The Thirst For Oil

The fat book opens like the tale of another age, with a nighttime image of auto lights streaking red and white past the World Trade Center. Released last May, the Bush energy policy warns that dwindling supplies of oil and gas, an antiquated power grid and burdensome regulation threaten to drag the United States into the "worst energy-supply crisis since the 1970s." In his introductory speech, Bush spelled out a scary 20-year scenario in which America becomes increasingly "vulnerable to price shocks, supply interruptions and, in the worst case, blackmail." Four months later the World Trade Center was suddenly gone, and it would no longer do for the U.S. president to evoke other crises, or a time of post-oil-shock stagflation. Yet if Bush's projections were ever true, they still are, raising a scary question: is there really an energy crisis ahead?

For decades presidents have been coming up with plans to deal with the fact that one day the world will run out of its key source of energy, oil. Bush's plan is almost unique in that it is all-American. Especially since September 11, Washington's rallying cry has become "freedom from foreign oil." But there is no definition of freedom--1.7 million barrels a day to replace imports from Saudi Arabia, 650,000 barrels to replace supply from Iraq? There is no explanation of where the United States might realistically find so much oil. There is no recognition that any crisis in the United States would be inextricably linked to energy supplies and demand everywhere in the world. Not since the Ford administration, says energy strategist Anthony Cordesman, has "an energy strategy addressed so little. This policy acts as if the rest of the world didn't exist."

The global view suggests, in fact, that there is no supply crisis. We know there's a lot more oil worldwide now than in the 1970s. Using increasingly advanced probes and sensors, surveys that once estimated total global reserves at 650 billion now find more than a trillion barrels. At present-day consumption rates, it looked in 1970 as if oil would run out in 33 years--that is, next year. This year, the same calculation puts the day of reckoning in 2046. In the United States, much of Texas, including the fabled Panhandle, has long since run dry, but oil companies have found new sources in the crooks and crannies of old fields, extending the expected life of reserves an additional 16 years. The threat of a shortage is receding, assuming we can reach the oil in the ground.

Buying oil is much easier today, too. Then and now, the Middle East oil cartel sat on roughly two thirds of known reserves, but in 1970 its members sold directly to customers--and could punish them individually. Today oil is sold on an international market mediated by thousands of middlemen and futures exchanges around the world, a system that has done much to undermine OPEC's clout. "They can't cut off our oil supply, they can only cut off oil supply," says Prof. William Hogan of Harvard. "It's a very blunt political weapon, so they stopped using it as a weapon."

The potential for crisis is shrinking. The '70s won't come back because the United States learned from the dismal era. Jimmy Carter responded to oil shocks by trying to micromanage the price of oil, which only made matters worse. Consider, by contrast, what happened after bankruptcies and brownouts rolled through California, the world's seventh largest economy, in early 2001. Prices shot up and Californians started cutting back on demand--leaving cars in the garage, turning off escalators and lights at night. Regulatory hurdles were cleared from the path of new energy-plant construction, and a feared second summer of even worse blackouts never came. "You know, it's hard to have a supply crisis today," says Adam Sieminski, a strategist for Deutsche Bank. The energy market works: if prices are allowed to go up, demand goes down. Crisis averted.

The United States is also increasingly immune to oil shocks. In 1980, when prices shot up due to the Iran-Iraq war, the United States spent 8 percent of GDP on oil, and the shock produced a deep recession. In 1999, prices spiked by a similar magnitude, but the United States had cut oil costs to 3 percent of GDP, and many economists believe it's no accident that the recession was surprisingly mild. "There's no question we're less vulnerable today," says Philip Verleger, a senior fellow at the Council on Foreign Relations in New York. "But price increases still hurt us, and they do serious harm to our trading partners, who are still far more dependent on foreign oil."

It's this kind of connection that Bush ignores. Nations that spend far more of their GDP on oil, like China, South Korea or Thailand, pass those costs through to customers, so Americans pay more for everything from steel to TV sets. It makes no sense to strive for "freedom from foreign oil" in isolation. But Bush projects only U.S. domestic demand for energy and its key sources, oil and natural gas, outpacing stagnant domestic supplies by a widening gap through 2020. The Bush strategists, says Cordesman, think globally on every economic issue except energy.

Bush's oil pals don't think this way. The big oil companies are global adventurers, willing to explore in war zones, opposing sanctions on pariah states like Libya and Iraq. They know they can't meet U.S. fossil-fuel needs from U.S. reserves. Tellingly, no major company has expressed interest in the small natural-gas fields Bush wants to open in Alaska. But when Saudi Arabia invited foreigners to explore its huge gas reserves in 1998, U.S. majors rushed in. Texaco chairman Peter Bijur once said that talk of failing energy supplies remind him of Cyprian, a Roman who warned in A.D. 250 that "the world has grown old... The rainfall and sun's warmth are both diminishing, the metals are nearly exhausted."

There's increasingly less reason for consumers to fear "foreign oil," either. OPEC's attempts to raise prices have backfired in the long run. With each price spike, new competitors enter the market. With each drop, an industry shakeout forces players to cut costs to stay alive in an increasingly low-cost industry. After the shock of 1974, consuming nations created the International Energy Agency to confront further supply disruptions. But since then, argues IEA executive director Robert Priddle, the result of OPEC manipulations has been a "boom-and-bust cycle" of prices settling "at ever lower plateaus." Adjusted for inflation, even recent spikes left prices at historic lows.

This explains the stalemate over Bush's energy plan in Washington. In the '70s, Americans accepted new fuel-economy standards that would force them into smaller cars for a decade. But even at the peak of trouble in California--a real, if transitory and local, crisis--polls showed most Americans didn't believe warnings of a national crisis. It didn't feel real because prices weren't high. In Senate debate last month over raising fuel-economy standards for the first time since the '80s, cheap gas and big cars were defended as cornerstones of the American way. Republican leader Trent Lott held up a picture of a purple German minicar, and suggested that Americans want no part of such a pathetic set of wheels. Higher fuel-economy standards were defeated, as Bush wanted. But his supply-side solution, like opening up Alaska to drilling, appear headed for defeat in coming weeks, too.

For now, America is happy to do nothing to free itself from foreign oil. That may change, as debates grow over Bush's plans to boost supplies of clean coal, revive the nuclear industry and invest in alternative energies. A national discussion of dependence on foreign oil would make sense if it took up the real issues: how to stabilize energy needs through an optimum mix of petroleum from the Middle East, U.S. reserves and other sources--along with alternative energy supplies. That debate could give birth to a real global energy strategy, if and when the United States is ready for one.