Energy: the danger of complacency

By , John E. Schork is chairman and chief executive officer of Research-Cottrell, Inc.

Energy issues are on the back burner and the reason is obvious. It's the squeaking wheel that gets the grease, and the US energy situation is squeaking less today than at any time since before the 1973 embargo. Energy consumption has contracted; oil and gas output and reserves have stopped declining; and oil imports have plummeted amid a world oil glut.

There is a real danger, however, in the temptation to celebrate our victory over OPEC and the energy crisis. What we are really coasting through today is a lull in the battle.

It is not only short supplies and price increases that impel energy conservation and development. It is also the expectation that these conditions will persist. And it is exactly here that we see a danger.

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Until recently, the conventional wisdom was that world oil demand would be crashing into the supply ceiling by the mid-1980s, driving OPEC prices ever higher. Today many experts think that, barring political disruption, world oil producing capacity will exceed demand by an unimaginable margin for years to come; and that OPEC prices, now on the downswing, will at best trail inflation for an indeterminate period.

It's too soon to say exactly what impact this shift in perceptions will have, but the general implications are clear enough. Development of domestic alternatives to imported oil, which was predicated on steadily rising prices and fed by the cash flow from rising producer revenues, is likely to suffer. One indicator is that US oil and gas drilling is now expected to grow less than half as fast in 1982 as it did in each of the past two years, largely because of reduced price incentives.

In this context, it should be remembered that the expert consensus on US oil output was, even when prices were expected to keep on rising, that output wasn't likely to do better than hold about flat through the 1980s despite increased drilling. Higher gas prices, when they became available, were indeed expected to call forth additional supplies. But the economic viability of synthetic fuels from coal and oil shale, even with continually rising oil prices, always seemed just over the horizon. Exxon's recent decision to pull out of the Colorado shale oil project suggests this horizon could remain frozen in the receding distance.

On the consumption side, the incentive for businessmen and homeowners to invest in energy conservation is also certain to weaken in today's new environment. One alarming sign is the recent consumer shift from smaller to larger automobiles.

To be sure, both domestic energy development and conservation efforts will continue at a steady pace compared to the middle 1970s. But compared to the astonishing improvements of the last few years, the gains will likely seem rather modest. And a resumption in economic growth of any magnitude would inevitably trigger a rise in energy demand.

Most recent forecasts suggest that 1990 import needs will be very roughly comparable to those of last year -- that is, around six million barrels daily, give or take a million. This looks like good news when compared against projections from four to five years ago that the late 1980s would see US imports zooming to the 15 million barrel-per-day range. And another happy aspect of this forecast is that the import lifeline will be fundamentally less fragile than in the mid-1970s, because expanded output outside the OPEC group means that it will comprise more diverse strands of supply.

But while not downplaying these improvements, I do not consider the future they point to acceptable. The US paid about $80 billion for imported oil both last year and the year before, an intolerable burden on our trade balance.

Washington's own proper role is to assure that government policy does not hinder resource development, and that short-term price declines do not undermine the drive to develop and conserve energy. When ephemeral events like today's oil surplus threaten essential national goals like energy self-sufficiency, government should act to ensure that the incentives and cash flow needed to achieve those goals are unimpaired.

The administration and the Congress should move to:

* Decontrol domestic natural gas prices promptly and completely.

* Delete the existing windfall profits tax on domestic crude oil, where it applies.

* Retain and strengthen tax credits for investment in energy development, the switch from oil and gas to coal, and conservation in home and industry.

* Streamline and rationalize regulations that inhibit the increased production and use of coal by electric utilities and industry. When all is said and done, coal is America's energy insurance policy, the cheapest and most abundant alternative to imported oil, and the easiest to use. The technology to burn it directly, in conventional applications and with minimal environmental impact, is fully in hand today.

* Expedite the release of federal lands for energy development. Long after the wells of the Mideast run dry, the energy reserves locked up in federal land will be powering our homes and industry, and perhaps those of our trading partners.

Finally, the time is ripe to be thinking about new oil import fees as a price floor to protect US energy development from temporary declines in world oil prices. Such a system would add immeasurably to investor confidence and forestall counterproductive starts and stops in our drive toward self-sufficiency. Once domestic oil and gas prices were fully decontrolled, such fees would impose no special hardship on import-dependent areas like the Northeast, since domestic prices would continue to track import costs. The fees would also help offset federal revenue losses from the energy development and conservation tax credits we support.

The energy challenge today is to mobilize when our back is not against the wall. The program we have proposed would impose substantial costs on the economy , but we are convinced that the future benefits would far outweigh them.

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