The high cost of oil
The spread of popular revolt in the Middle East to Libya has exacerbated a spike in oil prices and gasoline costs at the pump. In turn, this has stimulated widespread complaints about the lack of a coherent U.S. foreign policy toward despots in the region. This is not the first time this has happened.
More than four decades ago, a military coup, led by a 27-year-old Moammar Kadafi, overthrew Libya’s ineffectual King Idris and expelled all American and British troops from their large Libyan airbases. The new regime demanded a substantial increase in the price of Libyan oil — at a time when Libya supplied about 30% of Europe’s oil.
Following Kadafi’s lead, Abu Dhabi, Iran, Iraq, Kuwait, Qatar and Saudi Arabia soon sought higher prices for their oil. But the price increases didn’t satisfy Kadafi or the Organization of the Petroleum Exporting Countries for long. The nations of OPEC demanded “equity participation” in the oil companies. This was a turning point as the oil-producing nations established control over the oil in their lands. The Arab embargo of October 1973 soon thereafter made it unmistakable that control over Middle East oil production had shifted from U.S. and European oil companies — which for decades had controlled both output and prices — to the nations in whose lands the oil was located.
President Nixon had a clear foreign policy response to this. The United States turned to our Cold War allies Saudi Arabia and Iran for support, in spite of their autocratic nature. Washington provided them with military aid and encouraged economic interdependence, hoping that in exchange the countries would serve as the Middle East’s “two pillars” of anti-Soviet stability and free-flowing oil. Needless to say, that plan failed miserably.
The Iranian “pillar” collapsed a few years later in an anti-American Islamic revolution. And even though Saudi Arabia and the other Arab states of the Persian Gulf have nominally remained U.S. allies, they, not we, hold the key strings in the relationship. The United States continues to support and aid these regimes despite their authoritarianism. If the sheiks of the Persian Gulf decide to put down popular unrest with the same fervor Libya has, the hands of U.S. foreign policy almost certainly will be tied.
The problem, however, is not that the United States has had the wrong foreign policy. The problem lies in the failures of U.S. domestic policies. For 40 years, we have had no effective response to what eight presidents — from Nixon to Barack Obama — have called our addiction to oil. The fundamental problem, of course, is that notwithstanding all the laws Congress has enacted since the oil embargo of 1973, we have still not solved the nation’s energy problems.
The fundamental difficulties that brought energy into the policy forefront then remain unabated. The United States has 4% of the world’s population, but we consume 25% of the world’s oil. Today, we import more than 50% of our oil, compared with 35% in 1973, the year the Arab oil embargo shocked consumers at the pump.
Our domestic energy policies have failed us. Although we have succeeded in eliminating oil from electricity production (reducing oil-based electricity generation from 17% in 1973 to less than 1% today), this has come at the cost of substantially increasing our reliance on dirty coal-fired electricity, boosting our carbon emissions considerably.
Likewise, automobile fuel efficiency standards have reduced somewhat U.S. oil consumption, but in an unnecessarily costly manner, and they do nothing to reduce the miles we drive. Economists have estimated that a gasoline tax of just 25 cents a gallon would have saved as much oil as these fuel efficiency standards at one-third the cost to the economy.
We have also decreased our oil imports by creating a heavily subsidized ethanol industry that now supplies about 7% of the fuel our automobiles burn. The costs of this wasteful pork-barrel program, however, have substantially outweighed its benefits, except to the corn farmers and ethanol refiners for whom it has been a bonanza.
Decades after the Arab oil embargo, we accept instability and even war in the Middle East as inevitable. We take it for granted that we will pay the costs in lives and treasure. And although we know that high gasoline prices change people’s behavior, Congress refuses to impose taxes that would raise petroleum prices, even though it could devise a way to return all of the revenues from such taxes to the American people based on their household size or level of income. As a result, our growing oil consumption and our reliance on imports continue.
The president recently described Libya’s oppression of popular unrest as unacceptable. It is. But so is our longstanding failure to address our inadequate domestic policies concerning oil.
Michael J. Graetz is a professor of law at Columbia Law School and the author of the forthcoming “The End of Energy: The Unmaking of America’s Environment, Security, and Independence.”
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