The time: 1974. The free industrialized nations have just experienced a severe economic jolt created by an oil embargo. OPEC, the prime culprit, can hardly contain itself for joy at an unexpected triumph. The United States, Canada, the Western European nations, and Japan react in a panic. Among their first responses to the crisis, true to form, is the establishment of a new organization. It is the International Energy Agency (IEA), an oil consumers' coalition designed to provide protection against the next embargo through a mechanism for sharing the shortage created by a supply cutoff.
The time: 1984, 10 years later. Oil from the Middle East is abruptly cut off. The United Kingdom and Canada react indifferently because, thanks to their own domestic production, they are now essentially independent of imported oil. US dependence on Middle East oil imports has been substantially reduced, representing only 4 percent of its energy consumption. As the result of conservation, conversion to alternative energy sources, and the availability of a strategic petroleum reserve, the US can absorb the temporary loss of Middle East oil imports with tolerable economic effect.
The other IEA signatories are in bad shape, and under the IEA mechanism the US is committed to help them. Japan, West Germany, and Italy, still heavily dependent on Middle East imports, are exposed to immediate economic shock waves. They expect that all IEA members, notably the US, will honor the commitment to share the oil deficit equitably. Beyond helping them ride out the emergency, they expect the US to play a major role in restoring the interrupted oil supplies by applying the required military muscle to restore order in the Middle East.
It is clear that, in the event of such a scenario, the US economy would be exposed to serious consequences. Shortage sharing with allies would require an immediate curtailment of US oil supplies. The sudden domestic shortages would increase inflation and unemployment and decrease the rate of economic growth. The Congressional Budget Office has estimated that a 25 percent curtailment of normal US imports would result in the following: a 25 percent rise in inflation; a 2.2 percent increase in unemployment, and a 7.5 percent decline in the rate of GNP.
The US government would be faced with a serious dilemma. On the one hand, the IEA agreement requires each member in an emergency situation to reduce domestic consumption by 7 percent and, if that is not enough to compensate for the shortfall, to participate in a mandatory allocation system to restore the supply equilibrium. On the other hand, the administration would understand that, once an allocation system was in effect, the American public would likely experience rising prices and long gasoline lines, as it did in 1979.
Would the public accept the deprivation created by the additional losses required by the IEA agreement? In 1984, would it forget the damage done in the 1980s to American industry and labor by Japanese imports? Would it forget the indifference of European allies to American foreign policy and national security initiatives designed to safeguard Middle East oil? Would it be willing to expend its financial and human resources by sending a rapid deployment force into the Middle East to protect oil supplies primarily required by the allies?
We cannot today accurately forecast the public response to IEA commitments, but public resistance would probably be severe. The prudent policymaker had best base his plans on a worse-case scenario of public toleration. And as for our IEA partners, they should recognize now the likely American public reaction to oil-sharing schemes that might be invoked in the future and adjust their behavior accordingly.
IEA members must recognize that the IEA charter is based on an anachronistic situation. The burdens and consequences of oil dependence are now distributed differently among various IEA members and therefore the application of a uniform formula to correct the burdens could create domestic reactions that would rupture the alliance.
If IEA is to continue on the basis of shared obligation, the whole concept of mandatory allocations should be scrapped. A rigid formula for sharing cannot be responsive to a future crisis because we cannot foresee the nature or impact of the crisis. As a workable alternative, IEA should develop a statement of general principles that would suggest a range of acceptable responses to an emergency. With an ever-increasing oil stockpile available as a temporary buffer, we need not now prescribe the appropriate response to the next crisis, but can mount a response to the emergency when it arises.
Most important, the member governments need to adjust to the realities that exist today. They must accelerate efforts to reduce oil consumption and expedite the transition to other energy fuels. They must examine the IEA charter in light of developments of the last 10 years. And they must acknowledge a joint responsibility and financial commitment to safeguard Middle East oil supplies for as long as the Western alliance requires them. They should not expect others to do their work.