ENERGY POLICY AND FUTURE SUPPLY

With an oil supply disruption forcing the U.S. to rediscover links between energy and national security, it's time to repeat the steps government should take in the name of energy policy.

First, energy policy should assure markets that the government won't reintroduce measures that failed before. It should explicitly reject price and allocation controls and recommend a presidential veto of any legislative attempt to implement them. It should treat ideas about punitive taxes, such as so-called windfall profit taxes, the same way.

HIGHER STATUS

Next, energy policy should seek status at the top of the national agenda. Environmentalism has smothered energy concerns for too long. The excessively costly Clean Air Act reauthorization bill now in congressional conference typifies the energy-blind environmental overkill that results from this distortion of national priorities.

Having thus immunized itself against repeated error, and having claimed a proper role in federal decision making, energy policy then should address its self-defining question: How can the government promote energy security?

The question will create controversy because it implies official concern for future supply. Some pressure groups would make conservation the focus of energy policy. Their emphasis is wrong. Conservation does deserve attention in energy policy. But energy security means ensuring that energy supply limits never constrain the country's ability to grow economically or to defend itself militarily. Conservation-which means consumption efficiency, not just lower consumption-is part of the equation. Future supply is a bigger part. And the government can best promote future supply by removing barriers.

Safety questions stymie nuclear power. Environmental questions restrict coal use. Regulatory questions snarl natural gas. A nation with rapidly growing needs for electricity should find answers to those questions and accelerate power plant construction.

Environmental issues swirl around vehicle fuels, even lavishly promoted "clean" substitutes for gasoline and diesel. A nation with enormous transportation needs should be able to resolve them as a matter of energy policy and let markets make fuel choices.

And a nation with energy requirements destined to remain huge certainly should make maximum use of its natural endowments. U.S. leasing and tax policies work to the contrary. As a matter of energy policy, the U.S. must revive oil and gas leasing of the Outer Continental Shelf and speed onshore leasing in the West. Congress must allow leasing of the Arctic National Wildlife Refuge coastal plain.

REPAIRING TAXATION

Furthermore, oil and gas taxation must be repaired. Current law does not recognize the unique capital deployment patterns that characterize petroleum exploration and production activities. That must change. Energy policy should at least call for exclusion of all intangible drilling costs from the alternative minimum tax. And it should seek restoration of some form of statutory depletion allowance-free of AMT liability-for all producers. If politics makes those measures impossible then energy policy must include a system of simple tax credits to sustain the search for domestic oil and gas.

There are some hopeful signs. The Bureau of Land Management has urged its state offices to expedite leasing and permitting of land under its control. And last week President Bush recommended leasing of the ANWR coastal plain and renewed his call for tax code drilling incentives. These sound like the early makings of energy policy, If officials keep their faith in markets and their sights on future supply, they might get it right this time.