage.

As far as general policy, we have been unable to resolve or compromise between a number of contending different factions. The oil industry argues strongly that we need to open up our offshore areas and develop Alaska, and they have been making the same arguments since 1973. The environmentalists argue equally strongly that we shouldn’t do that. They say we should pursue “soft path” solutions, like conservation and renewable energy sources. Some parts of the oil industry want tax incentives, even though tax incentives have been removed from most of the economy. And the same arguments keep being made, and the situation remains deadlocked. It’s really very hard to see much progress in 10 years.

What are some elements that could be included in an appropriate energy policy?

One question that always comes up is, “Should the United States be so reliant on imported oil?” The economist’s response is that trade should not be restricted. But if something goes wrong, you need an insurance policy. The strategic petroleum reserve is an insurance policy. I’d push for a larger one.

But that’s not the only thing. We also need to really try to break out of this impasse. We need new ideas. One of the best new ideas I’ve run into is the idea of allowing oil companies to buy used cars and claim “pollution credits” for getting them off the road. The oil companies could use the “credits” for other endeavors, and highly polluting cars that use a lot of gas would be off the roads.

Singapore has two policies. One is that if you’re going to drive into downtown at certain times of day you have to buy a ticket. A user fee to drive at rush hour would reduce congestion on roads, and reduce pollution and gas consumption. Singapore also has a policy of limiting the number of cars that are licensed.

What is the likelihood of a repeat of the 1970s energy crisis?

We are right now in the first days of the worst energy crisis we have ever had. These things come, and then they go. They rise and they fall like the tides. Prices fell Wednesday back to $26 a barrel, so they were only up $11 from their low at the end of June. Interest in the economic side of the story is beginning to wane. But we could get the news in an hour that Saddam Hussein has done something in the Middle East and then the story could be right back on the front page and prices could be much, much higher. If he manages to shut down Saudi Arabia for a little while, we have a real problem.

What is different now from the 1970s? Are we better prepared?

We have all this oil in the strategic petroleum reserve, so in theory we are better prepared, but we haven’t used it.

How can we reduce our dependence on imported oil?

There are several ways. One is obviously increased domestic production: Open the Alaska National Wildlife Area, drill off California, open up some of the wilderness areas. I support opening up the wilderness area, but I’m not certain about California.

Second, the United States can commence to adopt measures that would encourage people to substitute other fuels for oil, such as natural gas and coal.

Third, the United States could go about systematically redesigning its program for building nuclear power plants. The Japanese can build them in three years.

Most important, we can pursue the conservation option. The conservation option can be pursued by requiring higher efficiency standards on everything from appliances to buildings.

The best way to ensure conservation is higher prices. It’s painful but we probably should be paying twice as much for gasoline, diesel fuel and other energy sources. Large energy taxes are an anathema to everybody in the energy business, but they are the best way of encouraging conservation, and conservation is one of the key things we need.

How far along are we in developing alternative energy sources?

We haven’t come very far on alternative fuels. There’s no interest. We certainly should have the research going into it. If we don’t, we will probably be at the mercy of other countries’ technologies. And we’ll use more oil.