Editorial: Clarity from crisis

June 27, 2005
Clarity of US thinking about energy occurs most often during crises of supply. A case in point is the Trans-Alaskan Pipeline System, which since its opening in 1977 has made as much as 2 million b/d of North Slope crude available in the Lower 48, California in particular.

Clarity of US thinking about energy occurs most often during crises of supply. A case in point is the Trans-Alaskan Pipeline System, which since its opening in 1977 has made as much as 2 million b/d of North Slope crude available in the Lower 48, California in particular. It took a supply crisis, the Arab embargo of 1973 with its consequent doubling of oil prices, to push the pipeline past political opposition that had blocked its construction for 3 years. In other words, it took a supply crisis of historic proportions to convince the US of its subsequently well-demonstrated need for Alaskan oil.

Clarification on that order of US thinking about energy would be useful now. And fate might oblige. The oil market lacks its normal defenses against the type of supply crisis that seems so unfortunately necessary to American acuity on this subject. Spare production capacity remains well below easily imaginable losses from politically precarious or intentionally malign exporters. Inventories, although higher than they were at this time last year, would drain quickly at current levels of consumption.

Vulnerability

This vulnerability largely explains how the price of crude oil so easily cleared the $50/bbl hurdle this year and now flirts with $60/bbl on rumors of strikes in Norway or terrorist attacks in Nigeria. What happens when one of those rumors comes true? Or two of them? Can $100/bbl be out of the question if, as happened in late 2002 and early 2003, when global oil demand was 4.5 million b/d less than it is now, circumstances sequentially curtail exports from Venezuela, Nigeria, and Iraq?

While no one wants an oil price shock, it’s useful to wonder how US discussions about energy would change if the economy received another such jolt.

With the crude price above $100/bbl, American refusal to make federal land available for oil and gas leasing would be revealed as the costly national phobia that it is. With prices of oil products zooming and economies faltering, states determined to block leasing off their shores would find it increasingly difficult to hold national interests, not mention their own needs for jobs and revenue, hostage to environmental alarmism. For similar reasons, with the crude price above $100/bbl, leasing of a small and bleak part of the Arctic National Wildlife Refuge would look like something Congress should have approved years earlier.

With the crude price above $100/bbl, Congress would face growing resistance to any proposal to raise energy prices even more. Portfolio standards favoring energy sources more costly than what they were supposed to replace would be out of the question. And when farm state lawmakers demanded mandates for fuel ethanol to enrich farmers and grain distillers at taxpayers’ and consumers’ expense, they’d be laughed down.

With the crude price above $100/bbl, skepticism about costly precautions against global warming would intensify. Facing stiff new taxes on fossil energy or mandates for costlier alternatives, consumers already stung by the oil price increase would want assurance, now largely absent, that the imposed hardship would yield any benefit.

With the crude price above $100/bbl, government manipulations undertaken or proposed in panic would look feeble, awkward, and slow. A crude price above $100/bbl would encourage conservation, accelerate development of conventional energy supply, and invigorate markets for alternative fuels. The economic pressure of $100/bbl crude thus would inspire behavior long upheld as desirable by policy-makers with their own ideas about how to bring it about. But it would do so in ways that made immediate and lasting sense.

Energy adventures

With the crude price above $100/bbl, governments surely would feel the urge to do something-to change tax rates, allocate supplies, regulate consumption, or force fuel substitution. Faster than anyone could have predicted, however, a crude price above $100/bbl would induce a market correction strong enough to rescue government from its natural temptations before it managed to do much harm. With the crude price above $100/bbl, the US would see yet again that price distress in a free market is self-correcting and that most government energy adventures do more harm than good.

Energy legislation slogging through Congress promises too much government and too little affordable energy. It would look different to its supporters with the crude price above $100/bbl.