Editorial: Wanted: new argument

June 19, 2006
The oil and gas industry needs a new argument. The old ones don’t work.

The oil and gas industry needs a new argument. The old ones don’t work. Failure of the old arguments is manifest in a US Congress that seems bent on aggravating rather than solving energy problems. Worse, much of what Congress proposes now repeats historic errors. The industry should wonder why lawmakers in the world’s largest oil-consuming and third-largest producing country know so little about so important a subject and steadfastly refuse to learn. The industry also should wonder about the extent to which it is to blame for these troubles.

The politics of energy has turned one of the old arguments around on itself. The argument pivoted on import dependency. It asserted that the more dependent the US was on oil from abroad, the less secure the country became. Energy policy thus hitched itself to national security.

Domestic oil

The argument had its merits. It just ignored too much. It’s axiomatic that domestically produced oil is better than the imported kind, quality differences aside. But the reason relates more to the wealth generated by production than with security calibrated to import dependency. Development and production of oil and gas enrich investors, workers, and governments. From the standpoint of the US, it’s much better when those things happen in the US than when they do so elsewhere.

In addition to creating domestic wealth, domestic production also represents supply more reliable than production controlled by governments with political agendas. As growing revenue needs raise incentives for government-owned producers to sell oil, however, the comparison loses weight as a policy driver. State producers have powerful incentives of that type now. In fact the ones babbling most about curbing production to sway politics are the ones that can least afford to make good on the threat.

Furthermore, globalization of commerce has destroyed the dependency-security relationship. The US would not be twice as secure if its import dependency were half its present level. Indeed, it would still have some security exposure if it imported no oil at all because of its trading partners’ needs for oil.

On a more practical level, the security argument in the last 30 years has won no major political battle for oil and gas. Because of high fuel prices, it is taken slightly more seriously now than is usual. In policy-making, however, it works in reverse. The security argument repeatedly fails to win congressional approval of leasing of the Arctic National Wildlife Refuge coastal plain, for example, or of an end to moratoriums on leasing of the Outer Continental Shelf. Yet the hope for reduced imports of foreign oil effectively pushes Congress toward policies that would replace oil with fuels that are demonstrably more expensive yet promise less supply for the money.

For an energy industry and major consuming country facing daunting if not unachievable demand projections, that approach is backwards. The perspective is skewed because modern energy politics shirks a core interest. It’s the interest of consumers.

Congress, of course, claims to be acting on behalf of consumers when it threatens to raise taxes on producers and criminalize “price-gouging.” But it’s really just dressing up outrage as policy. It never benefits consumers to crimp supplies and raise costs of affordable and plentiful energy while forcing substitution of costlier and scarcer alternatives. That, however, is the sad pattern for most congressional initiatives on energy these days.

Costs to consumers

The policy results impose costs on consumers. A ready example is the 20¢/gal premium consumers now pay in reformulated gasoline markets undergoing a coerced switch to ethanol. Congress could have prevented the distress but favored other interests over those of consumers.

This will continue until consumers achieve the clear, learned voice they now lack in energy politics. The voice has to come from the oil and gas industry. The revulsion many consumers harbor for the industry therefore must change. It won’t change until the industry makes consumer interests a priority in message, deed, and dollar. Without such change, consumers will encounter more costs of policy errors born of congressional demagoguery, and the industry will continue to receive the blame.