Editorial: Imports and energy policy

Feb. 9, 2004
When decision-making about energy policy hinges itself to the supposed horror of imported oil, anything can happen.

When decision-making about energy policy hinges itself to the supposed horror of imported oil, anything can happen.

The administration of US President George W. Bush has made reduction of US dependency on oil from abroad the guiding light for a mixed set of energy proposals. They range from leasing of the Arctic National Wildlife Refuge coastal plain to federally funded promotion of hydrogen as a vehicle fuel. The resulting discord reverberates in a comprehensive energy bill too incomprehensible for Congress to pass.

Different proposal

Demonization of imported oil figures just as centrally in the very different energy policy proposed by Sen. John Kerry (D-Mass.), who this week widened his lead in the campaign to become the Democratic candidate in next November's presidential election. Kerry's proposals deserve close attention. If implemented, they wouldn't work. But they'd do a lot of damage while failing.

Kerry, according to his campaign materials, envisions "a new Manhattan Project to make America independent of Middle East oil in 10 years by creating alternative fuels like ethanol and making cars more efficient."

Kerry apparently supposes that America can indeed be independent of oil from the region where the preponderance of conventionally recoverable oil exists. This isn't so. Even if the US somehow managed not to buy any oil from Middle Eastern suppliers, it still would be dependent on them.

The important US dependency is on oil available in international trade. Of all oil in trade, Middle Eastern supplies account for 41%. Although that share recently has shrunk, geology and the reliance of Middle Eastern states on oil revenues destine its growth over time. The greatest US need—which it shares with trading partners—is that Middle Eastern producers respond rationally to their own needs to sell oil. How much oil the US buys directly from Middle Eastern suppliers is inconsequential.

In the US, however, reducing dependence on suppliers headed by unpopular governments stirs political passion. So Kerry proposes to reduce "oil dependence" by 2 million b/d—roughly the amount the US imports from the Middle East. He would do this by declaring martial law on energy markets.

To cut oil use by 2 million b/d, Kerry would tighten fuel economy standards on motor vehicles and subsidize development of alternative fuels—including, of course, ethanol. To pay for the displacement of competitive energy with more-costly alternatives, he'd create an "energy security and conservation trust" funded by federal receipts from oil and gas royalties. The trust would bankroll development of technologies "that will reduce America's dangerous dependence on oil."

The trust-fund mechanism cleverly creates the illusion that money from oil and gas—and not taxpayers—would be paying for niceties the market won't support, such as supernaturally efficient vehicles, biofuels, and a hydrogen-based economy. Taxpayers still would have to compensate for the diversion of royalty funds away from other uses, which means they'd still be paying for all these lurches by their government.

Kerry would pursue his energy goals by fiat. He would raise the national fuel-economy standard for vehicles to 36 mpg by 2015. He would mandate that hydrogen be used throughout the country by 2020. He would cut the federal government's energy bill by 20% by 2020 and provide tax credits for energy-efficient (meaning officially favored) buildings and houses. He'd require that 20% of electricity come from renewable sources by 2020. He'd promote natural gas, a North American energy trade alliance, a gas pipeline from Alaska, liquefied natural gas (from "reliable foreign sources," of course), and coal, as long as it's "clean."

This is old-fashioned energy selection by government instead of markets. The US has tried it before. The effort squandered citizens' money and failed. The same would happen now.

Pet technologies

A meaningless cut in imported oil would not be worth the inefficiencies, disruptions, and costs that an energy program like Kerry's would impose on the US economy, not to mention personal freedom. And the pet technologies and pop fuels he would hustle into use would suffer from premature exposure to the ravages of competition.

US politicians—including an incumbent president who needs the reminder—should know this from experience. Energy policy should pivot on markets, not import dependency, which is no reason to repeat disastrous errors of the past.