IMPORT DEPENDENCY AND ENERGY POLICY

Sen. Frank Murkowski (R-Alas.) wants to do several right things for the energy business. But the reason on which he bases his initiative will eventually hurt the business.

May 11th, 2000

Sen. Frank Murkowski (R-Alas.) wants to do several right things for the energy business. But the reason on which he bases his initiative will eventually hurt the business.

Murkowski, chairman of the Senate Energy Committee, says he will introduce legislation that would take a number of overdue steps: increasing the area of federal land available for oil and gas leasing, easing the federal royalty on production resulting from frontier exploration, lowering tax rates on production from marginal wells during periods of low oil and gas prices, allowing leasing of the Arctic National Wildlife Refuge coastal plain.

Those are all right things for US energy. Murkowski's overarching objective, however, is to limit US dependence on imported oil to 50% by 2010. That's the problem.

It no longer makes sense to calibrate energy policy to import dependency. The US needs imported oil and always will. Its policies should aim at ensuring the free flow of oil in international trade, not at treating imports like poison.

What national interest will be served by attempting to cap imports at 50% of total supply? Why not set the cap at 60%? Or 40%?

Pick any number. The degree of US import dependency has meaning in only one area.

It does not have anything to do with the price of crude oil or petroleum products. If US import dependency had been half its level last year when the world ran short of crude, prices still would have risen as they did.

The degree of US import dependency also does not have anything to do with the US need to stand ready to defend oil in trade. If its import dependency had been half the level it was in 1990 when Iraq invaded Kuwait, the US would have had no less a compulsion to lead the counterattack. The interest at stake was the shared prosperity of commercial nations, in which the US interest is great no matter how much oil it imports. Global prosperity depends on oil in trade and is indifferent to the degree of import dependency of any one nation.

The degree of import dependency has meaning only insofar as it reflects US refusal to produce as much oil as it economically can. Such refusal forfeits wealth creation, ancillary commerce, and tax collection. It makes no economic sense, and the environmental arguments behind the sacrifice are always exaggerated.

The government should encourage oil production in America for the simple reason that the activity creates American wealth. It doesn't need to do the oil and gas industry any special favors. It just needs to let the industry fulfill its potential for turning a mature but still bountiful natural resource into economic value, commerce related to production activities, and tax revenues.

Attempts to set and enforce an artificial threshold of import dependency thus obscure more-fundamental reasons to encourage domestic production. What is more, such a threshold would eventually hurt the industry.

There are two ways to reduce the import share of total oil supply. One is to raise domestic production, which is good. The other is to set artificial limits on oil consumption, which is bad-but more likely to survive modern politics.

The bad way to reduce import dependency plays into an antipetroleum prejudice that gets its political way far too frequently. So a shrunken import share of total supply can quickly become a shrunken oil market.

That doesn't help producers. It doesn't help consumers. And it hurts the US economy.

The US oil industry should cheer Murkowski for wanting to do so many right things for domestic production. But it should encourage him to do those things for the right reasons.

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