Another day, another energy plan. On Sept. 29, Texas Gov. George W. Bush rolled out his third (by my count) action plan for reducing high energy prices. It’s basically plan No. 2 modified with a handful of bad ideas borrowed from Vice President Al Gore: additional tax credits for renewable energy and energy efficiency, a federally managed home heating-oil stockpile, more R&D for “clean coal” technologies, and additional money for the poor to help them pay their heating bills this winter.
At the heart of each Bush plan is the call for increased domestic production to achieve “energy independence.” OPEC market power, he contends, can only be combated by increased domestic production. It’s one of the central premises of what passes for Republican energy policy, and it is nonsense.
First of all, a cutback in OPEC production raises the price of domestic crude just as much as it raises the price of Saudi crude. That’s because the oil market is international, and domestic prices rise commensurate with world price. OPEC, whether we like it or not, can set the world price in the short run. “Energy independence” makes for good political rhetoric, but it’s bad economic policy. Even if the United States imported no foreign oil, we’d still be in this particular predicament.
Second, government policies that restrict drilling on public lands in Alaska and off America’s coasts aren’t responsible for our heavy reliance on imported oil. Rather, simple economics are: It costs $5 to $7.50 to produce a barrel of domestic oil, vs. about $1.50 to produce a barrel of Saudi crude. As long as the Persian Gulf nations have a lot of $1.50-a-barrel oil — and they do — they will dominate the world market whether we allow drilling in environmentally sensitive areas or not.
In this sense, Bush’s charge that the administration has no energy policy is silly. We don’t have an explicit potato policy either, but somehow we manage to get along regardless. U.S. President Bill Clinton, in fact, does have an energy policy. Take away the political accretions — symbolic and largely harmless renewable-energy preferences and efficiency mandates — and the administration’s policy amounts to: “Let the market secure the cheapest resource.”
You get the impression from Bush that the U.S. is some sort of latent Saudi Arabia, sitting atop a vast pool of oil that for some inexplicable reason is being left to the bugs and bunnies. In reality, the U.S. controls only 2.8 percent of the world’s proven reserves of petroleum. Adding Alaskan Arctic National Wildlife Refuge oil fields now off-limits might increase that figure to about 4 percent. Even if the U.S. had opened the ANWR to oil companies a decade ago, we’d still be in the same situation today.
The bottom line is that, when economic developments cause global oil scarcities, OPEC can demand exorbitant prices for its oil. In this particular price spike, it was the Asian economic recovery, and the curtailment of exploration and development when oil dropped to $10 a barrel 21 months ago, that set the table. But OPEC’s ability to extort markets over the long run is greatly attenuated by the vast amount of non-OPEC oil available when prices top $25 a barrel. It takes some time to bring that oil to market, but come to market it will.
In the meantime, Bush’s muscular pronouncements about how tough diplomacy can curtail OPEC’s lust for short-term profit is just hot air. Never once in 30 years has that worked. Moreover, Bush’s call today for a multinational North American energy strategy takes the potential for mischievous governmental intervention to new heights.
Some of Bush’s energy proposals have merit. The industry can certainly be granted regulatory relief without sacrificing environmental quality. Refinery and transportation improvements should be encouraged, and a case can be made for opening some parts of ANWR and other offshore oil fields to development.
None of those initiatives, however, will deliver us from OPEC’s market power or occur rapidly enough to provide any relief from today’s high oil prices. At best, Bush’s plan misses the mark. At worst, it brings new governmental intervention to the energy marketplace, which is not what Republicans are supposed to do.
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