Commentary

Bush’s Energy Babble

This essay originally appeared on National Review Online. Copyright 2000 National Review.
Another day, another energy plan. Today, George W. Bush rolled out his — by my count — third action plan for dealing with high energy prices. Plan number one, pried out of him by Steve Forbes before the New Hampshire primary, was to do nothing and let the market work its wonders. Sure, he mumbled something about increasing domestic production, opening up some public lands to the industry, and working to promote natural gas, but he was clearly annoyed at having to spend any time whatsoever on a subject other than “compassionate conservatism.” Plan number two, unveiled a few months ago, was a more concrete plan calling for increased domestic production via tax preferences, regulatory relief, and access to public lands placed off limits by environmentalists of both parties. Plan number three is, well, plan number two enhanced by a handful of bad ideas stolen from … 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 cash transfers to the poor to help them pay their heating bills this winter.

At the heart of each of these Bush plans, however, is the call for increased domestic production. Bush, after all, is a former small-time oil man, and like all members of “Little Oil” (the so-called “independents” that dominate the southwestern political landscape) the Texas governor looks askance at oil imports. OPEC market power, he contends, can only be combated by energy independence secured by increased domestic production. It’s one of the central premises of what passes for Republican energy policy. And it is beyond nonsense. To paraphrase Jeremy Bentham, it’s nonsense on stilts.

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 an international market and domestic prices will rise to the world price. OPEC, whether we like it or not, has an ability to set the world price in the short run. “Energy independence” thus makes for good political rhetoric but inane economic policy. Even if the United States imported no foreign oil, we’d still be in this particular crisis.

Second, government policies that restrict drilling on attractive public lands in Alaska and off America’s coasts aren’t primarily responsible for our heavy reliance on imported oil. This is: It costs between $5.00 — $7.50 to produce a barrel of domestic oil versus 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 laying around — and they do — they’re going to 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 trudge along regardless. Clinton, in fact, does have an energy policy. Take away the political accretions — symbolic and largely harmless renewable energy preferences along with more annoying and costly but still marginal energy efficiency mandates and subsidies — and the administration’s policy amounts to the following: “let the market secure the cheapest resource.” Independent domestic oil producers — like domestic steel producers, textile manufacturers, sugar farmers, and host of other uncompetitive domestic industries — hate this. Substitute “steel” for “oil,” and your typical Bush energy speech reads like Fritz Hollings’ windy diatribes against free trade. And it’s no coincidence.

Third, you get the impression from W. that America 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, however, there simply isn’t enough oil in Alaska or other publicly owned lands to significantly expand the world market. Currently, the United States controls only 2.8 percent of the world’s proved reserves of petroleum. Adding Alaskan oil fields now off-limits to the industry in the Arctic National Wildlife Refuge (ANWR) might increase that figure by about 50 percent. I say might because we really have no idea how much is there and 50 percent is the most optimistic projection. No exploratory drilling has been allowed.

Putting a big ANWR field into the market would be a sizeable addition to global supply as far as these things go. But not one that will radically change the dynamics of the world oil market, particularly when that oil is about 6 times more expensive to produce than Persian Gulf oil. Even if America had opened up those reserves a decade ago, we’d still be in the same boat today. OPEC’s ability to manipulate the world market wouldn’t be significantly attenuated by the Bush plan.

The dirty little secret here is that OPEC is the only reason the domestic oil industry exists at all. If the cartel were to disintegrate tomorrow and collusion between foreign oil producers were put to an end, world oil prices would probably stabilize somewhere below $10 a barrel. U.S. oilmen simply couldn’t compete with that price. That’s one reason that presidents of both parties — Carter, Reagan, Bush, and Clinton — have from time-to-time worked to prop-up the cartel when prices got too low for the independents’ comfort (ensuring a robust market for U.S. arms sales is another, but that’s the subject for yet another op-ed).

The bottom line is that, when exogenous economic developments produce global oil scarcities, OPEC can “hold up” the world market and demand exorbitant prices for its oil. In this particular price spike, it was the Asian economic recovery and the curtailment of exploration and development investments once oil hit $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. Moreover, while consumer demand for oil products is inelastic in the short run, it’s quite elastic in the long run. High prices will in time reduce demand. The bubble will burst of its own accord.

In the meantime, Bush’s muscular pronouncements about how tough talk and diplomatic leadership from the White House can curtail OPEC’s lust for short-term profit is so much hot air. Never once in 30 years has that worked. Moreover, Bush’s call today for a multi-national North American energy strategy takes the potential for mischievous governmental intervention to new heights.

Some of W’s energy proposals — those that weren’t stolen from Gore’s website, that is — indeed have some merit. The industry can certainly be provided some degree of regulatory relief without sacrificing environmental quality. Refinery and transportation capacity expansions can and should be encouraged with reasonable policies. Opening up some parts of ANWR and other offshore oil fields might well make good economic sense, but that’s less clear.

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 augurs new governmental interventions in the energy marketplace. Not, by the way, the sort of thing that Republicans are supposed to be doing.

Jerry Taylor is the director of natural resource studies at the Cato Institute.