One of the most depressing aspects of the recent Persian Gulf upheaval is that the United States has once again been caught virtually unprepared to deal with the threat to its supply of imported petroleum. This should not have come as a surprise. Indeed, as the 1980s unfolded, the increasing vulnerability of the US energy supply to foreign manipulation would surely have been clear to Persian Gulf adventurers in the yearly reports of our national energy and economic accounts. That Americans ignored it until this August is yet another troubling indication of the national somnolence of the 1980s.
It is true that when OPEC overplayed its hand in 1979 and sharply raised prices, the US temporarily decreased its oil consumption and domestic oil production rose. But the decrease in consumption was over by 1983—ironically just as many Americans were convinced that they were entering a period of painless national prosperity. US oil consumption has since risen by 12 percent. And the good news about energy production was over by 1985. Between 1985 and 1989 US production declined by 12 percent, and it is expected to decline another 4 or 5 percent this year. From net crude oil imports of about four million barrels a day in the mid-1980s, our oil deficit has lately been increasing—to six million barrels a day in 1988, and, according to recent projections, it will exceed seven million barrels a day this year.
A downward trend in world energy prices between 1980 and 1988—partly caused by energy conservation in other industrial countries—temporarily reversed the impact of our growing oil deficit (measured in barrels) on our trade balance (measured in dollars). Indeed, from 1980 to 1986 our annual net oil trade deficit fell by over $45 billion. But again the good news is over. Nearly all experts agree that our net oil trade deficit, after reaching a low of $29.9 billion in 1986, is bound to rise from now on. When the figures for 1989 become available, they will show that the oil deficit will exceed $40 billion.
What will it be during the 1990s? Even if we assume no increase in real energy prices—although such an increase seems highly likely—the US Department of Energy now estimates that we will have a net deficit of over $80 billion by 1995 from importing nine million barrels of oil a day (or over half our national consumption of oil and twice our imports in 1985). Even a very gradual rise in real energy prices could easily push this figure above $100 billion by 1995. Even before Saddam Hussein’s move into Kuwait, James Schlesinger, the former secretary of energy, testified that he believes that by 1995 oil imports will reach ten to eleven million barrels a day at a cost of $120 billion. Thus by 1995 the US oil import bill could well exceed our present trade deficit.
During the last decade, we often heard that there was a “glut” of oil in the world, that OPEC was “in disarray,” and that there was little cause for concern about the cost of oil. We failed to recognize how rapidly market forces were shifting, indeed reversing. In the early Reagan years, the falling world demand for high-priced oil and the expansion of oil production by such non-OPEC nations as Norway and Mexico undermined the mechanism that OPEC traditionally used to defend itself against threats to its control over oil prices—coordinated cut-backs in production among Persian Gulf producers, principally Saudi Arabia. When OPEC tried to force its members to reduce and strictly ration its oil production, it failed. But with world and especially US oil imports again rising, OPEC no longer needs to exert such discipline on its members—and this would be the case even without the interruption of oil supplies caused by Saddam Hussein’s actions. Most of the smaller producers are now nearing their maximum levels of output.
This means that the Gulf states are back in control. While they currently account for only 25 percent of world production, the Gulf states possess 65 percent of the world’s known recoverable oil reserves and an equal share of the world’s production capacity in excess of that now being used. These countries know they will be the “swing” producers—i.e., countries that can easily contract or expand production—of the 1990s, just as they were in the 1970s. At the same time, the amount of oil from Alaska and other US sources will be decreasing. Compounding these trends will be a decline in North Sea output later in the decade and the serious oil production problems that will probably arise in the Soviet Union as a result of the general failure of its economy.
So once again Americans must ask whether they can depend on reliable sources of energy. The warning signs are clear. Five years ago the Gulf producers accounted for only 6 percent of US oil imports. This year they are supplying 28 percent and could reach 50 percent by 1995. The US now depends on oil imports for about half its needs. Moreover, increased US imports have counted for more than half of the growth of OPEC exports. Thus, however unwittingly, the United States has been a principal force in restoring OPEC’s power.
In devising ways to reduce its oil gluttony the US has been lethargic. Many European countries and Japan—by raising the price of oil to the consumer and by continuing to invest both in more efficient energy and in different sources of energy—have said that they will be able to keep increases in oil imports under some degree of control during the next decade. France now gets over 70 percent of its electrical power from nuclear energy and it has set a goal of getting 100 percent by 1995. Its nuclear industry has had no major safety problems so far; and it has enabled the French to reduce some of the worst effects of generating plants run with fossil fuels—among them, acid rain, green-house effects, and damage to the health of coal miners. Japan’s economy is able to obtain about 2.5 times as much physical output per barrel of oil as we do. Our less efficient use of energy intensifies the negative effects of higher oil prices on American economic growth and inflation. Whether Europe and Japan will be able to continue such policies of encouraging restraint in oil consumption is not certain, but meanwhile our own volume of oil imports is expected to grow by a third or more during the next decade.
Moreover, the European Community members are reducing the risks of an unfavorable balance of trade with OPEC members—including the weakening of their currency and excessive reliance on foreign capital—by exporting four times as much goods and services to them as we do. They are also encouraging joint investment projects with some of the OPEC countries and have recently opened negotiations on a free-trade pact with the Gulf Cooperation Council. Americans may be surprised to learn that British employees in Saudi Arabia now outnumber Americans by 40 percent. As recently as ten years ago, there were about 80,000 Americans in Saudi Arabia; today the number has shrunk to about 25,000. And until Iraq’s attack on Kuwait the United States did not give much attention to improving its relations with OPEC members in general or with the moderate Gulf states in particular.
How could a new energy crisis come about? It may, to be sure, resemble what happened in 1973 or 1979, when a sudden contraction in supply was followed by public rationing and political hysteria. But I doubt such a replay of events. If there is one lesson the Gulf states have learned over the last decade and a half, it is that very sharp increases in price unleash market forces that both limit demand and encourage competing supplies to be produced; and both these work against their own long-term interests. Equally important, they may have observed that while Americans often react decisively in the face of an obvious crisis, they appear likely to tolerate trends, such as chronic trade or budget deficits, that are insidious and gradual. The most astute OPEC strategy would be to let both oil production and prices rise steadily as long as the cartel leaders can keep them under control. (Interestingly, periodic relapses in oil prices such as those that occurred just before Iraq invaded Kuwait also tend to undermine new investments in energy supplies outside of OPEC, but they have only minor adverse financial consequences for the Saudis and most of the other chief OPEC exporters.)
The connection between our growing energy deficit and the trade deficit of the 1990s is not just a theoretical one. The energy deficit, if left to grow, will certainly make the trade deficit more difficult to balance. The trade deficit—i.e., the shortfall between everything we sell to foreign consumers and everything we buy from foreign producers—now runs over $100 billion per year. If our oil deficit worsens by $60 billion between now and 1995, the only way we can eliminate our overall trade deficit during that period is to improve our trading balances apart from oil by some $160 billion or more. Excluding US farm products and raw materials—which, over the long term, stubbornly resist contributing to a major or sustained improvement of the trade deficit—this would mean a huge 50 percent real increase in our exports of other goods and services—without any increase in our non-oil imports.
The US has never achieved such rapid net export growth in living memory. To do so, we would need a steep reduction in imports, probably caused by some combination of a bad recession and a free fall in the dollar, and a surge in our exports made possible, perhaps, by a sudden craving for American brand names abroad, and a very tolerant reaction to the import of our products by our industrial trading partners. Not an easy, likely, or pleasant prospect. A more likely outcome is that even more American assets will pass into foreign hands, as one way of paying for the increase in our imports of goods and services.
The US faces a choice. On the one hand, those who make public policy could publicly disavow any intention to bring national consumption in line with national production—at least before the twenty-first century. And when our children ask us why we saddled them with vast debt obligations to our overseas creditors, we will have to tell them: “Despite the fact that in 1990 our national appetite for oil was far out of proportion to our population or our productivity—in 1990, with less than 5 percent of the world’s population, the US consumed fully one quarter of the world’s oil output, including one tenth just for our automobiles—we deemed any reduction on your behalf to be too great a sacrifice for us to make.” Or, better: “We left the outcome up to the free choice of the American consumer and, too bad, you lost!” And as the bills we are passing on to the young painfully become due, they are bound to encourage a selfish spirit in which each person will be out to save his or her own interests and the sense of community will erode.
Clearly, we will be unable to tell our children that our appetite for imported fuel was good for their health, for the air they breathe, for the climate in which they live, or, indeed, for their economy. Other industrial democracies have confronted similarly difficult political problems and have made real choices instead of the cost-free choices we persist in making. Why not the United States? We could, in my view, work out a farsighted energy policy that would increase our productive use of energy, improve the environment, avert the risk of crisis being imposed by foreign energy producers (whether through a “sudden cut-off” or a “slow bleed”), and do much to erase our trade and budgetary deficits.
A main component of such a policy should be an energy consumption tax or at least a tax on petroleum products, such as a sales tax on gasoline of 25 to 50 cents a gallon which would be phased in over several years. One idea that still merits consideration is to impose the tax when oil prices drop below a predetermined level. In other words, the tax would get larger as oil prices fall below a floor price, thus encouraging investment in energy while discouraging the easy consumption of cheap oil.
The primary benefit and purpose of such a policy would be to reduce the federal deficit; but a significant gasoline tax would also lower the volume of the trade deficit in oil by restraining total US oil consumption, and indirectly it would also help to lower the dollar trade deficit by boosting national savings and bringing down world oil prices. This last effect is important. While fearing OPEC’s power to push up prices, Americans have seldom understood that the US, as the world’s largest oil consumer, possesses sufficient buying power to pull down prices, if only we care to use it. With an energy tax, we could at least try to do just that—playing the OPEC game in reverse.
Such a tax could raise at least $25 billion and perhaps as much as $40 to $50 billion yearly in new federal revenue (tied, ideally, to even larger reductions in federal spending). It could cut our oil-import deficit by perhaps $5 to $15 billion yearly, and would still leave us with the lowest heating oil and gasoline prices of any major Western nation. Even if there were a US gasoline tax of 50 cents a gallon, people in the other leading industrialized countries, where the average gasoline tax is about $2, would be paying two-and-a-half times more tax than Americans would. (See the accompanying table comparing international gasoline prices.) We have come to regard cheap gasoline as yet another entitlement.
A farsighted energy policy would also go much further in encouraging conservation of petroleum and the development of clean energy sources. Here, we should consider not only the risks of dependence on imports and the dangers of a swollen foreign debt, but also the growing national consensus that fossil fuels pose serious environmental hazards, possibly including the greenhouse warming trend. In a replay of what happened with VCRs—American companies developed the technology and Japanese companies then profitably produced the machines—other industrial countries including Japan and France have invested heavily in the development of new and safer nuclear technologies whose principles were first worked out in the US.
Meanwhile, the US cannot even decide where to dispose of the waste from its own limited (and now antiquated) nuclear industry, or how acid-rain-control legislation should affect the future use of emerging clean coal technologies, or how to encourage the production of cheap natural gas, another domestic energy source that is cleaner than petroleum. As a result, utilities are turning back to petroleum to provide generating capacity; this, of course, will simply add to the pressures on oil prices and our oil import bill, not to mention the bad effects on the environment. The countries of the developed world should be launching a major research-and-development effort to find safe, clean, and relatively cheap forms of energy; and Japan, which imports 99.5 percent of its oil, should have a central part in such an effort. We might consider, for example, the project supported by Dr. Glenn Seaborg for research on “aneutronic power,” a form of nuclear fusion that might lead to clean, non-radioactive energy.
Concerns about the deficit and the environment are not so mutually contradictory as is often claimed. Both require long-term vision and planning, and they cannot be adequately addressed in a political perspective that is limited by ten-month budget forecasts, and by constant jockeying for position in the next election.
Finally, in a world in which foreign policy is becoming increasingly demilitarized, and concerns about national security and economic security tend to converge, the US must pay more attention to the security of its energy supplies. We should reach agreement with the other industrial countries to coordinate policies for dealing with energy emergencies within the International Energy Agency, which was set up in response to the oil crisis of 1974 and has since been neglected. The Strategic Petroleum Reserve should be much enlarged, and we should consider a new, long-term arrangement for low-cost “leasing” of oil for this reserve from selected OPEC sources, under which we would, in effect, rent the oil we store. (In the shorter term, we might reassure oil users in the US and achieve added price stability if we were to release into the market some of the oil in the Strategic Petroleum Reserve as one part of a comprehensive energy program in which the supply of energy sources would be increased and the demand for petroleum would be reduced.)
An elementary way to reduce our bilateral trade deficits with the Gulf states is to increase our exports to them. Until the US gave up—to Britain in 1985–1986—a huge arms contract for Saudi Arabia, we behaved as though we were aware of the value of closer economic relationships, including two-way investment. America, of course, has more potential influence than Britain, since it can link economic cooperation with defense assistance to any friendly state, especially Saudi Arabia, that has a plausible need for it. As long ago as last February, Saudi and Kuwaiti leaders were privately expressing their rising concerns about a potentially aggressive Iraq, and clearly with good reason.
Energy policy now must go far beyond the Gulf States. What happens in Eastern Europe and the Soviet Union, for instance, will have a critical impact on world oil prices in the 1990s. Current trends suggest that by the mid-1990s overall Soviet production may be down 20 percent or more from its peak. In 1989 Soviet oil exports fell by 13 percent, and during the next few years all of the former Communist states will face critical choices about energy production and environmental protection—along with enormous popular pressure for gasoline consumption.
If we persist in our frivolous and willful habits and continue to succumb to energy gluttony throughout the 1990s, we may no longer enjoy the luxury of saying that it’s “just another problem” that one day will go away, like the S&L debacle. By the middle of the decade we will likely be forced to recognize America’s use of energy as part of a much deeper problem: a national tendency to avoid hard choices, which results in excessive consumption at the expense of our future combined with a foolish dependence on foreign capital. The economist Herbert Stein once observed, “If something is unsustainable, it tends to stop.” The only question is whether we will decide to choose when and how it stops, and at what cost to ourselves and to our children.
September 27, 1990