Edward L. Morse, Chair
Amy Myers Jaffe, Project Director
Executive Summary: The Challenge
Introduction and Background
Strategic Policy Choices
Strategy, Recommendations, and Action Plan
Task Force Members
Task Force Observers
For many decades now, the United States has been without an energy
policy. Now, the consequences of not having an energy policy that can
satisfy our energy requirements on a sustainable basis have revealed
themselves in California. Now, there could be more Californias in Americas
future. President George W. Bush and his administration need to tell
these agonizing truths to the American people and thereby lay the basis
for a new and viable U.S. energy policy.
That Americans face long-term energy delivery challenges and volatile
energy prices is the failure of both Democrats and Republicans to fashion
a workable energy policy. Energy policy was allowed to drift by both
political parties despite its centrality to Americas domestic
economy and to our nations security. It was permitted to drift
despite the fact that virtually every American recession since the late
1940s has been preceded by spikes in oil prices. The American people
need to know about this situation and be told as well that there are
no easy or quick solutions to todays energy problems. The President
has to begin educating the public about this reality and start building
a broad base of popular support for the hard policy choices ahead.
This recommendation sits at the core of an Independent Task Force Report
sponsored by our two organizations. The Task Force was chaired by Edward
L. Morse, a widely recognized authority on energy, and ably assisted
by Amy Myers Jaffe of the James A. Baker III Institute of Rice University.
Their Task Force included experts from every segment of the world of
energyproducers, consumers, environmentalists, national security
experts, and others.
There are no easy Solomonic solutions to energy crises, only hard policy
tradeoffs between legitimate and competing interests. Tightening environmental
regulations, among other factors, have discouraged the rapid expansion
of badly needed energy infrastructure in many U.S. locations. But Americans
are also demanding a cleaner environment and cleaner energy.
Strong economic growth across the globe and new global demands for more
energy have meant the end of sustained surplus capacity in hydrocarbon
fuels and the beginning of capacity limitations. In fact, the world
is currently precariously close to utilizing all of its available global
oil production capacity, raising the chances of an oil-supply crisis
with more substantial consequences than seen in three decades. These
limits mean that America can no longer assume that oil-producing states
will provide more oil. Nor is it strategically and politically desirable
to remedy our present tenuous situation by simply increasing dependence
on a few foreign sources.
So, we come to the reports central dilemma: the American people
continue to demand plentiful and cheap energy without sacrifice or inconvenience.
But emerging technologies are not yet commercially viable to fill shortages
and will not be for some time. Nor is surplus energy capacity available
at this time to meet such demands. Indeed, the situation is worse than
the oil shocks of the past because in the present energy situation,
the tight oil market condition is coupled with shortages of natural
gas in the United States, heating fuels for the winter, and electricity
supplies in certain localities.
This Independent Task Force Report outlines some of the hard choices
that should be considered and recommends specific policy approaches
to secure the energy future of the United States. These choices will
affect other U.S. policy objectives: U.S. policy toward the Middle East;
U.S. policy toward the former Soviet Union and China; the fight against
international terrorism, environmental policy and international trade
policy, including our position on the European Union (E.U.) energy charter,
economic sanctions, North American Free Trade Agreement (NAFTA), and
foreign trade credits and aid. The Bush administration is in a unique
position to articulate these tradeoffs in a non-partisan manner and
to rally the support of the American public. U.S. strategic energy policy
must prioritize and coordinate domestic and foreign policy choices and
objectives, where possible. Moreover, the energy problem is inexorably
intertwined with the fundamental challenge of creating sustainable economic
growth without sacrificing environmental protection. The pursuit of
a solution demands a major national effort.
Finally, we come to the pleasant task of thanking those on the Independent
Task Force who were instrumental in supporting Ed Morse and Amy Jaffe
in the organization of the Task Forces meetings and the preparation
of the report. We would like to thank Col. James E. Sikes Jr., of the
U.S. Army, who served as a Military Fellow at the Council on Foreign
Relations this year and also was the project coordinator of the Task
Force; Sarah Saghir, a Research Associate at the Council on Foreign
Relations; W. O. King Jr., Baker Institute administrator; and Jason
Lyons, Baker Institute Energy Forum staff assistant. And for them and
us, special thanks to all the participating members of the Task Force
for their expertise, ideas, stimulating debate, and hard work.
Leslie H. Gelb
Council on Foreign Relations
The Independent Task Force on Strategic Energy Policy Challenges for
the 21st Century was a collective endeavor reflecting the contributions
and hard work of many individuals. First and foremost, I am indebted
to the superb chair, Dr. Edward L. Morse, for his dedication, wisdom,
insights, superior writing and editing skills, guidance, and steadfast
support during the past five months. Ed Morse made this challenging
assignment look easy through his outstanding leadership and deep analytic
understanding of the subject matter. I congratulate him on drawing together
this outstanding group of professionals and policymakers into a broad
consensus on highly complex and divisive issues. But most importantly,
I would like to thank Ed Morse for his loyalty and faith in me that
extends back more than a decade and has truly made a difference in my
life and career.
I am also indebted to the Task Force members, observers, and reviewers
who generously shared experience, information, ideas, and concepts.
Their energetic participation in three complicated video conferences
and teleconferences from diverse locations and time zones offered invaluable
insight, suggestions, and advice during December, January, and February
200001. This report reflects their views and concurrence on the
broad thrusts of this examination of U.S. energy policy. Although not
every member signed on to every word or prescription, I am grateful
for every view presented in this report, including the concurrence with
the main report as well as additional views and dissent. The dedication
of our Task Force members to enhancing the debate on this important
matter of public policy is the cornerstone to a better framework.
The Task Force benefited greatly from the counsel and input provided
by a group of reviewers with broad academic, economic, and energy expertise.
These individuals reviewed drafts of the report at various stages and
participated in the Task Force meetings. Throughout the period of their
supportive collaboration, the Task Force benefited from their keen observations,
and their insights greatly enhanced the final report. Additionally,
the Task Force recognizes the contributions of those members of the
James A. Baker III Institute for Public Policy and the Council on Foreign
Relations staff acting as observers for the Task Force.
I want to thank Sarah Miller, Vice President of the Energy Intelligence
Group, for her invaluable editing contribution to this project. Also,
I extend my deep gratitude to the staff that made this project run so
well, including Col. James E. Sikes Jr., U.S. Army, the project coordinator
and military fellow for 200001 who worked closely with me; research
associate Sarah Saghir of the Council on Foreign Relations; and my invaluable
partner, Jason Lyons, the Baker Institute Energy Forum program assistant
without whom it would not have been possible to complete this project
in a timely fashion. Other staff members of the Baker Institute and
Council on Foreign Relations also provided invaluable support, including
the technical advisor at the Council, Irina Faskianos, who is the National
Program Deputy Director; W.O. King Jr., Baker Institute Administrator;
Jay Guerrero, Baker Institute events coordinator; Calvin Avery, technical
advisor; and other Baker Institute technical staff, Katie Hamilton,
and Suzanne Stroud. I would also like to thank my research interns Matthew
Chen and Rachel Krause. I extend a special thanks to Falah Aljibury
for his astute observations about the Middle East and his always sympathetic
ear. Finally, and most importantly, to my husband and three great children,
Jordan, Rebecca, and Daniel, for the personal sacrifices made in the
hopes of a better U.S. energy policy and safer environment.
The Task Force was made possible through the generous support of Khalid
Al-Turki, a member of the Council's International Advisory Board, and
the Arthur Ross Foundation.
The Task Force reflected a productive institutional collaboration between
the James A. Baker III Institute for Public Policy and the Council on
Foreign Relations. I want to express my special appreciation to Ambassador
Edward Djerejian, Director of the Baker Institute, for his mentoring,
wise guidance, and insights, and to Dr. Ric Stoll, associate director
for Academic Affairs at the Baker Institute, whose astute advice and
counsel has kept me on track for this and many other equally challenging
projects. I also owe a debt of gratitude to the faculty of Rice University
who have taken me in and taught me the art form of academic discourse,
and to Joe Barnes and Robert Manning for their excellent counsel in
matters of policy formation and writing. At the Council in New York,
I am grateful to Les Gelb, the Councils President, for his support
and astute comments that helped us develop a clear and effective draft;
Mike Peters, Senior Vice President, for his general assistance in resourcing
the Task Force; Vice President Janice Murray; Director of Publishing
Patricia Dorff; and Communications Director April Palmerlee.
This final report reflects an extraordinary amount of work by a broad
range of experts who took the time to participate in this important
endeavor. They responded in detail to several drafts, improving the
structure, providing understanding on regional issues, providing information
on federal and state regulatory policies, expanding the horizon of the
members on the impact of globalization on energy issues, and filling
in the gaps while suggesting new approaches to challenging problems.
Without the hard work and collaboration of the Task Force members this
project would not have been possible.
Amy Myers Jaffe
EXECUTIVE SUMMARY: THE CHALLENGE
For many decades the United States has not had a comprehensive energy
policy. Now, the consequences of this complacency have revealed themselves
in California. Now, there could be more California-like situations in
Americas future. President George W. Bush and his administration
need to tell these agonizing truths to the American people and lay the
basis for a comprehensive, long-term U.S. energy security policy.
That Americans face long-term situations such as frequent sporadic
shortages of energy, energy price volatility, and higher energy prices
is not the fault of President Bush. The failure to fashion a workable
energy policy rests at the feet of both Democrats and Republicans. Both
major political parties allowed energy policy to drift despite its centrality
to Americas domestic economy and to national security. Energy
policy was permitted to drift even though oil price spikes preceded
virtually every American recession since the late 1940s. The American
people must know about this situation and be told as well that there
are no easy or quick solutions to todays energy problems. The
president has to begin educating the public about this reality and start
building a broad base of popular support for the hard policy choices
This executive summary and the full report address the following questions.
What are the potential effects of the critical energy situation for
the United States? How did this critical energy situation arise? What
are the U.S. policy options to deal with the energy situation? What
should the United States do now?
What are the potential effects of the critical energy situation
for the United States?
As the 21st century opens, the energy sector is in critical condition.
A crisis could erupt at any time from any number of factors and would
inevitably affect every country in todays globalized world. While
the origins of a crisis are hard to pinpoint, it is clear that energy
disruptions could have a potentially enormous impact on the U.S. and
the world economy, and would affect U.S. national security and foreign
policy in dramatic ways.
An accident on the Alaska pipeline that brings the bulk of North Slope
crude oil to market would have the same impact as a revolution cutting
off supplies from a major Middle East oil producer. An attack on the
California electric power grid could cripple that states economy
for years, affecting all of the economies of the Pacific Basin. A revolution
in Indonesia would paralyze the liquefied natural gas (LNG) import-dependent
economies of South Korea and Japan, affecting domestic politics and
all of their trading partners. While oil is still readily available
on international markets, prices have doubled from the levels that helped
spur rapid economic growth through much of the 1990s. And with spare
capacity scarce and Middle East tensions high, chances are greater than
at any point in the last two decades of an oil supply disruption that
would even more severely test the nations security and prosperity.
The situation is, by analogy, like traveling in a car with broken shock
absorbers at very high speeds such as 90 miles an hour. As long as the
paving on the highway is perfectly smooth, no injury to the driver will
result from the poor decision of not spending the money to fix the car.
But if the car confronts a large bump or pothole, the injury to the
driver could be quite severe regardless of whether he was wearing a
An energy crisis need not arise abruptly. One can emerge through slower
contagions. Electricity outages already have our most populous state
in a vice and are threatening to spread from California to other parts
of the country. Natural gas is available to heat homes and run power
plants in some parts of the United States only because prices soared
over the winter to many times previous historic peaks. Gas markets dealt
successfully with a supply shortage, but only at the cost of driving
a few lower priority industrial users to close plants and lay off workers,
and many to desert gas for fuels that were more polluting. If economic
growth continues, price spikes and supply shortages could become widespread
recurring events challenging expectations of free energy and making
the United States appear more similar to a poor developing country.
How did this critical energy situation arise?
How the United States and indeed the rest of the world got into this
difficulty is a long and complicated story. The situation did not develop
overnight. But one of the fundamental reasons it could develop is unambiguous.
The United States has not had a comprehensive, integrated strategic
energy policy for decades. Instead, many factors were allowed to converge
to contribute to todays critical energy situation. Infrastructure
constraints, inadequate infrastructure development, rapid global economic
expansion, the lack of spare capacity and the changes in inventory dynamics,
a lack of trained energy sector workers, and the unintended side effects
of energy market deregulation and market liberalization all contributed
to the critical energy situation.
The reasons for the energy challenge have nothing to do with the global
hydrocarbon resource base, which is still enormous, and everything to
do with infrastructure constraints that can and must be addressed as
a matter of the highest priority at the highest level of government.
In the United States, years of rapid economic expansion coincided with
tightening restrictions on building new facilities and capital flight
from smokestack to high-tech industries that discouraged investment
in conventional energy sources. The result was sudden, severe strains
at critical links in the energy supply chain. Now, acute shortages are
evident in electric power generation and transmission capacity. Natural
gas production was not adequate last year to replenish inventories during
low demand seasons, leading to this year's soaring prices. Oil refineries
are barely able to produce enough of the cleaner fuels that are increasingly
in demand, refined product imports are soaring, and isolated but politically
troublesome shortages have already occurred in both gas and heating
oil. Oil and gas pipelines are operating at so close to capacity that
unexpected outages can quickly lead to price spikes and even regional
physical shortages, as witnessed with heating oil in parts of New England
last winter. And the industry faces critical shortages of trained personnel,
as well as of the capital equipment required to overcome these constraints.
At the same time, to bolster profitability and share prices, industry
has adopted strict "just-in-time inventory" policies that
further weaken the safety net.
Internationally, too, rapid economic growth during the past decade
has stretched to the limit world capacity to produce oil and natural
gas. Falling real prices for oil over much of the last two decades gave
the few producing nations with the bulk of the world's reserves little
incentive to invest in new infrastructure as the capacity cushion left
from the 1970s gradually disappeared. Meanwhile, across much of the
developing world, energy infrastructure is being severely tested by
the expanding material demands of a growing middle class, especially
in the high-growth, high-population economies of Asia. As demand growth
collided with supply and capacity limits at the end of the last century,
prices rose across the energy spectrum, at home and abroad.
Since the 1970s, governments around the globe have, to varying degrees,
retreated from heavy regulation of national energy sectors. Market forces
were freed to stimulate investment and allocate resources. And up to
a point, the strategy worked. In the United States, as elsewhere, deregulation
did bring initially the expected lower energy prices in most cases.
But market liberalization brought some less desirable consequences,
as well. For all their advantages, deregulation and reliance on consumer
preferences failed to provide incentives either to build surplus infrastructure
capacity or hold the inventories of fuel needed to smooth out market
dislocations. Capacity cushions that had built up earlier gradually
eroded. Shortages that have been years in the making seem to be springing
up overnight. As a result, todays situation arose by stealth,
as years of rapid growth crashed into the physical supply barricades
that were erected by decades of under investment in energy infrastructure.
What are the U.S. policy options to deal with the energy situation?
There are no easy overnight solutions. The United States faces three
policy paths to deal with the energy problem. One option is to continue
the easy approach of "muddling through" with marginal Strategic
Petroleum Reserve (SPR) management and complete free market solutions.
A second option is to take a near-term, narrow approach by expanding
supply to ensure cheap energy while enduring conflict with environmental
and consumer groups and others. Finally, the United States could develop
a comprehensive and balanced energy security policy with near-term actions
and long-term initiatives addressing both the supply side and demand
side including diversification of energy supply resources, which would
enable the United States to escape from a pattern of recurring energy
The nation, like the international economy on which it depends for
prosperity, confronts a deep-seated energy problem that demands attention
at the highest level of government and industry, if it is not to act
as a clamp on sustained and sustainable economic growthin the
United States and across the world. Long-term, dedicated programs are
required and explicit tradeoffs might well be needed between energy
objectives and other areas of public concern, including economic growth,
the state of the human habitat, and certain foreign policy objectives,
if these problems are to be overcome. Long-term problems require long-term
solutions and may literally require a higher price of energy goods if
the right supply and demand responses are to emerge.
Supply-side responses alone will not suffice. To be effective and politically
acceptable, solutions must also focus on demand-side efficiency and
must address the environmental and foreign policy concerns that frame
so much of the American public's attitude toward energy development
and use. Indeed, if quick fixes on the supply side alone brought prices
back down in the absence of effective efforts to promote energy efficiency,
they might actually prolong the problem the United States now faces
in the energy arena, by bringing even greater reliance on imports.
As it is, national solutions alone cannot work. Politicians still speak
of U.S. energy independence, while the United States is importing more
than half of its oil supplies and may soon for the first time become
reliant on sources outside North America for substantial amounts of
natural gas. More flexible environmental regulation and opening of more
federal lands to drilling might slow but cannot stop this process. Dependence
is so incredibly large, and growing so inexorably, that national autonomy
is simply not a viable goal. In the global economy, it may not even
be a desirable one.
What should the United States do now?
The United States must stake out new paths as it adjusts to economic
interdependence in energy. Alliances, effective diplomacy, freer trade,
and innovative multilateral trade and investment frameworks will all
be tools for securing reliable energy supplies in the 21st century.
Traditional policies and long-standing institutional approaches, developed
mainly in the 1970s, are inadequate to the challenge. Much has changed
in the last 30 years, yet institutions such as the International Energy
Agency (IEA) have done little to revamp their outmoded missions, memberships,
The energy problems we face today are complex, and our response to
them must range from a review of our domestic environmental, tax, and
regulatory structures to a reassessment of the role of energy in American
foreign policy. This uncomfortable truth is largely absent in todays
public debate, which is all too often marked by simplistic analysis
and debilitating accusation. We need not to apportion blame but to seek
workable, integrated solutions that balance energy priorities with economic,
environmental, and national security objectives.
Such a strategy will require difficult tradeoffs, in both domestic
and foreign policy. But there is no alternative. And there is no time
to waste. The problems facing the energy sector will take at least three
to five years to solve. Some will take longer. Short-term measures can
alleviate immediate bottlenecks or buttress emergency preparedness,
but it takes years to license and build power plants, lay new pipelines,
expand refineries, train skilled workers and engineers, and develop
new oil and gas fieldsmuch less negotiate new international agreements
and understandings. A successful U.S. energy policy must encompass not
only quick fixes, but also long-term initiatives that produce results
well into the future.
Until the emerging constraints are overcome, government will need to
increase its vigilance and be prepared to deal with sudden supply disruptions.
The consequences of inaction could be grave. Not only is economic growth
at risk. But high prices and sporadic dislocations threaten public acceptance
of market solutions and foster support for a return to regulation. The
government will need to work hard to ward off political pressures, both
at home and abroad, that could undermine the huge gains that have been
made and to assure that markets become more efficient. Disadvantaged
segments of the population need to be convinced that the right course
of action is not a new form of government regulation.
Delay will simply raise the costs. As each year passes, the investment
required to overcome supply bottlenecks grows. The president needs to
act now to reassess the nations long-term objectives in this most
important area of policy, with an eye to developing a comprehensive
approach that can assure economic prosperity and international security
for future generations.
INTRODUCTION AND BACKGROUND
Recent energy price spikes, electricity outages in California, localized
oil product and natural gas shortages, and extreme energy price volatility
have ushered in a new era of energy scarcity. The process of managing
and working off surplus capacities that marked the past two decades
is complete. Supply constraints have emerged across the energy spectrum,
not only in the United States but around the world, presenting fundamental
obstacles to continued economic growth and prosperity. The challenge
of the new era is marshaling capital to develop adequate resources and
infrastructure to meet rising demand for energy, in a manner that is
consistent with environmental goals.
The cause of these energy infrastructure constraints is evident: persistent
under investment juxtaposed with strong economic and oil-demand growth.
Their solution will require a complex set of well-coordinated domestic
and international efforts. The fact that oils input into Gross
Domestic Product (GDP) has been nearly cut in half during the last fifty
years does not mean that output can expand with no increase in energy.
Nor does it break the link evident in the fact that virtually every
U.S. recession since the late 1940s has been preceded by sharp rise
in the price of oil. (See Appendix A.) The economic reversal now looming
will, if it develops into a full-fledged recession, be no exception.
The United States faces a steep decline rate in its domestic oil fields
and, to some extent, in its natural gas fields. Proven oil reserves
have declined from about 26 billion barrels in 1990 to 20 billion today.
Proven gas reserves had slipped to 164 trillion cubic feet in January
2000, from 177.6 trillion cubic feet a decade ago. However, this does
not mean that ultimate resource levels were a major factor in the tightening
of U.S. energy markets. The United States managed to produce 20 billion
barrels during the decade in which the proven reserve levels slipped
by 6 billion barrels, and it still has more proven oil in the lower
forty-eight states today than it did in 1930, indicating a still substantial
replacement rate. Even more important for the future, estimates of the
amount of undiscovered oil outside the United States are still rising,
according to the U.S. Geological Survey, while the global search for
natural gas has barely begun. The world will not run short of hydrocarbons
in the foreseeable future.
The problem is one of developing these and other fuels and getting
them to the consumers who need them. U.S. investment aimed at accomplishing
this failed to keep pace with rising demand in part because energy industry
profits were dismal through much of the 1990s, hitting bottom during
the oil price collapse at the decade's end. The situation was exacerbated
because low returns coincided with tightening environmental restrictions
and an uneven regulatory process, especially in the electricity sector.
No new oil refineries are likely to be built in the United States, given
the high costs of environmental compliance and historically low returns
on investment. Meanwhile, U.S. product imports shot up by nearly 20
percent last year from 1999, to 2.25 million barrels a day, and appear
to be growing even more rapidly this year.
Chronically low prices, adverse fiscal regulations, inter-state disputes
about pipeline rights of way, and restrictions on land access have all
undermined growth in natural gas availabilityat the same time
that its clean burn has encouraged wider use of gas to heat buildings
and fuel power plants and industry. In both 1998 and 1999, investment
hit bottom amid plunging oil prices, and extremely mild winter weather
masked both the rapid growth in underlying demand for natural gas and
the erosion of spare "deliverability." All these events prevented
the run-up in prices that might have sparked investment earlier. Then,
in 2000 and early 2001, extreme weathera hot summer and a cold
start to the wintersuddenly inflated the previously hidden underlying
growth in gas demand. Lags in the supply system prevented a rapid response,
leading to record low inventories and soaring prices. Some relief may
now be on the way, given rising rig counts and increased imports from
Canada, accompanied by fuel switching and closure of uneconomic industrial
capacity. Yet questions remain as to how robust the domestic supply
response will be, given high depletion rates in North America and a
shortage of rigs and trained personnel.
The story in the power sector is similar. No new nuclear plants have
been ordered in the United States in more than twenty years. For the
last decade, well over 90 percent of all new power plants ordered have
been gas-fired. In some states, such as California, environmental concerns
raised the bar to impractical levels even for construction of conventionally
fueled electric power stations. High gas prices, an unusually cold winter,
an explosion at a major natural gas pipeline last August, maintenance
closures at nuclear power plants, and a drop in hydroelectric power
converged with incomplete deregulation to produce devastating shortages
in the California power grid. The resulting public outcry has called
into question the benefits of electricity deregulation, despite relatively
successful programs in other parts of the United States. Spare generation
capacity also looks to be in short supply in the New York State region,
where brownouts could emerge in the summer of 2001 if hot temperatures
inflate demand for air conditioning.
Other parts of the U.S. energy infrastructure are afflicted as well.
Permits and rights of way are nearly impossible to obtain for new pipelines,
especially oil lines, and tanker shortages threaten to occur again partly
because of environmental regulations.
The 199899 downturn in U.S. oil and gas investment came against
the backdrop of years of reduced oil-field development spending by state-owned
oil companies in Organization of Petroleum Exporting Countries (OPEC)
countries. Internal political pressures impelled governments as diverse
as those of Saudi Arabia and Venezuela to dedicate more of their oil
revenue to social programs. This converged with an unexpectedly robust
world economy in the late 1990s to virtually wipe out excess capacity.
That, in turn, sparked anew debates about the depletion of conventional
hydrocarbons in a way that sometimes obscured the true nature of the
The enormous swings in energy prices over the last four years have
affected different parts of the world differently. But it has been good
for no one. In 1998, most of the world benefited as stunningly low crude
oil prices filtered through consuming economies. Yet a handful of oil
exporting countries faced a fall of up to 50 percent in their national
incomes within a yearan experience that had severe political and
economic repercussions. Governments changed in Algeria, Brunei, Indonesia,
Nigeria, and Venezuela, as loss of income exacerbated other difficulties.
The price collapse threatened to destabilize societies as diverse as
Russia and Indonesia. The following year, non-OPEC producers Mexico,
Norway, and Oman joined with OPEC to remedy the situation by cutting
production, thus pushing the burden back onto the rest of the worldbut
not before resentment had built up against the industrialized nations
for turning a blind eye when prices fell so low. Industrialized countries,
developing-country energy importers, and energy exporting countries
have common concerns about severe price volatility and its impact on
the domestic and international "political economy." The challenge
now is how to turn this common perception into effective joint action.
In the past, energy crises have appeared simply to fade away over time.
Sometimes, as in the late 1970s and early 1980s, recession solved the
problem by radically reducing global energy demand. At other times,
technological improvements reduced costs and created new efficiencies
on both the supply and demand sides, fostering complacency among policymakers.
Government attention to energy issues has tended to fade as prices fall.
That complacency could be justified so long as surplus capacities existed.
But in a world of energy capacity constraint, complacency could shackle
the U.S. economy for years to come. If it does not respond strategically
to the current energy circumstances, the United States risks perpetuating
the unacceptable leverage of adversaries and leaving its economy vulnerable
to volatile energy prices.
The time has come for a fresh strategic assessment of U.S. energy policyone
that intelligently balances potentially conflicting objectives of energy
supply promotion, sustainable economic growth, environmental protection,
and national security. A comprehensive effort is required that will
integrate energy with other policy goals, while developing new sources
of supply and finding ways to prune expected demand growth in order
to assure that clean and adequate energy supplies will be available.
This Task Force offers a unique perspective on the problems at hand
and the difficult choices that will be required to deal with them effectively.
The Past Two Decades: A Review of Policy
Through the 1980s and 1990s, the centerpiece of U.S. energy policy has
been to foster, at home and abroad, deregulated markets that efficiently
allocate capital, provide a maximum of consumer choice, and foster low
prices through competition. U.S. policy also favored diversity of supply,
both geographically and in terms of energy sources. Domestically, infrastructure
needs have been left to market forces. This hands-off policy has generally
led to lower real energy costs. But this, in turn, has brought a dramatic
slowdown in efficiency gains and a potentially dangerous complacency
about energy supplies, energy efficiency, demand management, and conservation.
Tax policy was not utilizedas it was in Europe and Japanto
discourage use of hydrocarbons or to promote environmentally friendly
fuels. Transportation's share of petroleum use had risen to 66 percent
by 1995 from 52 percent in 1970, and could hit 70 percent by 2010 if
new technologies are not put in place. Improvements in automobile mileage
standards could dramatically influence these growth rates in U.S. consumption,
while keeping the automotive industry competitive.
At the same time as it was ignoring demand management, U.S. policy
frequently allowed energy supply goals to take a back seat to environmental
considerations when it came to land management, emissions, and other
policy requirements. Even in foreign policy, where the United States
has frequently stated its desire to see new acreage opened to oil and
gas exploration, it has not backed up its words with active support
of these goals. On the contrary, it has frequently used energy sanctions
as an instrument of foreign policy, blocking targeted countries from
trade or investment, while making energy goals secondary to other foreign
For the most part, U.S. international oil policy has relied on maintenance
of free access to Middle East Gulf oil and free access for Gulf exports
to world markets. The United States has forged a special relationship
with certain key Middle East exporters, which had an expressed interest
in stable oil prices and, we assumed, would adjust their oil output
to keep prices at levels that would neither discourage global economic
growth nor fuel inflation. Taking this dependence a step further, the
U.S. government has operated under the assumption that the national
oil companies of these countries would make the investments needed to
maintain enough surplus capacity to form a cushion against disruptions
elsewhere. For several years, these assumptions appeared justified.
But recently, things have changed. These Gulf allies are finding their
domestic and foreign policy interests increasingly at odds with U.S.
strategic considerations, especially as Arab-Israeli tensions flare.
They have become less inclined to lower oil prices in exchange for security
of markets, and evidence suggests that investment is not being made
in a timely enough manner to increase production capacity in line with
growing global needs. A trend toward anti-Americanism could affect regional
leaders ability to cooperate with the United States in the energy
The resulting tight markets have increased U.S. and global vulnerability
to disruption and provided adversaries undue potential influence over
the price of oil. Iraq has become a key "swing" producer,
posing a difficult situation for the U.S. government.
Another new element is adding to vulnerability: Deregulation has encouraged
U.S. and other energy companies to focus more single-mindedly on maximizing
their competitive positions. One tool has been to slash inventoriescushions
that are expensive but are needed to smooth out the functioning of markets
during temporary dislocations.
How Did Energy Markets Suddenly Become So Constrained?
By the end of the 1970s, a consensus had emerged that the world economy
had entered a "permanent" period of tightness in energy supplies.
But actually, the high prices that followed the 1973 and 1979 oil crises
attracted increased investment in energy resources and energy efficiency.
Oil use dropped initially in absolute terms, especially in the power
sector, where robust growth of nuclear power and increased reliance
on coal replaced it. At the same time, the oil shocks and other factors
contributed to a slowdown in some major industrialized economies, further
reinforcing the substantial drop in oil use. Higher prices also encouraged
investment in conventional and non-conventional fuels, especially outside
of OPEC, as well as in energy efficiency. As a result, for most of the
late 1980s and early 1990s, real oil and natural gas prices returned
to historically "normal" and more moderate levels.
New sources of oil supply outside of OPEC countries contributed to
this price slide, as did increases in production from Iraq and Iran,
whose capacities had earlier been constrained by war. Resource nationalism
began to ebb, as deregulation and liberalization of markets seemed to
provide energy consumers near-unlimited resources at low prices, whether
in the form of oil, electricity, or natural gas. Surplus capacities
along the entire energy chainaccumulated in the days of government-subsidized
industry and falling demandmeant that there could be an expansion
of energy use without significantly affecting underlying costs. These
surpluses were found in all aspects of the energy industry, including
refineries, tankers and pipelines, offshore and land rigs, other oil-field
equipment, and power-generating capacity.
Concern about the adverse environmental impacts of higher energy use
prompted public authorities throughout the industrial world to tighten
regulations. These measures could be implemented without fear of price
consequences because energy supplies were ample. New technologies were
expected to continue reducing the costs of energy production, while
at the same time creating adequate supplies to meet demand. Market deregulation
and the emergence of futures markets reinforced the view that energy
supplies would always be ample, while giving energy producers new financial
instruments with which to mitigate price risks.
The persistence of surplus capacities also allowed policymakers to
place a greater emphasis on non-energy goals than on timely resource
development, without fear of economic consequences. Environmental restrictions
on oil products were tightened, elaborate permit procedures for new
infrastructure were created, and importantly, economic sanctions were
imposed on key oil-producing countries for an array of foreign policy
reasons. The U.S. government even moved 180 degrees away from its policy
of the 1970s, and began to adopt secondary boycotts of certain oil-producing
countries in an effort to combat terrorism. Sanctions policy was buttressed
by the belief in many U.S. circles that economic warfare was partially
responsible for the collapse of the Soviet Union.
The August 1990 Iraqi invasion of Kuwait witnessed a major test of
global energy security. That test was readily met, creating a deeper
sense of complacency among oil-consuming nations. With the end of the
Cold War, U.S. leadership was able to forge an international coalition
to repel Iraq. Although oil-supply security was a major issue cementing
the coalition, it could be assigned a back seat to issues of international
order because of three critical factors:
- Surplus Capacity: The United Nations (U.N.) embargo on Iraqi
and Kuwaiti oil was made possible by the existence of extensive surplus
production capacity elsewhere. In August, some 5 million barrels a
day of production was taken off the market through the embargo. By
December, all of the lost production was made up through increases
from Saudi Arabia, Venezuela, Abu Dhabi, and other OPEC nations, which
had been carrying vast spare capacity and were willing to assist the
coalition against Iraq. Previous surpluses also had cushioned the
market with unusually high commercial stocks of crude oil and products.
- Strategic Reserves: The more than 1 billion barrels of strategic
petroleum reserves in International Energy Agency (IEA)-member countries
loomed over the market, depriving OPEC or other oil producers of market
power. It also restrained speculators, who would lose financially
if those reserves were released. In the case of the Gulf War, the
IEA system fulfilled its original mission to serve as a deterrent
to market manipulation by adversaries during a crisis. Its very existence
served to damp prices under the new market conditions.
- Market Mechanisms: The deregulation of petroleum and refined
product markets in the 1980s and the growth of futures and forward
markets provided rapid and effective adjustment mechanisms. These
developments facilitated refiners orderly transition from Kuwaiti
and Iraqi supplies to replacement oil from Saudi Arabia, Venezuela,
and Abu Dhabi, whether those refiners were in East Asia, Europe, or
the Western Hemisphere.
What Has Changed?
Perhaps the most significant difference between now and a decade ago
is the extraordinarily rapid erosion of spare capacities at critical
segments of energy chains. Today, shortfalls appear to be endemic. Among
the most extraordinary of these losses in spare capacity is in the oil
arena. In 1985, when oil prices collapsed, OPEC was estimated to have
some 15 million barrels a day of shut-in production capacity, equal
to perhaps 50 percent of its theoretical capacity (Iran and Iraq were
at war with one another at the time) and 25 percent of global demand.
By 1990, when Iraq invaded Kuwait, spare capacity globally was still
about 5- to 5.5-million b/d, which was the amount of oil taken off the
market by the U.N. embargo. That was about 20 percent of OPECs
capacity at the time and about 8 percent of global demand. This winter,
before OPECs seasonal cuts, spare capacity was a negligible 2
percent of global demand.
The surge in energy demand worldwide that combined with under investment
to create these shortfalls has been stunning, especially in high-growth
Asian economies. In the United States, oil demand has risen on average
1 percent-2 percent per year since the late 1980s. In recent years,
the rate has picked up to at least 2 percent, reflecting not only strong
economic performance but also the relative neglect of policies related
to conservation and energy efficiency. U.S. energy efficiency as measured
by the amount of energy used per constant dollar of Gross National Product
(GNP) declined from 8,300 British thermal units (BTUs) per 1996 U.S.
dollar thirty years ago to 4,600 BTUs in 1995. But it dropped only an
additional 400 BTUs between 1995 and 1999, despite great technological
advances in many sectors of the economy. The decline in petroleum used,
measured in terms of thousands of BTUs per dollar of GDP, was even more
radical in the twenty-five years to 1995, from $15.15 to $8.43, reflecting
structural shifts in the economy and improvements in energy efficiency.
However, as energy costs fell starting in the mid-1980s, promotion of
energy efficiency slowed dramatically.
Although appliances have become increasingly energy-efficient, energy
consumption patterns have loosened up. Nowhere is this more apparent
than in the U.S. automobile sector, with the growth in demand for light
trucks (pickups, sport utility vehicles [SUVs] and minivans) that burn
more gasoline than smaller vehicles. The transportation sector accounts
for an increasing share of petroleum use in the United States, rising
from 52 percent in 1970 to 66 percent in 1995. This is expected to increase
to 70 percent by 2010 unless new technologies are put in place. The
United States is not unique in displaying this trend. Assuming no major
breakthroughs in automotive technology, the IEA projects that 59 percent
of the 41-million b/d increase in worldwide oil demand expected from
1995 to 2020 will come from the transport sector.
Efficiency has increased in the transportation sector, where average
miles per gallon (mpg) for standard automobiles have increased from
15.1 in 1983 to about 21.5 in 1999. However, the potential to do much
more is an attainable option. The average fuel economy of light trucks
on the road is only 17.4 mpg. Ford and General Motors have vowed to
improve fuel economy for certain SUVs by 25 percent by 2005, but across-the-board
implementation of higher mileage standards for light trucks could substantially
lower oil use in the United States.
SUVs account for 25 percent of the category of "Light Trucks,"
up from 13.2 percent of all light trucks in 1992, yielding an average
annual growth rate of 14 percent. The average annual growth rate for
the entire "Light Truck" category was 4.42 percent. If fuel
efficiency of light trucks matched that of cars, U.S. fuel savings would
equal about 910,000 b/d of crude oil. If the fuel efficiency of only
SUVs matched that of cars, the fuel savings would be 225,000 b/d. Thats
just one example of the result of disregard of demand measures, where
demand management could well be the most efficient way to "develop"
more oil supply in the United States.
By 2010, without government intervention, high-mileage "post combustion"
automobiles such as the gas-electric and fuel-cell hybrids could make
up as much as 1520 percent of new vehicles but would still only
trim U.S. crude oil demand by 600,000 b/d, according to private studies.
However, in the period between 201020, such technology could begin
to make a significant contribution to curbing the growth in energy use.
Several major car companies have announced plans to introduce new prototype
hybrid cars by 200304.
Since 1973, the share of oil in the U.S. energy mix fell from 49.5
percent to 41 percent in 1999. But this trend could slow in the coming
years if rising natural gas prices discourage gas substitution for oil.
Already, fuel switching back to oil has resulted in a 500,000 to 600,000
b/d increase in oil use in the United States in early 2001, according
to Department of Energy statistics.
The share of natural gas has risen from 18.2 percent in 1973 to 24
percent in 1999. Nuclear power is an indigenous source of energy, unique
in having the capacity to provide enough energy to last hundreds of
years without emitting greenhouse gases. Nuclear energy represents 22.9
percent of total U.S. electricity generation and is expected to fall
as older plants are retired and as new construction is thwarted by social
concerns and by regulatory issues as well as waste-disposal obstacles.
No new plants have been constructed in the United States for two decades,
and if the licenses of existing plants are not granted extensions, license
expiration could lead to a 50 percent reduction in nuclear generation
capacity by 2020. The United States choice of an open fuel cycle (i.e.,
once-through utilization of nuclear fuel followed by geological disposal)
is plagued by spent-fuel isolation issues. The alternative closed fuel
cycle advanced in France, Japan, and other countries (i.e., reprocessing
of spent fuel to extract and recycle plutonium) is plagued by large
accumulations of separated plutonium and unfavorable economics. The
proliferation danger posed by separated plutonium led to a U.S. decision
in the late 1970s to pursue the open fuel cycle.
Also in the 1970s and early 1980s, companies began investing in renewable
technologies, but as oil prices began to fall in the mid-1980s and some
investors in renewable projects failed to turn a profit, this trend
also slowed. Renewable energy sources, including biomass, solar, wind,
and hydro, now represent less than 10 percent of total U.S. energy use.
Technological advances that have led to cost reductions in some fuels
such as solar and wind represent an area for expanded attention. But
hydro is the dominant renewable resource and has minimal expansion potential
in the United States.
Environmental factors have also led to a decrease in the share of coal
in the U.S. energy mix from 30 percent in 1973 to 23 percent currently,
despite the fact that the United States has among the largest coal deposits
in the world. Still, more than 50 percent of all electricity generated
in the United States is fueled by coal. Internationally, coal use is
expected to double in the next fifteen years. Despite governmental and
industry efforts to foster clean coal technologies, coals high
carbon base has made it a subject of attack by environmental concerns.
But progress has been made and can continue to be made in reducing coal
Influence of Environmental Restrictions
Besides influencing the mix of fuels used in the United States, environmental
factors have also created market inefficiencies that have exacerbated
the underlying tightening of energy infrastructure. Federal and state
environmental regulations have created at various times anomalies in
local and regional supplies. Refiners and distributors have lost much
of the flexibility they used to have to move gasoline supplies around
the country to keep local and regional supply in balance. Thirty years
ago, U.S. refineries made gasoline, diesel, and heating oil to national
standards. In recent years, petroleum companies have been required under
environmental restrictions to formulate at least seven different varieties
of cleaner burning fuels for national or wide-scale distribution. Nationwide,
the U.S. market uses more than fifty different types of motor gasoline,
comprising different regional and local environmental requirements,
octane levels, and seasonal fuel requirements. This "Market Balkanization"
as labeled by the Petroleum Industry Research Foundation, Inc. (PIRINC)
has distorted markets, creating artificial supply problems as well as
artificial barriers to free trade in products. The result is that local,
pocketed markets with their own individual quality requirements have
become extremely vulnerable to disruption and localized price spikes,
raising the costs to consumers of meeting environmental goals.
The problem of Balkanization is easy to describe at a theoretical level.
Uncoordinated state regulations require refiners to manufacture an increasingly
larger number of types of specific products and to distribute and store
these products in or close to final end-user markets in the states that
mandate particular specifications that differ from one another and from
general norms. With the refinery system of the United Statesindeed
of all of the Organization for Economic Cooperation and Development
(OECD) countriesconstrained in terms of their ability to meet
both new national and multinational specifications mandated by environmental
authorities, the addition of particular state specifications stretches
the physical refining and distribution system beyond its limits. The
result is supply shortage and high price volatility affecting consumers
in specific locations. The shortages that emerged two years ago appear
inevitably bound to worsen in the decade ahead.
Boutique fuels problems have become especially acute in the gasoline
and, to some extent, the distillate markets, which have become highly
segmented. For gasoline, problems in the Middle West and California
in 2000 are likely to be repeated this year and indefinitely into the
future unless efforts are made to smooth out market segmentation. Last
year, California and the Chicago markets became extremely sensitive
to disruptions in local supplies. In 2000, as PIRINC has shown, a 23
percenti.e., very smallsupply shortfall in the Middle West
region of the United States helped create sharp increases in prices
of reformulated gasoline in the region. As a result, average prices
there, as has recently been the case in California, rose by up to 50
cents a gallon versus better-supplied markets (e.g., the U.S. Gulf Coast
The distillate situation last year in the Northeast United States displayed
similar bottlenecks. Differentials between New England and U.S. Gulf
Coast distillate prices widened significantlymore than 12 cents
a gallon both in December and January. The differentials reflected differences
in inventories being held in the regions. The newly created Northeast
Heating Oil Reserve partially helped to solve the problem. But it took
much longer than it might have to reduce these market differentials
largely because heating oil marketers were forced to use U.S.-flagged
tankers to move distillate from the U.S. Gulf Coast to New England.
Meanwhile, distillate was being exported from the Gulf Coast to Latin
America and Europe, where price differentials were high enough to make
such trade profitable.
U.S. Northeast and Atlantic Coast markets are "net importers"
of product. The imports come from abroad (mostly Europe and Latin America),
and from the U.S. Gulf Coast (via pipelinemostly the Colonial
lineand via tankers). The U.S.-flagged ("Jones Act")
tanker fleet has been in long-term decline. Meanwhile, ever since President
Ronald Reagan permitted the export of products, the Atlantic Coast and
Northeast regions have had to compete with foreign markets for U.S.-produced
products. Increasingly, there have been problems encountered in moving
both distillate and gasoline into the Atlantic Coast market. When the
pipeline is fully utilized and when imports are inadequate, there is
a potential need to waive the Jones Act requirements on the U.S. product
tanker fleet to enable non-U.S. flagged vessels to carry cargoes between
U.S. ports. While Jones Act waivers are available, they are rarely granted.
Streamlining procedures for issuing waivers to the Jones Act would facilitate
the elimination of this market anomaly and free up supply within the
U.S. market during severe logistics crises.
The failure to coordinate environmental policy in a manner consistent
with energy supply goals is making itself felt in the pocketbook of
the American consumer. Lack of coherent policy has led to lower attention
to the kinds of demand-management programs and diversification strategies
that will be needed to meet the dual challenges of environmental enhancement
and energy security, including fighting global warming and expanding
energy demand. Continued over-reliance on oilwith relative neglect
of efficiencyhas left the United States and other importing countries
more vulnerable to disruptions in supply. With limited spare capacity,
a significant accident anywhere in the world, including, for example,
along Alaskas pipeline infrastructure due to an earthquake, would
affect global conditions. Accidents in two or more places would be even
worse. It is in this context of limited surplus capacity that concern
is raised about the resources of the Middle East. Gulf crude oil comprises
about 25 percent of world supply today. Many analysts project it could
increase to more than 3040 percent over the coming decade. If
political factors were to block the development of new oil fields in
the Middle East, the ramifications for world oil markets could be quite
severe unless measures are taken immediately to diversify to other energy
U.S. unilateral sanctions as well as multilateral sanctions against
oil-producing countries have discouraged oil resource investment in
a number of key oil provinces, including Iraq, Iran, and Libya. U.S.
sanctions policy has constrained capacity expansion to some extent in
Iran and Libya, although the unilateral aspect of the U.S. action limited
its impact. In the case of Iraq, the U.N. sanctions imposed as a result
of the Iraqi invasion of Kuwait have had a severe effect on potential
Sanctions role in constraining investment in several key OPEC
countries has aggravated the global problem of spare production capacity,
which is now less diversified among a number of large producers than
was the case twenty years ago. The consequent lack of competition has
contributed to high prices. Most of todays spare productive capacity
is located in Saudi Arabia. And Saudi Arabias high, and growing,
level of production and the lack of significant spare unutilized capacity
outside the kingdom have spotlighted that countrys critical role
in determining the state of current and future oil markets, in turn
creating unique political pressures. Iran and Iraq accuse Saudi Arabia
of seeking higher production rates to accommodate the economic interests
of the United States, Japan, and Europe at the expense of the needs
of local populations, creating internal pressures in the Arabian Gulf
region against a moderate price stance. Bitter perceptions in the Arab
world that the United States has not been evenhanded in brokering peace
negotiations between Israel and the Palestinians have exacerbated these
pressures on Saudi Arabia and other Gulf Cooperation Council (GCC) countries
and given political leverage to Iraqs Saddam Hussein to lobby
for support among the Arab worlds populations.
Several key producing countries in these important areas remain closed
to investment. Encouragement of open investment policies in these countries
would greatly promote renewed competition among the largest oil producers
and the advancement of oil supplies in the coming years. A reopening
of these areas to foreign investment could make a critical difference
in providing surplus supplies to markets in the coming decade.
Removal of bureaucratic, logistical, and political obstacles to investment
in Russia could also play a major role in promoting supply outside the
Middle East. The deterioration of the Russian oil industry has been
a prominent feature of international oil markets in recent years. While
Russia has the worlds eighth-largest oil reserves, the countrys
political and economic problems have discouraged investment by both
domestic and international oil companies. As a result, oil production
in Russia has fallen to about 6 million b/d in 1999, down from 12.5
million b/d in the late 1980s. Both Russia and the Caspian Basin countries
show promise as key future suppliers of hydrocarbons. In fact these
two regions could hold as much as 27 percent of the worlds undiscovered
oil resources. But, bureaucratic, logistical, and political obstacles
remain a hindrance to both the timely development of currently exploitable
reserves and new discoveries.
Oil resource development in Latin America, which offers great strategic
benefits to the United States, has also slowed in the past year or two
as sharp declines in oil fields in Venezuela and Colombia have not been
offset by new oil fields coming online. Political uncertainties in both
countries are thwarting foreign investment, and state revenues are tight,
discouraging spending in oil and natural gas fields by government-owned
But it would be a mistake for the United States to continue to rely
largely on development of key oil resources in the Middle East and Russia
as the linchpin of energy policy. Instead, U.S. energy policy must also
focus on reversing the decline in interest in energy efficiency and
conservation at home. The experience of the 1970s has shown that energy
security and energy price competition is enhanced by diversity of suppliers
and of fuel choices. The economies of other countries such as Japan
and Germany are better shielded from oil price changes than is the U.S.
economy because of the greater emphasis on efficiency and conservation.
Unfortunately, there is no new technology available on the immediate
horizon that could be commercialized for as widespread use as oil and
gas in the next ten years. Promotion of renewable fuels (e.g., bio-fuels)
sounds attractive and should be pursued. But even if renewable fuels
use were to be doubled over the next ten years as a result of a sizable
commitment to these more environmentally friendly fuels, they would
still only represent a low share of both electricity and total U.S.
energy use. Nuclear energy could be a clean, ample alternative for electricity
but problems of waste fuels, safety, and public confidence would have
to be overcome.
Similarly, industry and other groups are lobbying for the opening of
the Arctic National Wildlife Refuge to foster energy development. This
is an important issue for reasons seldom raised in current debates.
Alaska oil production has entered a period of decline, which can be
reversed only by opening up the ANWR. Such an opening could lead to
the development of resources that could make a significant contribution
to domestic supply for decades and would also bolster domestic industry
and the local and national economies. While the opening of the ANWR
would not in and of itself solve U.S. oil concerns, especially those
related to foreign dependence, added resources would undoubtedly be
significant. Yet, such a development program could take seven to ten
years to implement (although industry optimists claim that a emergency
effort could reduce the lag to three years) and would not free the United
States from the cyclical energy supply dilemmas that keep recurring.
In sum there are no quick fix solutions to todays energy problems.
Rather, a broad combination of measures is required that will stimulate
investment, enhance access to new supplies of oil and gas, promote competition
and eliminate political barriers to world energy markets, limit the
increase in energy demand, and promote new, cleaner technologies.
Deregulation: Plusses and Minuses
Many industry representatives and specialists believe that market forces
can eventually initiate many of these changes without government interference.
They even argue that consumers can foster cleaner fuel preferences through
the marketplace and market mechanisms. There is merit in these arguments
in favor of market solutions. But energy sector deregulation and reliance
on market solutions and consumer preferences can only go so far because
they do not take into account critical "public goods" aspects
of energy supply and environmental protection.
In the 1970s, virtually all governments in the industrial and developing
worlds directly administered the prices of key energy components, both
at the primary level (crude oil, natural gas) and at the consumer level
(petroleum product prices, residential natural gas, and electric power).
Governments were also involved in major purchase contracts for internationally
traded energy commodities (oil and natural gas primarily), and often
tied these contracts to other trade and national security issues (barter
of oil for construction projects, soft loans, arms).
Today governments have largely retreated from the energy sector. There
is a widespread global consensus that administered policies and regulations
that fly in the face of market fundamentals are inefficient, impede
smooth adjustment to rapidly changing times, and infuse energy issues
with other political issues (in short, politicizing energy issues unnecessarily).
Markets have been deregulated and liberalized; and government companies
have been privatized. Wherever governments still own significant energy
assets, the state-owned enterprises are generally run on commercial
terms. Moreover, governmental monopolies in the energy area have been
broken, and national preferential considerations have been reduced.
Generally speaking, liberalization has facilitated efficiency and smooth
allocation of resources to users who most require these resources. But
rapid deregulation of the oil, natural gas, and power sectors have also
reduced the incentives for specific businesses to invest in large inventories
or excess capacity that can help smooth markets during times of disruption
or unexpected volatility in demand growth. Tightening environmental
regulation for construction of new energy facilities has also discouraged
investment in some locations. These changes have placed more pressure
on how to achieve the public benefits of inventory and spare production
and generation capacity without discouraging investment in energy resources.
It has also changed the nature of the debate on strategic stockpiles
and government-controlled assets.
The IEA has provided an important institutional mechanism for coordinating
international preparations for such a disruption, and its members have
instituted strategic stockpiles that have, in turn, served as a major
deterrent against producer countries individually or collectively using
their "oil weapon" to pressure or "blackmail" individual
oil-importing countries. However, deregulation has brought some unintended
consequences about strategic stockpiles. By and large, deregulation
of energy markets has meant that the establishment of inventories and
the determination of their size have been left by governments to the
market to decide, except in the case of government-held emergency stores.
But markets do not always send fully accurate signals. That is in part
a result of lack of market transparency and the realities that with
imperfect information market participants tend to take the short view.
More recently, the lagged interplay between supply and demand in several
energy commodities this year has caused market disruptions. It is possible
that for some of these commodities, the market may, over time, provide
its own solution, through increased refinery runs, increased gas drilling/production,
and greater stimulus for investment to increase capacity. But interventions
may occur that hasten this process or ease constraints more quickly.
Inventories serve as a premier tool in preventing market failures and
in managing supply dislocations. Spare petroleum or natural gas production
and deliverability capacity or redundancy in power generation capacity
are ultimately inventory and inventory management issues. Spare capacities
reflect an inventory of available supply in case of market dislocation
or unexpected disruption. Similarly, more conventional references to
stores of natural gas or of petroleum products or of crude oil are also
inventories. Energy markets are constantly challenged by unexpected
eventsfrom severe weather to sudden technological changes that
undermine forecasts of supply and demand. Without inventory or spare
capacity, such events can create extreme price volatility, sometimes
for short periods of time but also sometimes for extended periods of
time. Moreover, severe price volatility can become self-generating by
discouraging investment by industry players who cannot properly assess
future market potential.
The unanticipated consequence of deregulation, industry consolidation
and restructuring, and of environmental policies on inventories is now
raising new challenges for policymakers. It is also redefining the debate
on the appropriate role of government intervention in energy markets.
Thats because of the political impact from supply shortfalls and
price volatility on classes of consumers and on the general economy,
when supplies are effectively auctioned to the highest bidder in times
The Task Forces action program for implementing a coherent U.S.
energy policy is framed in the context of the fundamentally changed
circumstances in todays energy sector. For the two decades following
the energy price spikes of the 1970s, the main opportunities and challenges
for governments and consumers were based on the sometimes extraordinarily
large surplus capacities that defined the energy system. These surplus
capacities have now disappeared, or have been reduced to such low levels
that there is only a limited cushion available to meet growth in demand
or to buffer economies against disruptions. As demand moves against
and away from capacity limits, the result is price volatility.
Over the past three years, the prices of most core energy sourceselectricity,
natural gas, and oilhave been more volatile than at any time in
recent history. At a global level, crude oil prices hit their highest
and lowest levels since the price collapse of the mid-1980s between
1998 and 2000, with the exception of a brief price spike after Iraq
invaded Kuwait in 1990. In North America, natural gas prices this winter
set all-time record highs, and may well do so again a year from now,
while electricity prices have reached unprecedented peaks in California
and other pockets of the United States. Other regions of the country
are likely to suffer the same fate this summer.
Under these circumstances, history demonstrates that the main tasks
of energy policy are the following:
- To assure that markets operate efficiently so as to develop the
infrastructure necessary to meet growing requirements of demand;
- To facilitate orderly growth in demand;
- To ensure the well-being of the human habitat and ecosystem; and
- To guarantee that mechanisms are in place for warding off and,
if necessary, for managing disruptions to energy supply.
This report is motivated by the beliefshared by many energy specialiststhat
pervasive shortages in the energy sector will not go away of their own
accord, other than through a sharp economic downturn. Market solutions
are fundamental to providing the kind of stable and predictable energy
prices that are needed to sustain the economy and safeguard security
over the long term, and they should be embraced. But market solutions
go only so far, especially at a time when inventories of all sorts are
so low as to result in price surges that harm consumers and cause political
backlash. A more comprehensive strategic approach is needed.
Implementing this reinvigorated energy policy will take time. Quick
fixes can alleviate supply bottlenecks or conserve energy use, but the
energy sector is capital intensive and, with few noteworthy exceptions,
involves projects that can unfold only within a three- to five-year
horizon, or even one that is even longer.
Energy issues need to be brought before the public to counter some
widespread misconceptions. There are no easy, overnight, and politically
attractive solutions to the countrys or the worlds infrastructure
and supply problems. There is no existing technology that can quickly
replace oil in the crucial transportation sector. There is no place
at home or abroad where enough oil or gas can be developed fast enough
to moderate prices in the next six to twelve months. There is no cost-free
way to allow unrestricted energy use and simultaneously safeguard the
environment. But neither is the world running out of energy resources.
The Task Force acknowledges that energy policy starts at home. But
any attempt to reframe U.S. energy policy must take into account the
fact that the energy sector has become extremely interdependent internationally.
The United States cannot achieve energy independence without the emergence
of new technologies that are not yet on the horizon. Increasing domestic
supplies will therefore not necessarily reduce U.S. vulnerability to
disruptions to any substantial extent, and artificial ceilings or targets
for imports will contribute little to security and could create unwanted
distortions. An oil shortfall anywhere in the world will produce an
equal price rise in every country, irrespective of the level of national
import dependence, as long as markets are allowed to clear without government
The United States must face up to this energy interdependence squarely
and pursue new paths to assure that neither its economy nor policies
are excessively vulnerable to foreign influence. For the foreseeable
future, the Gulf will remain the worlds base-load supplier and
least expensive source of oil to meet growing demand. The global nature
of oil trade and pricing means that it matters little if Gulf oil flows
to Asia or to the United States. Middle East Gulf pricing and supply
trends will affect energy costs around the globe regardless. If the
United States wishes to change this reality, it must start now to deploy
new energy technologies that will lessen this dependence in the long
The Task Force determined ten broad findings:
- The U.S. government has not for a long time adequately integrated
the security, energy, technological, financial, and environmental
policies that make up a comprehensive energy policy. It has relied
on overlapping commercial and political interests with key oil-producing
countries to meet the needs of its own economy and those of the international
economy. A surplus in energy supplies during the past two decades
convinced policymakers that other objectives could take precedence
over energy security and that the costs of neglect would remain low.
That period has ended. In todays tighter energy markets, the
costs of leaving energy security unattended could become extremely
high. These costs, and the means of reducing them, need to be evaluated
in a more purposeful, strategic fashion.
- There are no overnight solutions to the energy supply and infrastructure
bottlenecks facing the nation and the world. Success will require
long-term investments. It will also require the revocation of failed,
outmoded, or simply less important policies, which interfere with
the pursuit of energy security. Economic sanctions that limit energy
investment and environmental policies that increase the costs or availability
of energy sources require a fair-minded review. A few concrete short-term
actions are available; but many of these clash with other policy objectives,
which may need to be compromised or even scrapped.
- Continuous governmental review is needed of the tradeoffs between
energy security and other national goals. The articulation of
a coherent energy policy requires the integration of foreign, national
security, and trade policy with numerous domestic environmental, tax,
and investment programs. Energy policy should play a significant role
in diplomatic discourse, especially where bilateral relations with
major powers are concerned. (See Appendix B.)
- Environmental issues affecting energy policy require new approaches
at home and abroad. The American public cares as much as the citizens
of other countries about such issues as greenhouse gases and other
atmospheric emissions, underground leakage of noxious substances,
and other environmental dangers. Sensible energy policy must take
this into account. But it is important that the public understands
that enhanced environmental standards come at a price to the availability
and cost of fuels. It is equally important that the public understand
the environmental and public-health consequences of unfettered energy
consumption. The government should take a leadership role in fostering
such understanding. Also, better coordination of fuels standards is
needed, both inside the United States and with U.S. trading partners.
- Energy infrastructure can be rebuilt and expanded rapidly only
if the government actively facilitates private-sector decision-making
and investment. The government should pave the way by removing
unnecessary jurisdictional and other obstacles to construction and
enlargement of pipelines, power plants, the electricity grid, and
other infrastructure. It also needs to weigh the desirability of incentives
to accelerate the development of spare infrastructure and the accumulation
of inventory to alleviate supply disruptions.
- U.S. energy independence is not attainable. Policy must therefore
focus on increasing the number of energy suppliers, the kinds of energy
consumed, and the efficiency with which energy is used. The effort
should include renewable and non-conventional forms of energy, as
well as conventional fuels, while recognizing that even a doubling
of renewable fuel supplies by 2020 could result in renewables having
a lower share of the market than today. Oil supply-side policy should
take into account the danger of relying on Middle East producers for
all of the worlds spare capacity without also bolstering strategic
stockpiles and reviewing rules for their use.
- Persistently tight crude oil markets highlight the concentration
of resources in the Middle East Gulf region and the vulnerability
of the global economy to domestic conditions in the key producer countries.
The Gulf nations have one major assettheir oil and gas reserves.
They, like Russia, Mexico, Indonesia, Nigeria, Venezuela, and some
other oil-producing nations, depend heavily on hydrocarbons to support
their citizens. If the current regimes in the Gulf cannot deliver
a better standard of living for rapidly increasing populations, social
upheaval could result, and anti-Western elements could gain power.
Similar concerns exist with respect to some other oil-producing countries
outside the Gulf.
- Energy policy has underplayed energy efficiency and demand-management
measures for two decades. It is clear that vigorous demand management
could significantly lower the volume of energy required for economic
growth. Demand curbs could apply to residential, commercial, and industrial
uses, but they are likely to bring the greatest and fastest benefits
in the core transportation sector.
- The instruments available to deal with energy-supply disruptions
are increasingly inadequate to the tasks they need to manage.
To date, the keystone to managing emergency supply disruptions has
been the Strategic Petroleum Reserve. The International Energy Agency
and its policies, including building of strategic reserves of crude
oil and petroleum products and mechanisms to share available supplies
in times of disruption, play an important role, as well. But this
program addresses yesterdays needs. IEA members oil consumption
has stagnated, while demand has grown rapidly outside, causing the
agency to lose the critical mass necessary for managing a future shortfall.
The size and effectiveness of the ninety-day cushion mandated by the
IEA also needs to be reexamined, as does management of the SPR, particularly
by bringing in modern financial tools to help build the reserve with
minimal impact on government budgets. Finally, what constitutes an
energy supply shortfall needs to be redefined in light of changes
in the structure of the global oil market.
- The United States needs to articulate a new vision of how best
to manage international energy interdependence, one that promotes
market transparency and fair distribution of gains from increased
trade and investment. Fundamental information about market trends
is often unavailable. Energy producers and consumers need to find
ways to build common institutions. Unless the U.S. government provides
leadership in modernizing market and investment structures, there
is a clear danger that others will take the reins and develop institutions
that run counter to U.S. interests.
STRATEGIC POLICY CHOICES
For two decades, the United States has gone without a serious energy
policy. In the past, such complacency about energy could be justified
because world supplies appeared to be indefinitely ample. The myth of
plenty was reinforced by the enormous gains that were made as market
forces were allowed to work, as regulations and controls were eliminated,
and as energy prices fell in real terms across the world. These gains,
in turn, allowed U.S. leadersboth Republican and Democraticto
take a minimalist approach supported by the comfort of consensus politics
that reflected an avoidance of strategic choices. From the perspective
of this Task Force, there is no escaping the fact that we are reaching
the beginning of an extensive period of sporadic supply shortages and
periodic price hikes in the United States and in other parts of the
world. This new situation requires a reevaluation of U.S. policy approaches.
The United States faces three policy paths: first, continue the easy
approach of "muddling through" with marginal Strategic Petroleum
Reserve management and complete free market solutions; second, take
a near-term, narrow approach by expanding supply to ensure cheap energy
while enduring conflict with interest groups; or third, develop a comprehensive
and balanced energy security policy with near-term actions and long-term
initiatives addressing supply-side and demand-side policy instruments
and diversification of energy supply resources that enables the United
States to escape from a pattern of recurring energy crises.
Taking the Easy Approach
Clearly the path of maintaining the status quo of no energy policy is
by far the easiest short-term option. This is obviously the path of
least resistance. Under such an approach, very little initiative would
be needed and could be limited to a very circumspect focus: reviewing
the size and mechanisms associated with the SPR and its coordinated
use with other countries in the International Energy Agency. This limited
policy would dictate that the United States simply muddle through any
portending crisis that might occur by reducing the pain of such an actual
event through the use of emergency measures at the time of the event.
It is a path that could readily be chosen for two reasons. First, there
is the ever-present hope that the market, left to its own devices, will
eventually correct itself and overcome current supply problems. Secondly,
history seems to justify this approach. Major oil disruptions with serious
consequences seem to occur only every decade or so, it can be argued,
seemingly limiting the costs of doing nothing. Electric power shortages
will eventually get sorted out, and in any case states rather than the
federal government bear the brunt of citizens claims. This approach
obviates the need to tackle the difficult political issues that would
have to be resolved to forge an energy policy consensus in Congress.
No comprehensive policy means Congress does not have to make the compromises
required to enact the legislation to backstop a more effective, comprehensive
One clear benefit of this approach is that the short-term costs to
the consumer would be limited and that no hard sacrifices would have
to be made. The costs to U.S. taxpayers seem minimal and indirect and
in any event they can be postponed. Consumers have the prospect of the
market assisting them yet again in achieving low energy costs. Some
of the real costs, such as the high-cost U.S. military presence in the
Middle East, are already accepted and forgotten by the public.
But the problem is that there is overwhelming evidence that there will
be no "free lunch" for taxpayers. A disruption might well
occur at a time when the mechanisms for dealing with it have become
outmoded, too narrowly confined to too narrow a segment of the world
community to make a difference. And meanwhile, the market volatility
of the past few years may be a precursor of much worse to comea
roller coaster of prices confusing the investment climate and impeding
the marshaling of capital required to overcome supply obstacles whose
emergence triggered the new critical state to begin with.
Under this scenario, the United States remains a prisoner of its energy
dilemma, suffering on a recurring basis from the negative consequences
of sporadic energy shortages. These consequences can include recession,
social dislocation of the poorest Americans, and at the extremes, a
need for military intervention. Moreover, this approach leaves festering
the conflict between rising energy demand and its potentially devastating
impact on the global environment.
Taking a Supply-Side Approach
Another easy-to-digest approach would be one that focuses predominantly
on supply-side solutions. A supply-side perspective is attractive because
it offers some eventual reprieve from the negative impacts of energy
shortages but with little or no direct cost or sacrifice to the average
American. A supply-side approach would aim to increase the amount of
land available in the United States and around the world for resource
exploration and exploitation and offer whatever tax or other incentives
would be needed to stimulate greater investment in energy assets. The
Task Force agrees that the supply side is an essential focal point of
any workable policy solution. Indeed, the Task Force recommendations
incorporate a number of supply-side options, including both convention
and non-conventional fuels. But the Task Force does not endorse an exclusively
supply-side approach for a number of reasons.
To begin, the costs of this policy are that it almost certainly will
bring its designers into conflict with public interest groups, especially
those that support environmental protection and land management. This
will create an atmosphere where the American people might feel forced
to make a difficult choice between a cleaner environment or ample energy
supplies. Partisan politicians are already driving this perception by
comments in the media or through partisan bills in Congress. But no
such choice might be required over the long term if a more integrative,
comprehensive approach were to be chosen. Environmental protection and
energy policy do not have to be de-coupled, but they can be integrally
linked through smart policy choices.
Another problem with a supply-side approach is that it creates the
impression that cheap energy is an inalienable right and is available
in the very near term. This creates an incentive to greater consumption
that is not likely to be sustainable and will eventually net us back
to shortages and price volatility once again.
Taking a Comprehensive Approach to Energy Security
Thus, it is the view of this Task Force that only by forging a comprehensive
energy policy can the United States escape from a pattern of recurring
energy crises. It is a tenet of the Task Force that a workable and comprehensive
energy policy requires a balance of supply-side and demand-side policy
instruments if it is to attract a practicable operating congressional
majority in the United States. Such a policy would favor diversification
of energy supply by fuel and by source.
The recommendations of this Task Force represent its best attempts
to outline a more coherent and comprehensive outlook for a long-term
policy initiative that also takes into account immediate steps. Thus,
the recommendations contained in this report are intended to be considered
as a whole. Outlined supply-side options require simultaneous pursuit
of the demand-management instruments enumerated by the Task Force. Combining
them provides a powerful mechanism for enhancing the energy security
of American citizens.
By way of one simple example, it might well be the case that enhancing
exploration and exploitation of hydrocarbon resources of the North Slope
of Alaska might well uncover new resources that could substantially
reduce U.S. dependence on imports. But the Arctic National Wildlife
Reserve is unlikely to achieve needed support for permitting the access
of companies to its exploitation in the absence of strong demand-side
measures. As the report indicates, demand-side measures could, alone,
have even greater and less costly an impact on Americas medium-term
balance of fundamentals than a supply-side only policy. And a combination
of the two, of new supplies and of lower demand, in all likelihood provides
a more durable solution.
A truly comprehensive policy may well provide the kind of balance and
compromise that are consistent with much of Americas political
history. However, any comprehensive plan is likely to require confrontation
with other policy objectives that have deep constituencies. In some
measure, concessions will have to be made that will impinge on certain
local environment goals, states rights, Middle East policy, economic
sanctions policy, Russia policy, and hemispheric and international trade
policy. Making compromises could be politically painful and will require
sustained leadership from the highest levels of government.
But the benefits will be quite real. The comprehensive approach could
minimize the negative consequences of a disruption in any particular
fuel and help shield the American consumer from the painful effects
of the cyclical nature of the energy business. It might allow us to
reduce military spending down the road and to create export opportunities
for American firms through the development of clean energy technologies.
It might also allow us to experience sustained economic growth but without
perilous environmental consequences.
The Task Force offers a detailed discussion of the components
of a comprehensive approach with elaboration about the policy tradeoffs
required for such an initiative.
STRATEGY, RECOMMENDATIONS, AND ACTION PLAN
A Strategic Vision For The Future
To ensure Americas well-being and economic prosperity in this
new era of energy constraints, the United States must have a strategic
energy policy predicated on a clear vision of the requirements of energy
security. This vision must reflect domestic economic and environmental
considerations, as well as geopolitical trends and security imperatives.
It is vital for the United States to assure stable and transparent international
energy markets that provide prices which foster economic growth. It
is also in the strategic interest of the United States to assure that
appropriate national and international mechanisms are in place to prevent
disruptions in energy supplies where possible, and to manage efficiently
and equitably any disruption that might occur. To this end, the United
States should promote a global network of arrangements that protects
against disruption, while securing equitable mechanisms for burden-sharing
Given the magnitude of the potential threat represented by global climate
change, it is equally in the strategic interest of the United States
to identify and implement cost-effective measures at home and abroad
to stabilize the atmospheric concentration of greenhouse gases at levels
that will not lead to catastrophic climatic change.
Many different constituencies within the U.S. government will need
to work together to develop a unified and integrated energy policy framework
with well-defined and orchestrated goalsa policy that will address
not only todays energy bottlenecks, but also will seek to provide
affordable, clean, and reliable energy supplies five to fifteen years
into the future, in order to underpin long-term economic growth in an
environmentally acceptable manner and to promote the security of the
United States and its allies.
Strategy is about making choices among competing goals. In reaching
the appropriate balance, U.S. energy policy must take into account the
fact that the vigor with which environmental goals are pursued will
affect the costs of energy supplies. Equally, the policy needs to consider
that the vigorous pursuit of market-oriented solutions can diminish
the level of consumer and general economic protection from the negative
effects of price volatility. Finally, the goal of affordable, clean,
and reliable energy supply places some constraints on and is influenced
by U.S. diplomacy and strategic policy.
The Task Force developed a broad consensus on the following strategic
goals for the nations energy policy:
- Protecting and promoting long-term diversity of affordable energy
supply for sustained global economic growth. Diversity refers both
to the mix of energy sources and the geographic origin of that energy.
The priorities established among fuels should take into account environmental
objectives, fuel efficiency, and national security considerations.
- Promoting energy end-use efficiency as a near-term approach to
meeting economic, security, and environmental goals.
- Providing adequate safeguards, both at home and abroad, against
energy supply disruptions and against manipulation of markets by any
party, state or private.
- Promoting market forces wherever and whenever possible, while acting
to ensure order in case of market failures or severe shortfalls or
accidents. Market failures can involve interference in trade flows
by private or state-owned entities and actions by adversaries. They
can also involve flaws in regulatory structures, including environmental
- Creating a stable, competitive, and predictable investment climate
to ensure that energy resources and infrastructure expand to meet
the growing needs of the worlds population in a manner that
safeguards the environment, promotes consumer needs, and enables U.S.
companies to operate on an even playing field.
- Encouraging competition in the United States and abroad, both to
the benefit of U.S. consumers and U.S. companies.
- Ensuring that all citizens, and particularly less affluent Americans,
have access to reliable and affordable basic heating fuels and electricity
when markets fail to serve this critical function.
The recommendations of the Task Force are divided into two sections:
The first comprises actions to be considered in the very short term
to assure that appropriate mechanisms are in place to deal with potential
supply disruptions and to buffer the economy from adverse impacts of
price volatility. The second set of recommendations is longer term in
nature. The first set of recommendations concerns action items designed
to provide the government with "breathing space" in case of
shortfalls or emergencies. The second set concerns a framework for dealing
with the challenges of creating new supplies and ample capacities along
various linked global energy supply chains, while also preserving and
enhancing the human habitat.
1. Deter and Manage International Supply Shortfalls
Recent oil market-price volatility has been driven by a number of complex
factors. However, three key drivers continue to fuel upward pressure
on prices: OPEC policy and the organizations lack of spare productive
capacity; the policies of Iraq and concerns about the reliability of
its U.N.-monitored oil exports; and fears of a possible flare-up in
the Arab-Israeli conflict. These factors have created uncertainty in
markets that has at various times outweighed considerations of immediate
market supply availability, fueling speculation and pushing prices above
$30$35 a barrel at various times in recent months. Although
these situations cannot be solved overnight, certain steps could be
considered to ameliorate their negative impact on oil market stability.
- Develop a diplomatic program ensuring GCC allies remain prepared
and willing to maintain stable prices to promote global economic growth
and also to fill any unexpected supply shortfalls in times of turmoil
in the oil markets, whether created by accident or by the adverse
political actions by any producing nation. The vast majority of
all unused, spare oil productive capacity is located in Saudi Arabia
and the United Arab Emirates. It appears that Kuwait might soon be
added to that list. Saudi Arabia has over 1 million b/d of spare sustainable
capacity and considerably more surge capacity that could be brought
online for several weeks in a crisis. The UAE has some limited spare
capacity of several hundred thousand barrels a day. Kuwait might soon
have a similar amount. These are all very important countries for
the United States, with a fundamentally positive attitude toward cooperation
and support, and with the only meaningful spare production capacity
in the world. They all deserve being cultivated as special priorities
of U.S. policy.
Over the past year, Iraq has effectively become a swing producer,
turning its taps on and off when it has felt such action was in
its strategic interest to do so. Saudi Arabia has proven willing
to provide replacement supplies to the market when Iraqi exports
have been reduced. This role has been extremely important in avoiding
greater market volatility and in countering Iraqs efforts
to take advantage of the oil markets structure. Saudi Arabias
role in this needs to be preserved, and should not be taken for
granted. There is domestic pressure on the GCC leaders to reject
cooperation to cool oil markets during times of a shortfall in Iraqi
oil production. These populations are dissatisfied with the "no-fly
zone" bombing and the sanctions regime against Iraq, perceived
U.S. bias in the Arab-Israeli peace process, and lack of domestic
economic pressures. A diplomatic dialogue that emphasizes common
U.S.-GCC goals and programs should be pursued at the highest levels
to minimize the potential for tension over these other issues. Goodwill
efforts such as a U.S. offer to buy oil from spare capacity for
the Strategic Petroleum Reserve when market circumstances warrant
and a willingness to discuss coordinated response to supply emergencies
can be used to offset anti-American sentiment among elite groups
in these countries.
There are, however, some trade-off issues. Working together with
the GCC could restrict some of the U.S. freedom of movement
on security and foreign policy actions that might be desirable with
regard to Iraq or the Arab-Israeli conflict from a U.S. point of
- Prepare for contingencies and gain agreement on coordination
in the IEA in efforts to deal with any attempts by adversaries to
remove oil from international markets. Some European country positions
on economic sanctions against Iraq differ from the U.S. position,
most notably France but also some other IEA countries including Japan.
Still, the IEA must be assured of efficient joint decision-making
in the event of a supply disruption under tight market conditions.
This includes any possibility that Saddam Hussein may remove Iraqi
oil from the market for an extended period of time and that Saudi
Arabia will not or cannot replace all of the barrels. (This is a contingency
that hangs over the market given the ability of Baghdad to continue
to earn revenues through smuggling and other uncontrolled oil exports,
even if it officially cuts off exports that are permitted through
U.N. procedures.) IEA member countries should be in agreement in advance
of such an event on what joint actions it will take. The IEA has been
very successful in recent years in providing definitive and forceful
statements of its intentions, and these statements have improved the
maintenance of orderly markets. The administration needs to ensure
that recent events do not derail this past success.
- Minimize public conflicts with OPEC and other independent oil-exporting
countries but emphasize importance of market factors in setting prices.
The previous administration engaged in public exchanges with OPEC
over the producer organizations decisions to push oil prices
higher. This fueled anti-American sentiment among certain sectors
of the population in the Middle East, lent support to the claims of
Saddam Hussein, and brought pressures on some U.S.-friendly regimes
in the region. The United States needs to prevent aggravation of this
situation by avoiding public discussion of the targeting of particular
price goals and emphasizing common interests of promoting and protecting
growth in the global economy. Such growth maintains demand for OPECs
oil. Rather than specify a price level that is "good for the
United States"which creates an "us-against-you"
mindset on oil-pricing policythe United States should emphasize
as a first line of policy its position that market forces should be
left to set the price of oil. Specific discussion of price should
be kept to private diplomatic discussion whenever possible. Although
short-term political gains can be garnered at home in the United States
for jawboning OPEC, longer term this activity is likely to stimulate
more entrenched positions within that organization, leading to higher
oil prices and eventually wearing down any short-term public relations
benefit inside the United States.
- While moving to defuse tensions in the Arab-Israeli conflict
through conflict resolution and negotiations, maintain energy and
political issues in U.S.Middle East relations on separate tracks.
The timing might not be appropriate for a major initiative to solve
the Arab-Israeli conflict in a comprehensive manner, but it is important
to reduce immediate tensions and violence in that conflict. While
this is a tenet of U.S. foreign policy for other reasons, it can also
be helpful to the oil situation in ensuring that the two issues do
not become linked and are kept on separate tracks. Iraq has been engaged
in a clever public relations campaign to intersect these two issues
and stir up anti-American sentiment inside and outside the Middle
East. The bombing of Iraq by the United States led coalition in February
2001 spurred anti-U.S. demonstrations in support of Iraq in traditional
U.S. allies such as Egypt. Moreover, Saddam Hussein is trying to recast
himself as the champion of the Palestinian cause to some success among
young Palestinians. Any severe violence on the West Bank, Gaza, or
Southern Lebanon will give Iraq more leverage in its efforts to discredit
the United States and U.S. intentions. A focus on the anti-Israeli
sympathies of some Arab oil-producing countries diverts attention
from the repressive nature of the Iraqi regime. Instead it rewards
Iraq in its claim to Arab leadership for "standing up to the
United States for ten years." Israel will assert its right to
defend itself from terrorist or other attacks, so it is important
that both sides of the Arab-Israeli conflict are given a stake in
avoiding conflict and violence. Creating an atmosphere where both
sides are willing to show restraint can be an important goal for U.S.
diplomacy on this issue.
- Review policies toward Iraq with the aim to lowering anti-Americanism
in the Middle East and elsewhere, and set the groundwork to eventually
ease Iraqi oil-field investment restrictions. Iraq remains a destabilizing
influence to U.S. allies in the Middle East, as well as to regional
and global order, and to the flow of oil to international markets
from the Middle East. Saddam Hussein has also demonstrated a willingness
to threaten to use the oil weapon and to use his own export program
to manipulate oil markets. This would display his personal power,
enhance his image as a "Pan Arab" leader supporting the
Palestinians against Israel, and pressure others for a lifting of
economic sanctions against his regime.
The United States should conduct an immediate policy review toward
Iraq, including military, energy, economic, and political/diplomatic
assessments. The United States should then develop an integrated
strategy with key allies in Europe and Asia and with key countries
in the Middle East to restate the goals with respect to Iraqi policy
and to restore a cohesive coalition of key allies. Goals should
be designed in a realistic fashion, and they should be clearly and
consistently stated and defended to revive U.S. credibility on this
issue. Actions and policies to promote these goals should endeavor
to enhance the well-being of the Iraqi people. Sanctions that are
not effective should be phased out and replaced with highly focused
and enforced sanctions that target the regimes ability to
maintain and acquire weapons of mass destruction. A new plan of
action should be developed to use diplomatic and other means to
support U.N. Security Council efforts to build a strong arms-control
regime to stem the flow of arms and controlled substances into Iraq.
Policy should rebuild coalition cooperation on this issue, while
emphasizing the common interest in security. This issue of arms
sales to Iraq should be brought near the top of the agenda for dialogue
with China and Russia.
Once an arms-control program is in place, the United States could
consider reducing restrictions on oil investments inside Iraq. Like
it or not, Iraqi reserves represent a major asset that can quickly
add capacity to world oil markets and inject a more competitive
tenor to oil trade. However, such a policy will be quite costly
as this trade-off will encourage Saddam Hussein to boast of his
"victory" against the United States, fuel his ambitions,
and potentially strengthen his regime. Once so encouraged and if
his access to oil revenues were to be increased by adjustments in
oil sanctions, Saddam Hussein could be a greater security threat
to U.S. allies in the region if weapons of mass destruction (WMD)
sanctions, weapons regimes, and the coalition against him are not
strengthened. Still, the maintenance of continued oil sanctions
is becoming increasingly difficult to implement. Moreover, Saddam
Hussein has many means of gaining revenues, and the sanctions regime
helps perpetuate his lock on the countrys economy.
Another problem with easing restrictions on the Iraqi oil industry
to allow greater investment is that GCC allies of the United States
will not like to see Iraq gain larger market share in international
oil markets. In fact, even Russia could lose from having sanctions
eased on Iraq, because Russian companies now benefit from exclusive
contracts and Iraqi export capacity is restrained, supporting
the price of oil and raising the value of Russian oil exports. If
sanctions covering Iraqs oil sector were eased and Iraq benefited
from infrastructure improvements, Russia might lose its competitive
position inside Iraq, and also oil prices might fall over time,
hurting the Russian economy. These issues will have to be discussed
in bilateral exchanges.
2. Remove bottlenecks and other obstacles to energy supply, both
domestically and internationally
There are few options available to United States to expand supply in
the short run whether or not there are energy supply shortfalls. There
are even fewer options available to reduce short-term demand. Fortunately,
in the area of petroleum, the government has a fairly robust strategic
reserve. But beyond petroleum, the options are severely limited. It
is in this context that the Task Force recommends that the government
consider all possible means of de-bottlenecking supplies and removing
obstacles to delivery of supplies, both domestically and internationally.
Options need to be considered that are unilateral as well as those that
are bilateral, regional, and international or multinational by nature.
In addition, the government needs to establish permanent machinery for
integrating energy policy with economic, environmental, and foreign
policy on a sustained basis.
Virtually all domestically available raw-material energy resources
are being produced that can be. In fact, there are virtually no actions
that can be taken in the short term to increase these home-grown supplies.
However, there are significant obstacles to the production and distribution
of certain petroleum products, gasoline in particular and distillates
to a lesser extent, that have come about due to localized differences
in regulations concerning petroleum product-quality specifications.
These differences are related in some cases to the implementation of
the Clean Air Act in areas with particularly troublesome pollution levels
or because of regional preferences as discussed in the introduction
to this report. These boutique fuels and the "Balkanization"
that they create in the market hinders efficiency and promotes shortfalls
in local markets even when surplus products of other specifications
might be available nearby.
What can be done to deal with Market Balkanization? In general,
the federal government should attempt to find ways to increase its flexibility
in dealing with market anomalies that stem from product specifications
and to increase product standardization so as to reduce the pernicious
impacts of lack of standardization. Such actions involve steps to
be taken both at home and abroad (see below).
- Streamline procedures for waiving product specifications. A
permanent interagency task force needs to be created involving, at
a minimum, officials from the Department of Energy and the Environmental
Protection Agency (EPA) to review the impact of boutique product specifications
on regional markets within the country. It should be empowered to
take action expeditiously to waive or ease mandated specifications
for limited periods of time so that market dislocations can be managed.
There are a number of tradeoffs that need to be considered. Clearly,
the suspension of mandated standards could set back the achievement
of national, regional, or state environmental goals. Waivers of
product standards that are issued in order to enhance supply should
explicit address the continued commitment to the environmental objectives
in the original regulations as well as the temporary nature of the
waiver. In addition, there are potential inequities to industry:
waiving certain standards could "punish" companies that
had invested in new equipment and technology to meet product specification
requirements and who stand to benefit from any increase in prices
for their rare product. Such inequities could be remedied in the
longer term through tax policy favoring those who complete costly
- Establish procedures to grant Jones Act waivers without adversely
affecting U.S. ship owners or U.S. labor. As discussed in the
introduction to this report, U.S.-manufactured petroleum products
are transported mainly by domestic pipeline or by ship but under federal
mandate only U.S.-flagged ships can be used for these deliveries.
For a long time the Jones Act tanker fleet was in long-term decline,
but U.S. flag owners and operators have invested significant amounts
of money to build vessels in the United States to comply with the
Jones Act. When the pipeline is fully utilized and when imports are
inadequate as was experienced last winter in New England, there is
a potential need to waive the Jones Act requirements on the U.S. product
tanker fleet to enable non-U.S.-flagged vessels to carry cargoes between
U.S. ports. As long as the current law exists, the government needs
to send a strong signal that under no circumstances will it provide
a Jones Act waiver on purely economic grounds. This is needed to give
U.S. tanker owners the ability to recover costs associated with U.S.-built
tankers and remove any investment uncertainty. But when the U.S. government
is concerned with logistics issues, officials could signal that waivers
would be granted for foreign-flagged vessels to enter the trade on
an emergency, case-by-case basis when no vessels could be made available
on the spot market by U.S. owners. Similar issues concern labor, which
has an interest in both the manufacture and manning of the Jones Act
fleet. While Jones Act waivers are available, the procedures to accomplish
this are cumbersome and the waivers are rarely granted. Streamlining
procedures for issuing waivers to the Jones Act would facilitate the
elimination of this market anomaly and free up supply within the U.S.
market during severe logistics crises.
- Enact legislation for federal primacy over state regulations,
especially with respect to product specifications and pipeline right
of way. Ways need to be created to simplify the nations
total petroleum product slate in order to reduce Market Balkanization
and therefore ease localized product-supply shortages and related
There is little doubt that establishing the primacy of federal
regulations would remove a significant bottleneck to future regional
supply glitches in this as in other areas. For example, it would
enable the federal government to override the objections of individual
states to exploration and development in offshore acreage. It could
also expedite procedures involved in the siting of new or expanded
energy infrastructure, including new pipelines, refineries, or power
If the federal government wants to make a serious effort to foster
market transparency, facilitate the development of new supplies,
and expedite permitting for new energy infrastructure, legislation
mandating federal primacy over state legislation and regulations
in specific areas should be a very high priority. However, there
are major obstacles to enacting this legislation.
- Federal legislation would almost certainly be opposed by many
states, whose legislatures and elected governors have enacted
product specifications that are different from and at times more
stringent than federally mandated specifications.
- Federal legislation could be challenged as unconstitutional.
- In the case of some boutique fuels, local authorities have
mandated them in order to help their urban areas meet national
Clean Air Act targets or targets of their own that are even more
stringent. Such conflicts would have to be managed by structured
cooperation among the EPA, federal agencies responsible for product
standards, and local officials.
- In efforts to mandate federal primacy, the administration might
well feel compelled to find a middle ground for quality specifications
that are significantly less stringent than what many state governments
would find acceptable. Conversely, if the federal standards were
to be strict enough to assist the most polluted urban areas, product
quality standards and compliance costs would be unsuitably high
and unnecessarily costly for regions with less severe air quality
- Enact legislation to facilitate regional solutions to a variety
of energy challenges. Mechanisms that would be far less intrusive
of the authority of state governments and regulatory bodies could
be created via regional approaches. Unlike legislation mandating the
primacy of federal regulations, the federal government could urge
and facilitate collaborative approaches that would provide federal
incentives for states that decide to work together on regional solutions.
Regional approaches would be far preferable to state-only approaches
in a variety of areas, including larger regional frameworks for mandating
fuel specifications, emissions limits, and for establishing siting
requirements for new energy infrastructure. Regional Councils should
be established and mandated to work in a streamlined manner with federal
agencies including the EPA, the Federal Energy Regulatory Commission,
and the Departments of Energy and Commerce on a variety of permitting
While regional solutions would be less efficient than national
solutions in eliminating bottlenecks to supply, they may in the
end be more readily acceptable, since they would lend the appearance
of greater local control.
- Investigate whether any changes to U.S. policy would quickly
facilitate higher exports of oil from the Caspian Basin region.
Generally speaking, all oil-producing countries outside of OPEC are
producing at maximum rates. There are a few exceptions where political
problems block immediate shipments, such as pipeline problems in Colombia,
where guerrilla warfare against the government extends to attacks
on oil installations. Also included in this category are labor unrest
and investment disputes that slow the progress of developing and producing
oil in Nigeriaor Norway, for that matter. The U.S. government
should assist with resolution of these problems, but a quick resolution
However, the exports from some oil discoveries in the Caspian
Basin could be hastened if a secure, economical export route could
be identified swiftly. It is unclear how much oil could be thereby
released: estimates range from a relatively insignificant 10,000
b/d to well over 100,000 b/d. To this end, the administration should
review policies toward this region. The option exists to downplay
diplomatic activities that dictate certain geopolitical goals for
specific transportation routes for Caspian oil in favor of immediate
commercial solutions that may be sought by individual oil companies
for short-term exports of "early" oil, including exports
through Iran. These geopolitical goals can later be articulated
for longer-term pipeline routing questions into the next decade.
The administration, of course, needs to take into account the
tradeoffs of this policy shift. Some European companies might choose
to send more oil via Iran. U.S. companies may seek case-by-case
waivers to send oil through Iran that would otherwise not be produced,
thus effectively forcing the United States to consider signaling
a change in its policy toward Iran. In any event, the United States
might find other reasons to improve relations with Iran. For example,
Iran could serve as a regional counterweight to Iraq. A shift in
pipeline strategy to favor commerciality might also encourage some
regional Caspian players to seek a closer relationship with Russia
in order to facilitate the movement of oil through Russian routes.
Russia may interpret this policy as one showing weakness of resolve
and a green light to press Georgia and other neighboring states
to compromise their sovereignty in favor of Moscows interests.
Still, it remains unclear whether these potentially adverse developments
might occur regardless of U.S. policy toward pipeline routes. In
general, for strategic reasons related to U.S.-Russian relations,
the United States might want to move the Caspian region into a zone
of cooperation with Russia, instead of a zone of competition or
confrontation. (It might seek this, for example, in order to jointly
counter the rise of radical, Islamic militant elements in the region).
This arena of discussion could thus start with energy issues and
later move on to other issues. Finally, U.S. insistence on the longer
and costly Baku-Ceyhan pipeline route could jeopardize a more comprehensive
approach toward the export of the Caspian Basins resources
and would put at risk a more commercial approach.
3. Take a Fresh Approach to Building and Maintaining National
Strategic and Commercial Crude Oil and Petroleum Product Inventories
There is no doubt that the most important mechanisms for dealing with
supply shortfalls are inventories of crude oil and petroleum product
held both by the government and by commercial enterprises. Inventories,
especially strategic stores, provide the nations first line of
defense against a supply shortfall and therefore warrant immediate attention.
Nor is there any doubt that the level of crude oil and seasonal product
inventories has become a significant domestic political issue. For example,
there was a strikingly widespread consensus nationwide when the Northeast
Heating Oil Reserve was created last year, although there were questions
raised about whether this should be managed by government or by industry
(with the latter through tax incentives). With respect to inventories,
the Task Force has a series of recommendations.
- Review the size and financing of the Strategic Petroleum Reserve.
The SPR represents the best means of replacing lost barrels of crude
oil. Its ideal size relative to the size of imports has not been officially
reviewed in two decades. Meanwhile, the SPR has declined both as a
share of imports and in absolute size since the mid-1990s. At its
peak, the SPR covered more than eighty days of imports; today it covers
under fifty days. The administration should, as a high priority, review
what the ideal size of the reserve should be, given the fundamental
changes in the nature of disruptions that the country confronts. The
review should take place both as a national, stand-alone issue and
in conjunction with an international review. (See the section on longer-term
issues, below.) For example, the administration may choose to make
its decision about the ideal size of the SPR in consultation not only
with other IEA members, but also in consultation with key OPEC producer
countries. The administration should also review how it should finance
reserve additions. Ideally this might be accomplished through direct
budgetary allocations. At a minimum the government should aim to fill
all of the nearly 700 million barrels of capacity it currently has
It should be recognized that one problem with trying to refill
the reserve at this time when markets are strong is that any purchases
made by the U.S. government (or other consuming countries) would
add to the current tight supply of international oil markets. Also,
critics of the reserve may argue that it hasnt been necessary
to tap a full draw-down since its creation, arguing against the
need for a full ninety-day supply. Thus, other, more creative measures
might be advised for filling the reserve during times of temporary
market weakness. One option would be to make such purchases through
a bilateral arrangement with a key oil supplier of the United States,
again at a time when markets soften. The purchases could be designed
to help an oil-producing ally maintain oil sales during a time of
market weakness. Another would entail buying oil that an OPEC country
might otherwise have held back from the market as part of its market-maintenance,
production-quota agreement. Such arrangements would have the benefit
of demonstrating U.S. support for positive consumer-producer relations.
Such a signal might improve relations between the United States
and important foreign oil suppliers.
Efforts have been made in the past to "lease" unused
production from Saudi Arabia at prices below the fair market value
for the oil to be put in cheaper storage in the United States. These
initiatives were rejected by Saudi Arabian officials who did not
want to produce the resources and "lease" them for nominal
amounts such as $2 a barrel. A plan that provided funds for the
United States to pay "fair" market value to acquire unused
Saudi or other producer-country oil for the SPR in times of market
weakness would highlight the commitment of the United States to
reciprocal relations, potentially easing tensions regarding conflicting
oil price goals.
- Establish professional criteria for managing the SPR. A
significant amount of controversy arose last year concerning President
Bill Clintons use of his discretionary authority to lease oil
to the market on a time-swap or exchange basis in order to address
winter heating-oil inventory concerns. The criticism was threefold:
(1) The exchanges reduced the size of the SPR, making less prompt
oil available to manage a future disruption. (2) The SPR should not
be used as a buffer stock but rather to manage severe accidents or
supply emergencies; and (3) The time-swap was badly managed, thus
earning the government far less in interest than it should have. Unfortunately,
perhaps, the governments use of its swap authority in the autumn
of 2000 became associated with a policy that appeared to advocate
that the SPR should be used as a market buffer stock to damp prices
and price volatility. In reality, proactive use of the swap or exchange
authority actually provides the government with an ability to build
the SPR over time and to improve its quality through prudent use of
market structures. It also enables the government to monetize its
crude oil reserves, which otherwise sit idly and unproductively. The
government should look into ways to improve management of the SPR
through the following types of actions:
- Take advantage of the markets forward price structure
to make sure the strategic reserve is strengthened efficiently
over time. Thus, if the market structure were backwardated,
with future prices lower than current prices, the government would
be able to replenish the reserve with more oil than it had leased
on an auction basis. If the market structure were in contango,
with future prices higher than prompt prices, the government could
lease its cheaper spare storage capacity to industry, thereby
also providing revenue to build government-owned reserves at a
later time. (Leasing spare tankage should also be considered separately
by the Department of Defense.) If a government agency did this
on a regular basis, as a standard operating procedure, it would
earn far more than it did in its initial efforts in the fall of
2000 and would have a means to finance a larger reserve.
- There are two objections that can be raised to this, however.
First, there are potential physical limits to using underground
natural salt caverns (salt domes) for storage in this manner without
the need to leach them anew. Second, there are objectionsas
there were in 2000on the ground that using the SPR oil in
this manner reduces theoretically the amount of oil available
in an emergency should one occur. That is a clear trade-off to
be taken into account in policymaking.
- Seek legislative authorization to expand the governments
latitude in implementing SPR exchanges. Professional management
of the SPR would require an expansion of the current limits on
the authority of the government to undertake time-swaps of SPR
crude. Current authority limits such swaps to 30 million barrels
within a specified time frame, but the reserve isnt permitted
to drop below 500 million barrels. The authority for time swaps
could be increased by several-fold.
- Establish Clear Policy for Use of the SPR. The administration
should as an early priority define publicly its general policy for
using SPR crude. It is especially important during times of lost supply
and uncertainty about future supply for the government to damp speculation
that breeds price volatility. For example, in August 1990, when Iraq
invaded Kuwait, the government delayed an announcement about use of
the SPR until January 1991. Had the SPR been used by September of
1990, if for no other reason than to calm markets until supplies could
be fully made up from other sources, the price spike of that autumn
could have been reduced and the likelihood of a recession in 1991
also reduced. The administration should therefore define its position
on the SPR soon. It should provide general criteria for determining
when strategic stocks might be tapped under the Presidents authority,
defining more generally what will be considered an emergency and what
conditions might prompt the President to authorize a time-swap. The
administration should also determine what conditions might prompt
the Department of Energy to either accelerate purchases for the SPR
or to lease out storage space to industry when future and forward
oil price curves encourage this. Finally, the administration should
improve the operability of the SPR. Unlike commercial stocks, the
recent release of the SPR (mostly sweet) crude showed that the industry
isnt fully educated about logistical issues involved in getting
SPR oil into the domestic refining system efficiently. Therefore it
would be prudent to review and highlight the negative experiences
of those who participated in last years exchange program.
It should be noted that clarification of the use of the SPR would
have a couple of additional benefits. It would eliminate debate
or trial balloons to media in the event of an interruption that
meets the clear criteria set by policy. Trial balloons or public
debate often cloud market transparency to the detriment of predictable
price formation and orderly markets. Public articulation of policy
would also eliminate the risk of holding hostage a release of strategic
stocks to the production policy of key OPEC countries.
Coordinate use of the SPR with other IEA countries. It
goes without saying that the United States should coordinate release
of the SPR in cooperation with other IEA countries. This would be
especially important either in the case of a market in which one
or more producer countries intentionally reduces or bans exports
in order to increase prices, or in case of market disruption. Nonetheless,
it should also be recognized that unilateral use of the SPR by the
United States might be criticized for giving other countries that
do not cooperate a "free ride" on the benefits of the
SPR release. The free rider problem may well be an unavoidable consequence
of having and using the SPRotherwise the United States would
have to consult and share decisions about its use, which would also
be risky and questionable.
Coordinate use of the SPR with actions by key producer countries.
One of the unnoticed and less criticized aspects of the use of the
SPR exchange by the United States in 2000 was that it was performed
in a "cooperation" rather than a "confrontation"
mode with producer countries in both OPEC and elsewhere. Only after
the OPEC secretariat and key OPEC members repeatedly stated that
"we have done our part" in easing the market and that
"it is up to the industrialized countries to do their part,"
was the SPR exchange actually triggered. Its timing demonstrated
that in a cooperative mode, use of the SPR could work hand-in-hand
with diplomacy vis-à-vis producing nations. (See next section,
number 4, below.)
- Review tax, accounting, and other factors affecting industrys
incentives to hold petroleum product and natural gas inventories,
with the intent of enhancing inventories before seasonal demand and
neutralizing any adverse impact of current rules.
There has been significant bipartisan support in oil "consuming"
areas of the United States for government-controlled stockpiles
of products and even of critical product components (e.g., ethanol).
There has also been support for state governments mandating
minimum stocks for fuel-switching purposes of certain categories
of consumers, including power plants. The federal government last
year also established the Northeast Heating Oil Reserve. Given the
critical role played by inventories in smoothing out supply shortfalls,
the government should undertake a wholesale review of product inventories
and consider incentives to industry to hold higher levels of inventory
than has recently been the case.
Industry inventories would be an alternative to the federal Northeast
Heating Oil Reserve. Industry generally fails to build inventory
when futures markets are in backwardation; that is, when futures
prices are lower than prompt prices. Industry builds stocks when
markets are in contango and industry expects that future prices
will be higher than prompt prices. Since industry is now managing
inventories on a just-in-time basis, there is a danger that market
structure will not go sufficiently into contango when product builds
are required. Therefore, industry will not have an incentive to
build gasoline stocks in advance of the traditional summer driving
season or heating oil and natural gas stocks in advance of the traditional
winter heating seasons. An alternative incentive could come from
fiscal measures that reward firms that carry seasonal inventory
or penalize firms that do not.
Accounting rules, especially "last-in, first-out" (LIFO)
rules, create year-end changes in inventory in order for companies
to reduce their tax liabilities. The federal government should review
national and state government rules and their impacts on corporate
inventory management positions, with the intent of neutralizing
any incentive on the part of companies to reduce stocks at year-end
when markets do not require rapid de-stocking.
- Encourage states to review minimum inventory for fuel switching
where feasible and also fiscal incentives to industry to build inventories
in advance of seasonal demand increases. Such an effort could
be incorporated into incentive programs for state governments cooperating
with one another on a regional basis. (See recommendations for immediate
actions, above.) States have traditionally made the issue of backup
supplies part of their regulatory frameworks. These requirements have
generally faded in the age of deregulation and should be reexamined.
4. Develop Mechanisms for a New National Approach to Energy
If the energy policy goals of the country are to be articulated coherently
and implemented effectively, steps need to be taken to build as wide
a consensus politically as possible, especially if the tradeoffs among
conflicting internal objectives of policy are to be successfully worked
out. This means that constituencies must be brought together at several
levels: within the federal government administration, between the administration
and Congress, between the federal government and state governments,
and between the federal government and the public at large. In order
to further this end, as series of steps should be considered:
- Create an appropriate interagency process to articulate and
promote energy security policy and integrate energy policy with overall
economic, environmental, and foreign policy. For energy policy
to be integrated with overall economic policy, environmental policy,
and foreign policy, it needs to be vetted and articulated through
a "permanent" interagency process that brings those responsible
for these areas together. The Bush administration has moved rapidly
in this direction through the creation of the White House Energy Policy
Development Group headed by Vice President Dick Cheney. That group
appropriately includes representations from the Departments of Energy,
Interior, Commerce, Treasury, and State as well as representation
from the Environmental Protection Agency and the FEMA (Federal Emergency
Management Agency). As this process unfolds, the administration should
find ways to establish a permanent framework for articulating energy
policy, perhaps including representation from the Department of Defense
as well. The secretary of energy should then be empowered to carry
forward and implement the policy recommendations of the Policy Development
- Review and streamline the allocation of authorities within the
federal government, especially in areas of land management and energy.
The federal government has been institutionally hampered in its ability
to articulate and implement a coherent national energy policy by the
allocation of disparate and overlapping authorities across government
departments. For example, the fact that land management for resource
exploitation is managed by the Department of the Interior rather than
the Department of Energy has created inefficiency in government decision-making
that should be reevaluated. The White House Energy Policy Development
Group should, in the process of its work, review such discrepancies
in authority and make recommendations for streamlining them.
- Convene a National Energy Summit to help develop a national
consensus on energy policy objectives and means. The administration
should use whatever mechanisms are at its disposal to educate the
public concerning its views on how the nations energy problems
can be dealt with. It should use similar mechanisms to forge the kind
of domestic consensus that is likely to be required if its energy
policy goals are to be implemented. One possible way to do this is
by convening a nonpartisan, multi-industry summit, possibly chaired
by the vice president, to review its national energy plan as developed
by the Energy Policy Development Group. The summit should be designed
not only to vet energy proposals to as wide a group of responsible
companies and institutionalized interest groups as possible, but also
to elicit proposals from those represented.
- Develop a Strategic Communications Plan on Energy Security Policy
in order to educate the public on the difficulties of achieving short-term,
unilateral solutions to the nations energy dilemmas. The
administration should conduct a thorough survey of constituency and
advocacy groups within the country in order to develop initiatives
concerning ways to build a national consensus on energy policy. It
should unfold a strategic communications plan with the goal of gaining
support of environmental groups and congressional leadership on whatever
tradeoffs may be involved in its energy policy. For example, it should
indicate its resolve to produce cleaner fuels if in its judgment it
is also recommending temporary delays in new restrictions (such as
sulfur production) or other environmental goals for compelling economic
and national security requirements.
Long Term Policy Initiatives
1. Review International Approaches to Build, Maintain, and Use
Strategic and Commercial Crude Oil and Petroleum Product Inventories
The administration should, in parallel with a review of our national
approach to strategic and commercial petroleum and petroleum product
inventories, conduct a review of other approaches both in the International
Energy Agency and by non-IEA members. The United States needs to work
together with other oil consuming and importing countries to assure
that there are adequate strategic stockpiles available globally to manage
future disruptions, beginning with a new definition of "adequate."
Two significant problems need to be reviewed and dealt with:
- First, the entire structure for managing supply disruptions is
built around the notion that physical shortfalls can be measured independent
of prices and in volumetric terms alone. The assumption that release
of global strategic stocks could be triggered by a volumetric shortfall
that was to be coordinated by an oil supply-sharing facility is outdated.
It was predicated on a world of regulated trade flows that disappeared
with market deregulation in the 1970s and 1980s. Instead, planning
needs to be based on todays fast-paced global market and on
the sorts of disruptions that are most apt to face us now, rather
than those that were most likely in 1975.
- Second, the mechanisms for dealing with disruptions are built almost
exclusively within the institution and membership of the IEA. IEA
or OECD countries dominated global oil trade when the IEA was founded
in 1974. Today its share is rapidly falling. Between 1985 and 2000,
East Asian countries alone increased their share of global oil consumption
from less than 20 percent to more than 27 percent, as the region represented
80 percent of the total increase in worldwide demand. As IEA oil use
continues to stagnate and as developing countries increase their individual
oil consumption and share of global consumption, mechanisms need to
be developed to encourage these high-demand growth countries to build
their own strategic stockpiles. They also need to participate in the
global planning that occurs within the IEA.
- Enhance and modernize IEA strategic stockpile policies in
light of the changed international market, taking into account situations
that technically fall short of a supply disruption as well as different
regulatory authorities among IEA members.
The IEA should initiate a strategic review related to the size
of strategic stockpiles as well as their management. The review
should recognize that the divergent approaches taken within the
organization to strategic stock management make harmonization difficult.
This is especially true for the relationship between the European
Union, with its requirement that refiners should hold stocks related
to seventy-five days of consumption (sixty-five days for non-refiners)
and the IEA, with its requirement that countries cover ninety days
of net imports. It should also try to find ways to harmonize the
differences that exist between those countries that hold government
strategic stocks (essentially the United States, Germany, and to
some degree Japan) and the others, which require inventories be
held by companies.
Harmonization of plans within the IEA need to take into account
the following issues, among others:
- Situations requiring international coordination of stock release,
short of a full supply disruption.
- The differences between those that hold crude oil stocks and
those that hold products, given the fact that release into the
market of crude oil supplies affects markets indirectly, while
release into the market of products, affects markets directly
- Differences between those with authority to use strategic oil
on an exchange basis (essentially only the United States) and
those permitted to use it only in an emergency. Efforts should
be made to harmonize authorities in case decisions are made to
release stocks in situations not covered by a shortfall that is
fully defined as a supply disruption.
- Encourage key non-IEA countries (e.g., China, India, Brazil)
to develop strategic stocks.
The International Energy Agency was created a quarter of a century
ago as a mutual-protection society of OECD countries. Designed as
a political grouping to prevent any oil-producing countries from using
oil exports as a political instrument to influence the foreign policies
of IEA members, the IEA was formed at a time when the OECD countries
dominated global energy consumption. Today it excludes the most rapidly
growing energy-consuming countries in the worldChina, India,
and Brazil among them. And, as a result, these new consumers become
vulnerable economically in times of disruptions as well as vulnerable
potentially to political pressures of producers.
Part of the problem relates to free-riding. Countries that do not
belong to the IEA can and do free-ride at present. Any country that
releases stocks or undertakes policies to reduce its exposure to price
shocks will bear the costs of that action but the benefits accrue
to all consumers including the large consuming countries that are
not members, such as China, India, Pakistan, and Brazil. But part
of the problem relates to what countries with rapidly growing oil
demand and imports should do for their own economic well-being and
to prevent spillover of economic problems they might encounter to
the large industrial countries. Moreover, at present some IEA members,
Japan in particular, are working bilaterally with neighboring states
to do this.
- Review IEA membership, taking into account the desirability
of creating a new class of associated members who could be encouraged
to hold minimum stocks and also benefit from direct participation
in other IEA activities.
Although informal programs to encourage stocking by developing
world countries would have a positive impact, such efforts cannot
replace the more effective tool of centralized coordination with
the IEA. Centralized efforts are needed so that international norms
and standards can be met during a crisis. This would be the case
even if Japan opts to finance such stocking activities by Asian
countries on its own. The United States should initiate a review
of ways the IEA can work with key countries that are not members
of the IEA to encourage them to define their strategic oil stockpile
requirements and to build strategic stocks (or to create minimum
inventory requirements for industry). The IEA should also consider
creating a new class of associated members, who, in exchange for
making commitments to hold minimum stocks would gain direct benefit
from participating in certain IEA activities.
2. Accelerate Demand Management Efforts at Home and Internationally
The United States has trailed other industrialized societies when it
comes to oil-demand management. Most other industrialized countries
have used fiscal policy to curb the growth in oil demand by heavily
taxing petroleum products. While those efforts can be criticized on
numerous groundsas they have been by oil-producing countriesthere
is little doubt about their effectiveness in limiting the exposure of
the economy to oil price shocks and promoting energy efficiency and
conservation. Still, it remains the case in the United States that demand
management has in recent years been the rhetorical stepchild of national
energy policy, even with the implementation of CAFE standards, appliance
standards and tax credits for a range of investments.
Yet it is clear that active demand-management policies could have less
expensive and equally large impacts on the balance between supply and
demand as supply-side solutions. Moreover, it is almost certainly the
case that any supply-side efforts will need to be joined with vigorous
demand-management actions to gain congressional approval as an overall
energy legislative package.
The government should recognize that it has significant impacts on
demand through its regulatory, tax and incentives framework. It also
has a considerable ability to remove distortions in regulations and
to promote market flexibility, with an eye on the impact of its actions
on demand management. With 60 percent of U.S. oil consumption focused
on transportation, the administration should encourage industry and
government investments in technologies to increase the fuel efficiency
of the nations fleet and to stimulate domestic development and
deployment of fuel-efficient vehicles, including gasoline/electric or
fuel cell hybrids. Actions could include the following:
- Take a proactive government position on demand management.
The best way to capture the nations attention on demand management
is for the President to take leadership in mapping out a demand-management
program as part of the nations energy strategy. Follow-up positions
and speeches by the vice president and secretary of energy could specify
the levels of supply savings that are targeted. They should also specify
how these targets can be reached and how demand management can impact
them (for example, with respect to sectors like transportation, residential,
commercial, industrial, and power, and with respect to choice of fuels
such as clean coal, cleaner oil, gas, nuclear, renewable sources,
and new technologies).
- Use federal procurement authority to enhance use of alternative
fuels and develop programs to introduce new efficiency technologies
into federal buildings and nascent transportation technologies into
government vehicle fleets. The federal government has an enormous
impact on fuel choices in the market through its procurement policies.
These policies should be used to invest in alternative fuels, including
ethanol, natural gas and hydrogen, or hybrid vehicles, and they should
incentivize the development of alternative fuel infrastructures. For
example, under most current programs, federal and state agencies have
been purchasing vehicles with flexible fuel use rather than vehicles
mandated to actually use alternative fuels in question or emerging
technology that greatly improves mileage standards. The result has
been the perpetuation of gasoline use and traditional engines rather
than use of alternative fuels or engine designs. This squanders both
the demonstration impact of federal programs as well as the opportunity
to create infrastructures for supply and fueling alternative design
It should be said, however, that the purchase of alternative design
vehicles could be more expensive than conventional vehicles and
might encumber unanticipated repair problems. There are clear cautions
to worry about. Efforts to mandate dual-fired ethanol cars, for
example, to fulfill the alternative vehicle mandates of the Energy
Policy Conservation Act, were little more than bones to domestic
interest groups rather than scientific efforts at promoting alternative
fuels. It is also the case that federal purchasing of a particular
design solution or fuel puts the federal government in the business
of trying to anticipate future market preferences and benefits.
These objections need to be taken into account in designing the
federal governments strategy. But they need not stop the efforts
as outlined. These efforts should be viewed as an investment that
promotes options of significance for energy security.
- Use federal procurement authority to achieve other demand management
goals. For example, review and rigorously implement minimal targets
for mileage standards for the federal automotive fleet, standards
for energy conservation in federal buildings, and other current standards
already in effect.
- Review and establish new and stricter CAFE (Corporate Average
Fuel Economy) mileage standards, especially for light trucks.
There are many good reasons to accelerate efforts to reclassify SUVs
and other vehicles (currently classified as "trucks") as
"automobiles," for the purposes of application of CAFE as
well as emissions standards. For example, mandating CAFE minimum fuel-mileage
standards for light trucks of 25 miles per gallon (comparable level
to four-door automobiles) could save 925,000 b/d of fuel demand. While
the automotive industry has traditionally argued that artificial standards
can weaken its profitability and therefore its ability to maintain
employment levels and investments in competitive vehicles, it is also
the case that such standards can increase their longer-term global
competitive position given other suppliers efforts in this direction.
It must be noted, however, that it takes seven to ten years for the
entire U.S. automobile fleet to turn over. Therefore, changes to CAFE
standards are not likely to have instantaneous results, which is a
good reason to start now. Some tax breaks to consumers who purchase
cars with more favorable mileage could hasten the process of moving
low-mileage cars off the road quickly. Even without government intervention,
hybrid vehicles still could make up as much as 15 to 20 percent of
new vehicle purchases, experts predict. This will contribute to a
drop in U.S. oil demand of 600,000 b/d. Studies show that tax incentives
can hasten and magnify this process.
- Actively promote the development of energy efficient technologies,
including fuel-efficient engine and vehicle technologies to encourage
more efficient worldwide use of scarce oil resources. China alone
is projected to add more than 150 million automobiles to the road
in the next two decades. Efficiency of that fleet has global implications
for oil requirements.
3. Maximize Efforts to Develop Clean Sources of Domestic Fuel
There is no doubt that the United States has a premier energy resource
base. But it is a mature province whose potential exceeds that of many
other conventional resource provinces. In addition, it is physically
incapable of rendering this country energy independent given our extremely
high energy consumption rates. And, during the past twenty years, while
other countries have made more of their resource base available for
energy resource exploration and exploitation, the United States is virtually
unique in removing significant acreage that was once available for these
purposes from energy development.
The United States requires a better-balanced and more integrated approach
to maintenance and enhancement of the environment and energy-supply
objectives. Twenty years ago, nearly 75 percent of federal lands were
available for private lease to oil and gas exploration companies. Since
then the share has fallen to about 17 percent. And a significant share
of the remaining 17 percent is for all practical purposes unavailable
The Bush administration made vocal campaign promises about one major
potential oil and gas provincethe coastal plain of the Arctic
National Wildlife Refuge. (It also supports a pipeline to bring some
49 trillion cubic feet of Prudhoe Bay gas reserves to the lower forty-eight
states, a proposal that is designed to expand opportunities for additional
gas exploration in Alaska). As the Task Force prepares its proposals,
it cautions that unless the administrations proposals to permit
exploration in the ANWR take into account other aspects of policyincluding
other aspects of land management as well as environmental policy and
demand-management policythe administration could seriously erode
support for its ANWR proposals.
The Task Force recommends consideration of the following with respect
to domestic resources and energy use. These recommendations recognize
that at present domestic drilling is constrained by many factors other
than availability of land. They also recognize that sound energy policy
must begin at home since, from three perspectives, it is desirable to
foster domestic supply: national security, balance of payments, and
the comparative advantage of American industry. Even so, lack of equipment
and personnel, in particular, will curtail the expansion of domestic
and international supplies for a number of years.
A. Oil and Natural Gas
- Accelerate completion of the U.S. oil and gas reserve inventory,
as mandated by Congress, highlighting restrictions on resource development.
Such an inventory needs to be completed soon and well before any plan
is adopted to develop particular domestic resources. The secretary
of the interior has been mandated to conduct an inventory of all onshore
federal lands, identifying reserve estimates as well as restrictions
on resource development on them. It is critical that this inventory
be completed soon and well before any plan is adopted to develop particular
domestic resources. It could well turn out, for example, that the
estimated 300 trillion cubic feet of natural gas resources in the
Rocky Mountain Overthrust could be a more appropriate and cost-effective
target for industry exploitation than the distant resources of the
ANWR. The virtues of completing the inventory first are that it would
provide an information base on which intelligent decision-making concerning
land availability can be made. It would also provide a more scientific
base for any tradeoffs than need to be accommodated with conflicting
environmental and other land-use policies. Additionally, expanding
this national effort to an international one that includes Canada
and Mexico as well could be an important step in delineating a hemispheric
- Undertake an accelerated and complete review of tax and fiscal
policy as they impact oil and gas development in the United States,
taking into account the competitive position of the U.S. fiscal regime
as compared to international conditions, in order to attract more
capital to the sector. While the United States has a mature
oil and gas resource base, it also has one of the least efficient
tax regimes in the world when it comes to oil and gas development.
The main direct tax is the royaltywhich has a well-understood
negative impact on development and field abandonment. Changes to federal
corporate taxes, especially during the 1980s, further exposed the
oil and gas industry. The Alternative Minimum Tax has also posed a
major problem to development of supply in that its deters activity
in a cyclical downturn. Industry has been adverse to a tax reviewexcept
with respect to royalty holidaysbecause of fear that it could
lead to even more restrictive policies (especially during a period
when the exploration and production sector is reaping record taxes).
Yet any effort to enhance domestic supply must be based on what makes
for sensible fiscal incentives. The administration should be encouraged,
therefore, to undertake this fiscal review as it also reviews its
land management policies.
- Create an appropriate comprehensive statutory framework for
electricity restructuring and for reestablishing a capacity cushion
for the nations power supplies. A new framework needs to overcome
the adverse impacts of todays highly fragmented regime, which
has reduced the reliability of the U.S. power grid and impeded investment
in new generation and transmission capacity. This is a key
conclusion highlighted by the regional and national impacts of the
California power crisis on electricity supplies and the economy. The
patchwork nature of twenty-five separate state legal and regulatory
frameworks has reduced the reliability of the transmission network
and impeded investment in new generation and transmission capacity
as these jurisdictions have instituted some form of electricity deregulation
or restructuring. The uneven landscape of state-by-state deregulation,
and growing competition for power supplies between regions, have produced
a climate of investment uncertainty that is inhibiting system upgrades
and expansion at a time of dramatically increasing electricity demand.
Thus, states must work together with each other and with the federal
government to ensure that regional power and transmission markets
are efficient and competitive. State and federal authorities must
also provide for the continued reliability of the interstate bulk
power grid. The challenge will be simultaneously to do the following:
meet increased demand for reliable and high-quality electric power;
create a favorable investment climate to expand the power infrastructure
to meet demand; expedite the development of new infrastructure; increase
the efficiency of power generation and distribution; and, at the same
time, mitigate the ongoing impacts of power generation, distribution,
and use on the environment.
- Work expeditiously to improve the statutory framework for
approvals of the siting of power generating plants, as well as transmission
and distribution infrastructure. This is likely to require
an unprecedented level of cooperation between the federal, state,
and local governments, as well as environmental, consumer, and industry
stakeholders. Only the federal administration can provide the focus
and leadership such an effort requires. The administration thus needs
to consider incentives to states and localities to work together to
encourage rapid construction of the required infrastructure.
- Evaluate the need for incentives to stimulate the introduction
of new technologies into the power marketplace, including distributed
generation and co-generation. Working with industry partners,
the administration should work to substantially increase investment
in technologies that enhance the efficiency, reliability, and quality
of the power transmission and distribution infrastructure. Policy
should also focus on reducing the business, regulatory, legal, technological,
and institutional barriers to the market introduction of new electricity
technologies, such as distributed generation and co-generation. And
the administration should continue to promote research and development
for alternative sources of power and work with industry to help stimulate
deployment of these technologies.
- Work with state regulators and regional authorities to allow
and incentivize companies to offer long-term contracts for electric
power and to encourage them to hedge price risks associated
with such contracts to maximize the part of the market that will not
be susceptible to large shifts in the spot market price. The use of
long-term contracts should help protect consumers from wild swings
in electricity rates when a shortage occurs in markets. The downside
is that companies who arent successfully hedged can be forced
into bankruptcy by the margin call on adverse market swings or by
an unwise hedging program. Experience shows that even the most expert
traders can make these errors. Thus, the institution of long-term
contracting is only a partial solution.
- Encourage the development of power capacity cushions on a
regional basis. For example, it could consider providing incentives
to system operators to buy stand-by power at auction to cover anticipated
energy level needs, in order to encourage construction and maintenance
of spare capacity. The guaranteed market and forward sale of stand-by
power will encourage generators to build up incremental capacity and
to maintain spare generation capacity that can be used to smooth out
market disruptions or anomalies. Although this will mean that overall
costs for electricity might be slightly higher on a long-term basis,
it will prevent sudden sharp rises that can be harmful to the public
- Recognize that many of the policies and actions that are needed
to meet increased demand for power generation are power source-specific.
- Assure that regulations protect open access to electricity
generated by new, nontraditional fuel sources. This action
is necessary to guarantee that new sources cannot be locked out of
the transmission system by suppliers using traditional fuels.
C. Natural Gas
- Apply strong leadership to develop a coherent, comprehensive
strategy promoting efficient development and use of the nations
natural gas resources. National policy can be especially effective
in enhancing market efficiencies and in accelerating long-term supply.
This was the conclusion of the National Petroleum Councils report
of December 1999 on "Natural Gas: Meeting the Challenge of the
Nations Growing Natural Gas Demand." There is no doubt
that a strong White House role is required to coordinate the array
of disparate government departments and independent federal agencies
that play a part in decision-making on natural gas. A strong White
House role is also required to promote collaboration between federal,
state, local, and tribal governments, in order to ensure the availability
and deliverability of natural gas to all classes of consumers.
- Endorse the construction of natural gas pipelines from the
Arctic to the lower-forty-eight states and work bilaterally with Canada
and the state of Alaska to address important issues that need to be
U.S.-Canadian relations are critical for delivering natural gas
to the Lower Forty-Eight. Without full cooperation from Canada,
efforts to harness additional resources from Alaska will be stymied.
Critical support for the pipeline would include making the infrastructure
permitting process efficient and helping resolve differences surrounding
questions of routing, environment, and construction. This calls
for a federal role in coordinating authorities in Alaska, within
a variety of U.S. federal agencies, and with Canada.
- Assure that regulatory authorities work together to bring
about natural gas market efficiencies, including the provision of
open access to markets by producers and to supply by end-users, and
that allow delivery costs to be determined transparently by market
forces so that commodity values are transparent to both producers
and consumers. The regulatory process needs to ensure that
delivery systems provide open access to markets by producers and to
supply by end-users. Regulators should promote efficiencies that allow
delivery costs to be determined by market forces so that commodity
values are transparent to both producers and consumers.
Regulations also need to protect open access to electricity generated
by new fuels outside the traditional domain, such as fuel cells
or biomass. This means that regulators should:
- Carry out regular pipeline rate reviews to assure that cost
reductions are passed along to consumers.
- Promote incentive rate-making plans to tie the financial returns
of pipelines to efficiency gains and losses. Such plans should
also require sharing of efficiency gains with customers.
- Invest inor stimulate and encourage private-sector investment
inresearch and development of technologies that focus on safe
and cost-effective ultra-deep water production, smaller drilling footprints,
and increased production from non-conventional sources, including
methane hydrates. Production of abundant and affordable gas supply
in environmentally sensitive ways will depend on technology developments.
- Encourage natural gas exploration and production through a
series of technology-targeted tax incentives that also encourage use
of advanced, environmentally sensitive technologies and that provide
counter-cyclical support for exploration and production. (E.g.,
geological and geophysical expensing, deepwater, marginal gas well
production, and infrastructure investments in such equipment as drilling
- Initiate a mitigation forum process to evaluate infrastructure
needs and reduce delays in new pipelines and storage facility siting.
The process should involve regulators, environmentalists, technology
developers, landowners, consumer advocates, and industry users. In
this manner authorization to construct new pipeline infrastructure
should be accomplished without undue delay, consistent with ensuring
that environmental factors are fully considered and addressed. This
new infrastructure will be needed to meet growing demand and to relieve
capacity constraints wherever they exist. The federal government should
work with industry and state agencies to re-engineer underground storage
- Consider providing incentives to state and local governments
that agree to expedite natural gas infrastructure siting.
- Invest inor stimulate and encourage private sector
investment intechnologies to ensure pipeline infrastructure
integrity, reliability, flexibility, and safety.
- Foster development of advanced storage technologies to increase
regional storage capacity and serve peak power and distributed generation
- Evaluate the potential of imported Liquefied Natural Gas (LNG)
as a major additional source of base load as well as incremental supply
for the United States, and in the process consider accelerating environmental
reviews required for siting as well as accommodating the commercial
logistics and other user needs associated with facilities built or
operated by LNG suppliers. Accommodation of the commercial
logistics and needs associated with LNG regasification facilities
will be important where such facilities may be built or operated by
LNG suppliers. Government policy will need to address means of accommodating
the commercial practicalities that attend supplier-driven LNG facilities.
Given the nations abundance of coal resources, it is critical
to foster the development of clean coal technologies such as gasification
to promote coal use in power generation. At the same time, such development
programs should mitigate the environmental impacts of coal combustion
to meet local, regional, and global environmental challenges.
Coal use continues to growit currently supplies 55 percent of
U.S. power generation and has increased in absolute volume by 17 percent
in the last decade. Its abundance makes it a fuel of choice for national
energy security reasons; but its use poses some of the most difficult
environmental challenges of energy production. Its worldwide use is
also expected to grow dramatically, as it represents an abundant and
inexpensive source of fuel for power in numerous fast-growing developing
countries, including China and India.
Investment in clean coal technologies continues to pay dividends. For
example, in the United States, increased coal use has been accompanied
by reduced sulfur emissions. These proven technologies need to be deployed
more broadly and further advances in them need to be promoted through
a renewed focus on research and development, as well as fiscal incentives
that are offered to these ends. The government needs also to find ways
to foster entirely new technologies, such as carbon sequestration technologies
that could dramatically increase the attraction of coal internationally
as a fuel whose use would not generate large greenhouse-gas emissions.
The vital importance of further breakthroughs in the area of clean
coal cannot be understated. It could be a major contribution to U.S.
and global solutions to energy and environmental needs.
- Support the Nuclear Regulatory Commission in relicensing expeditiously
plants whose licenses will soon expire in order to extend plant life
where possible. Nuclear power plants now generate
about 20 percent of the countrys power. Existing plants are
operating with unprecedented capacity factors of more than 85 percent.
The importance of this significant base load has been reinforced by
recent events in California. Increased attention to power plant emissions,
especially greenhouse gases, may further increase the attractiveness
of nuclear power. Licenses of operating plants, some initially granted
for forty years, are beginning to expire in 2010. The NRC is beginning
to relicense to extend plant life by an additional twenty years.
- Work constructively with stakeholders to resolve nuclear power
plant spent fuel (and high-level defense waste) disposition within
the next few years, since this is critical to preserving viable nuclear
options for the nation. This will require high-level administration
attention. In particular, the scientific study of Yucca Mountain as
a repository site and parallel development of engineered barriers
will present the President and Congress with the final suitability
decision and licensing application in about a year. If the site is
deemed suitable based on science and technology, the administration
should work with the state of Nevada, the nuclear utilities, and the
stakeholders to develop a path forward to resolve current disputes
and meet federal responsibilities of accepting spent fuel, as well
as disposing of high-level defense waste.
- Work to improve the investment climate for new nuclear power
plant construction, through NRC streamlining of licensing procedures
and by resolving uncertainties surrounding electricity deregulation
and restructuring. No new nuclear power plants have been ordered
in the United States for more than twenty years. But the impact of
reactor accidents at Three Mile Island and Chernobyl may well be fading,
with the excellent safety record of Western-designed reactors and
the availability of more advanced designs and their additional safety
features. However, safety alone is not the issue. Uncertainty surrounding
deregulation is also a problem, given the very large capital costs
of nuclear plants.
- Work with Congress to sustain the front-end domestic nuclear
fuel cycle through the next half-decade. A key element
is the development of U.S.-origin competitive enrichment technology.
The front-end of the nuclear fuel cycle requires attention. Congress
has established a statutory requirement to maintain viable domestic
uranium mining, conversion, and enrichment industries, yet all three
sectors are unhealthy. Uranium enrichment is particularly sensitive
because of its implications for nuclear weapons proliferation, and
reliability of American enrichment supply is as important for slowing
the spread of enrichment technology as it is for supplying domestic
- Work with Western European allies and Japan to shape a future
nuclear fuel cycle that would garner shared support.
The very large disconnect between U.S. versus European and Japanese
fuel-cycle policies is detrimental to sustaining nuclear power as
a viable and potentially important option. Unresolved issues concerning
spent-fuel isolation plague the choice of an open fuel cycle by the
United States (i.e., once-through utilization of nuclear fuel followed
by geological disposal). The alternative closed fuel cycle advanced
by France, Japan, and others (i.e., reprocessing spent fuel to extract
and recycle plutonium) is plagued by large accumulation of separated
plutonium and unfavorable economics. The proliferation danger posed
by separated plutonium led to the U.S. decision in the 1970s to pursue
the open fuel cycle. The administration needs to work actively and
closely with allies to help shape a future fuel cycle that would satisfy
our nonproliferation concerns and their energy security needs, while
minimizing waste issues and enhancing safety.
- Work with the education system to reinvigorate training in nuclear
science and technology. There has been a precipitous
drop in the number of American students studying nuclear engineering,
and some leading universities are on the threshold of irrevocably
cutting out the relevant essential educational programs and infrastructures.
The administration needs to work with the university community to
sustain nuclear science and technology education during the next decade
in order to help preserve the nuclear power option. New technologies
such as small innovative reactors promise to offer an alternative
to traditional designs and the problems described above.
4. Augment Diplomatic Initiatives to Spur Non- OPEC Production Increases
The more supply that is available on international energy markets and
the more diversified their sources, the better equipped markets will be
to handle a disruption without a market failure or extreme price response.
The United States has a stated policy favoring diversity of oil supply
and working to promote oil production from countries outside of OPEC.
- Expand Oil and Gas Forum programs
One method used to promote investment in non-OPEC resources and to
remove fiscal, bureaucratic, or political obstacles thwarting such
investment is to convene major trade conclaves involving U.S. energy
companies and political leaders from non-OPEC countries. The Departments
of Energy, Commerce, and State together have initiated such forums
as the China Oil and Gas Forum and the Latin American Oil and Gas
Forum, which provide a venue for discussion of investment opportunities
and problems among U.S. industry, U.S. government, and non-OPEC industry
and government. The budget for such programs should be expanded to
cover other important oil-producing countries or regions such as Russia,
West Africa, the Caspian, and Indonesia.
- Investigate ways to facilitate increased investment in Mexicos
oil and gas sectors
Mexico is one of the four largest oil suppliers to the United States
and could become a significant natural gas producer if it had the
resources to finance additional exploration activities in the Yucatan
peninsula. Northern Mexico has strong demand for natural gas and electric
power and currently imports a net of 0.25 billion cubic meters of
natural gas from the United States. Mexico has an important role to
play in North American energy markets, and assistance should be brought
to bear in its struggle to finance a higher level of investment in
its hydrocarbons sector. Higher production of natural gas in Mexico
would not only satisfy demand from northern Mexico, creating a backup
for natural gas supply in the United States, but could be an important
source to meet rising U.S. demand. At a minimum, the administration
should investigate ways to support Mexican government investment in
natural gas resources. But the administration may also want to consider
leverage tools that could be brought to bear to assist political leaders
in Mexico who advocate that Mexico open its energy sector to foreign
investment, starting with natural gas. This latter policy would garner
the strong support of U.S. energy companies and demonstrate the administrations
commitment to increase natural gas supplies in the hemisphere. Activity
that would encourage U.S. participation in Mexicos energy industry
would deflect suggestions that support for Mexicos oil and gas
industry should take a second seat to developing U.S.-based resources.
Ultimately, Mexicos resources are closer and maybe more economical
to develop than those in Alaska. However, Mexicos constitution
blocks ownership participation in oil and gas fields by foreign
entities, and Mexicos oil workers unions are heavily set against
any foreign participation in Mexicos oil and gas activities
under any kind of arrangement. Thus, U.S. visibility on this issue
could create some political tension with Mexico in the short term,
even if it is beneficial for both countries in the longer term.
One solution to this dilemma might be to keep discussion of opening
Mexicos natural gas sector within a hemispheric focus, including
Canadian and Brazilian oil and gas firms as well as American firms,
in order to diffuse attention from the negative aspects of Mexican
popular opinion regarding U.S.-led investment in Mexican resources.
- Encourage reforms in Russias energy sector
Further enhancement of the Russian energy sector would help the United
States attain the diverse oil and gas supplies that will be needed
during the coming years to moderate rising dependence on the Middle
East. Without a massive injection of capital, Russias production,
which has dropped by half since the collapse of the Soviet Union,
could continue to stagnate if not fall in the coming years. Russian
oil production is projected to rise only marginally to about 6.5 million
b/d during the next decade and then only if investments can be increased
to twice the current level, according to Russias Ministry for
Fuel and Energy. Investment scandals, poorly articulated property
rights, unstable tax and legal regimes, and bureaucratic barriers
have had a chilling effect on foreign investment, scaring away most
international investors from Russias energy sector. The Gore-Chernomerdyn
effort included a rehabilitation package for Russias oil and
gas industry but many of the funds allocated were not extended due
to the significant barriers encountered by U.S. companies trying to
operate in the country.
However, there appears to be a major change taking place in Russia
under President Vladimir Putin, whose government is showing renewed
interest in energy-sector reform, and new oil and gas laws look
to be forthcoming. This progress from the Russian side might open
the door for a new initiative from the United States on energy trade
and investment, as well as the development of a production-sharing
agreement law. In particular, the United States should support European
initiatives to bring Russia into the European energy charter. (See
section on multilateral institutions, recommendations 7 and 9.)
However, while energy is a potential area of cooperation between
the United States and Russia, other foreign policy and security
issues are likely to take precedence. Still, the United States must
consider seriously the fact that a declining Russian energy industry,
while possibly curbing Russias military budget and thereby
reducing Moscows ability to challenge U.S. interests, will
make it extremely difficult for the United States to promote diversity
of international supply. Given Russias important role as an
energy supplier to Europe, U.S.-Russia policy should not be pursued
without debate concerning energy supply considerations and consequences.
- Improve access to information, as well as transparency of comparative
oil and gas fiscal commercial regimes
Oil and gas investment in any particular country or region is influenced
not only by geology, but also by the fiscal regime and other aspects
of government take. Experience has shown that major changes in tax
policy can stimulate new investment and delay a decline in oil production
or even promote a production increase in mature fields. This was clearly
demonstrated through the 1980s in the U.K. sector of the North Sea.
Non-OPEC countries must stay abreast of international trends in fiscal
terms and other aspects of government take to ensure that their investment
terms remain competitive; but competitors may seek to cloud transparency
for competitive reasons, making it difficult for countries to know
when an improvement in terms is necessary. The United States has a
strong interest in promoting transparency and education about trends
in oil and gas investment terms in non-OPEC to help keep these countries
competitive and attractive for investors. This can be handled via
the Oil and Gas Forums mentioned above, through reviving the program
of publicly available embassy reports on the oil and gas industries
of various host countries, and through U.S. Agency for International
Development (AID)sponsored training programs, as well as through
Internet resources such as the Department of Energy website and IEA
5. Initiate Diplomatic Efforts to Spur the Reopening of Countries
That Have Nationalized and Monopolized Their Upstream Sectors
Middle East Gulf crude oil currently makes up around 25 percent of world
oil supply, but could rise to 3040 percent during the next decade
as the regions key producers pursue higher investments to capture
expanding demand for oil in Asia and the developing world. If political
factors were to block the development of new oil fields in the Gulf,
the ramifications for world oil markets could be quite severe.
There have been discussions in several important oil producing countries,
notably Saudi Arabia and Kuwait, to reopen their upstream oil and gas
sectors to foreign investors to garner the necessary finance and technology
for the massive investment necessaryestimated at anywhere from
$6 to $40 billion. This reopening is important and should be on the
bilateral U.S. agenda with these countries. The Department of State,
together with the National Security Council, the Department of Energy,
and the Department of Commerce should develop a strategic plan to encourage
reopening to foreign investment in these important states of the Middle
East Gulf. While there is no question that this investment is vitally
important to U.S. interests, there is strong opposition to any such
reopening among key segments of the Saudi and Kuwaiti populations. This
opposition must be taken into account so that pursuit of the investment
program does not fuel anti-Americanism in these countries or destabilize
their ruling regimes.
6. Review Oil Sanctions Policy to Identify Ways to Reduce the
Negative Impact on Energy Supplies While Accomplishing the Objectives
for Which the Sanctions Were Imposed.
More oil could likely be brought into the market place in the coming
years if oil-field development could be enhanced by participation of
U.S. companies in countries where such investments are currently banned,
particularly in Libya where frozen U.S. assets remain in limbo. Resources
are large and, with major contributions of foreign investment capital,
large additions to production rates could be accrued in the coming two
to three years.
Efforts should be made through cooperation and collaboration with Congress
to phase out or drop sanctions that are no longer relevant to U.S. strategic
objectives. Sanctions regimens that are ineffective should be reevaluated
and restructured to increase their chances of producing the desired
outcomes. An easing of sanctions in any particular country might conflict
with other U.S. policy goals and must be reviewed in this context. However,
the costs of prolonging these sanctions, both in terms of energy policy
and foreign policy, must also be taken into account. The government
needs to weigh arguments that sanctions are needed to restrain revenues
of regimes whose policies are hostile to U.S. interests against the
reality that imposition of oil sanctions on too many regimes at once
can be ineffective and can have cumulative adverse effects. When they
are effective they can also reduce market competition and contribute
to overall higher oil price levels, higher U.S. vulnerability to disruption,
and higher revenues for the very same adversaries. The latter can especially
be the case when world markets are tight and other suppliers will not
or are unable to increase supply to make up for the loss from the sanctioned
7. Develop a Credible International Stance on Global Warming and
Other Environmental Issues
The United States lacks a clear and consistent policy reconciling energy
and environmental objectives, and this is a large deficit in both U.S.
domestic and foreign policy. Attempts to integrate energy and environmental
policy continue to be hampered by the existence of market externalities,
in which the true social costs of consumption of different fuel sources
are not reflected in their purchase price. It is important in fashioning
policy to clearly define externalities and environmental objectives
from the outset. Environmental economic measures must tackle pollution
at the point where it occurs, and such measures should also be deemed
to have significant effect. They should be based on sound science and
not constitute a tax on general economic activity. Thus, some specialists
advocate that "green" taxes should be revenue neutral, except
when spent on related activities, such as cleanups. Tradable permits
can be considered in cases where tax solutions offer a strong policy
alternative. Cleaner fuels should face a lower fiscal burden than those
that have higher negative environmental consequences and thereby impose
real costs and social burdens.
- Conduct a thorough review of the Kyoto Accords and recommend
ways for the United States to revive international discussions on
climate change and also execute bilateral agreements with regard to
promoting environmental safeguards
A greater U.S. commitment on the global warming issue can help demonstrate
seriousness regarding environmental issues, which have become central
concerns of the international community. A strong U.S. international
commitment can build on the strong U.S. domestic record on environmental
matters, especially at a time when some more limited immediate environmental
regulations might have to be waived temporarily to defend or de-bottleneck
- Investigate new ways to promote efficiency and clean energy
technologies, including clean coal, expanded natural gas use, and
automobile mileage and emission standards, for use in large consuming
countries in Latin America and Asia, especially China and India
Programs can include joint research on safer, proliferation-proof
nuclear technologies, clean coal, renewable technologies, and alternative
fuel automotive design. The IEA program on energy efficiency education
and technology transfer should be expanded, and education programs
on energy conservation practices should be developed not only inside
U.S. public schools but also for governments and schools in other
countries such as Russia, the Former Soviet Union, China, India, etc.
- Develop a strategy to coordinate with the European Union and
the Association of Southeast Asian Nations (ASEAN) on refined petroleum
product specifications through multilateral dialogue and bilateral
Just as better coordination is required between environmental
regulators and energy policy officials nationally, so too should better
coordination between these authorities be promoted on an international
level. The issue of Market Balkanization referred to earlier in these
recommendations exists on an international level as well as on a national
level. Lack of coordination on both product specifications and the
timing of their introduction into the market have an important impact
on trade and on pockets of supply shortages internationally. Better
coordination would mean that shortfalls in one country could be rebalanced
more easily by exports from another. This will help smooth localized
price volatility and create more orderly international products trade.
8. Support Efforts to Develop and Disseminate Timely and Accurate
Information about the Fundamentals of Energy Market Supply and Demand.
Market efficiency and the smooth transition to deregulated energy supply
and price is highly dependent upon adequate market signals and information.
Yet ironically, in the information age, in which technology and communications
advances have facilitated the development and dissemination of data,
there has been a perceived decline in market transparency.
One of the major roles of public authorities in assuring the smooth
functioning of markets now centers on the provision of data and information
to facilitate market transparency. So far, this important role for governments
has been under-recognized. There are clear obstacles to market transparency,
and these will be hard to eliminate. These include the following:
- Restructuring of industry, with new "nontraditional"
enterprises emerging that have not reported fundamentals to government
(e.g., Independent Power Producer (IPPs in the United States).
- Restructuring of industry, with loss of old reporting functions
in some companies.
- Lack of government commitment to collecting data.
- Increased role of non-industrialized societies in the global energy
sector, with lack of data collection and development infrastructure.
- Decline of data collection integrity with the collapse of the Soviet
Union, at a time when the Russia and other successor states are more
integrated into global energy markets.
- Refusal of some governments, most importantly oil producing countries
including Saudi Arabia and Venezuela, to provide fundamental transparent
information on supplies to markets, capacity to produce, reserves,
and levels of inventories.
As a result, neither companies nor governments are receiving adequate
and timely information at a time when markets are more volatile and
more subject to large price movements. They are often making inappropriate
decisions affecting the public good largely because their information
base is wrong, threatening stable, affordable energy prices and reliable
supply. It is widely agreed that the most reliable data are those compiled
by the IEA. Yet there is widespread distrust of the integrity of IEA
data, not only in OPEC and in the developing world but within OECD countries
as well. Recognizing this, recently the Saudi government proposed establishing
a permanent global institution in Riyadh to bridge differences between
exporting countries and others. Yet Riyadh has acted in the past to
thwart a transparent energy system. The commitment of Saudi Arabia to
promote data transparency should be explored and tested by the administration.
- Recognizing that transparency is an important element in maintaining
orderly markets generally and in times of energy or unexpected disruption
in particular, the administration should provide a higher budget for
the Department of Energys Energy Information Agency.
The agency needs to strengthen its ability to collect domestic
data on all aspects of market fundamentals in order to restore the
integrity of information on the U.S. market, a critical step in
enhancing market transparency. It should work together with the
IEA to improve the worldwide energy database, including data on
fundamentals for all primary energy sources, including country specific
data. The DOE should also investigate how to support and promote
the sharing of accurate data among major oil-producing and oil-consuming
countries through private or multilateral Internet publishing, publications,
or regional organizations
9. Lay the Foundation for New Global Energy Institutions
If the domestic and international goals of U.S. energy policy are to
be maximized, it is time for the United States to consider revitalizing
and revamping the international mechanisms governing international investment
and trade in energy.
The United States should try to lay the institutional framework of
new international energy institutions. The institutions should be designed
to achieve such goals as:
- Greater Transparency. If the general goal of U.S. energy
policy is the perfection of markets so that investments can be made
efficiently on a global basis in energy resources, that goal must
start with transparency. (See recommendation 9 above.)
- Rules of Trade and Investment. At an international level,
the energy sector has retained far more of the elements of the pre-free
trade and investment environment of the 1920s and 1930s than any other
sector, save, perhaps, agriculture. It is, at the core, a highly politicized
sector. Efforts to defuse those politics have been relatively unsuccessful.
There is little doubt that the objectives of securing diversified
energy resources on a diversified geographic basis would be fostered
by the adoption of international rules governing trade and investment
in energy resources. Nor is there much doubt that as societies have
abandoned the critical elements of resource nationalism, the basics
are increasingly in place for the establishment of such rules.
- Keeping Energy and Other Issues on Separate Tracks. One
of the major benefits of establishing institutions through which governments
agree to a set of rules governing their mutual arrangements for trade
and investment is that through these rules governments would virtually
explicitly be renouncing the use of energy as instruments of foreign
policy for non-energy purposes. The energy world would parallel the
world of the General Agreement on Tariffs and Trade (GATT) and the
World Trade Organization. Governments would effectively agree to most-favored-nation
principles of trade and investment and would thereby forswear the
use of energy as an instrument of foreign policy against others party
to the agreements. For example, neither oil producers/exporters nor
oil importers would be able to embargo or boycottwith impunitytrade
or capital flows with other agreed parties. Such a rule would civilize
the energy sector much as other sectors of international trade and
investment have been civilized, with disputes settled about the sector
per se, not about exogenous issues.
The issue for the United States is not so much whether such new international
institutions are desirable. Rather, it is how to achieve them. But it
is clear that unless the United States assumes a leadership role in
the formation of new rules of the game, it will not simply forfeit such
a role, which others will assume. It will rather become reactive to
initiatives put forth by other governments which, if agreed by others,
could leave U.S. firms, U.S. consumers, and the U.S. government in a
weaker position than is warranted. This could be already happening,
for example, with respect to the establishment of a new information
base for energy, given the commitment of the Saudi government to house
such a base within its borders. It could also be happening with respect
to the European Energy Charter, if Moscow agrees to ratify the Energy
Charter treaty. In addition, such an effort would assist in preventing
the emergence of international groupings of countries that could be
antithetical to U.S. interestsfor example an effort by Venezuela,
Iraq, and Russia to align their interests against the United States
on a host of international energy and non-energy issues.
- Embrace the spirit of "producer-consumer" dialogue,
but not the framework with which it has been associated. The idea
of a broadly based and ongoing dialogue of oil producers and consumers,
graced by the presence of big oil companies, has increasingly moved
back into the international limelight. It has been reinforced by the
spirit of cooperation between key OPEC and non-OPEC countries working
together on production constraints and working with key oil- importing
countries on an implicit understanding over a "just price"
for oil. OPEC governments have been pushing this theme for several
reasons: volatility in oil prices; the collapse of oil prices and
revenues in 1998; and high consumer taxes on petroleum products in
Europe and Japan. Producers, including non-OPEC members Mexico and
Oman, argued that a handful of relatively poor developing countries
were forced to assume unfairly an extraordinary burden of adjustment
to lower oil prices. They argued that those benefiting from the lower
prices had an obligation to both understand their plight and assist
them in doing something about it. It was for this reason that most
OPEC countries were sympathetic to the U.S. governments use
of SPR time-swaps in 2000 to help damp the price peaks of the autumn
of 2000. OPECs position has been straightforward: OPEC cannot,
by itself, bring stability to oil markets. Collaboration is needed
both with other producing countries and with importing country governments,
especially on thorny issues related to information on fundamentals,
including the level of and management of inventories. The issues of
this dialogue are global; but the framework wont work: market-based
countries such as the United States cannot guarantee price floors;
producer countries with limited output capacity cannot guarantee price
ceilings. There can be no such bargain. Additionally, most OPEC governments
do not want to see markets left to operate without government intervention.
Some OPEC countries want not just a floor price, but a gradually rising
one, however anti-competitive and administratively difficult this
may be to enforce.
- With U.S. leadership, foster broad international cooperation
on a host of issues, including 1) sharing information on oil market
trends and the basics on evolving environmental standards on petroleum
products and emissions; 2) promoting mechanisms for attracting investment
capital; and 3) coordinating information on investments in refinery
upgrading and in new demand, which would define the requirements for
new grassroots plants. The question is, How should appropriate
global arrangements be institutionalized for a globalized world energy
- Build global energy institutions in three ways:
- Consider using the European Energy Charter as the basis
of the sort of energy institutions that the United States should
want to adopt on a global basis. The original idea of
a single European energy market extending from the Atlantic to
Siberia, put forward in 1990, was that once unleashed by Western
investments, ex-Soviet oil and gas resources could make Europe
virtually self-sufficient, ending dependence on the Middle East.
The main weakness of the original European scheme has always
been that it takes a long time to get from here to there. Ex-Soviet
output has languished; the rule of law has yet to be put in
place in Russia; and no appropriate administrative procedure
has been developed in any of the successors to the Soviet Union.
Moscow has yet to ratify the treaty. The United States and Canada
and Norway and Japan all had fears of being left in the cold,
and wavered between joining and killing off the plan before
it took root. But the Energy Charter put in place exactly the
genre of rules the United States should want to seek, covering
investment, trade, third-party transit, and fundamental environmental
standards in member countries. The United States was unable,
however, to sign the final texts because the European Union
members included certain stipulationsWest-West issues
as they were knownthat were impossible to ratify because
they touched on constitutionally fundamental federal/state divisions
of labor that were impossible to overcome.
It is time to re-examine the European Energy Charter as the
basis of the sort of energy institution that the United States
should want to adopt on a global basis. The United States should
take the lead to help forge a document that is in line with
its interests and free from the problems of the past restrictions.
- Build on overlapping interests and relations between
the worlds largest oil exporter (Saudi Arabia) and the largest
energy consuming country (the United States). Immediately
after the end of the Gulf War, the two countries had a once-in-a-generation
opportunity to put in place the elements of a new institution
governing oil trade. They failed to take advantage of that window
of opportunity. Nonetheless, the elements of an agreement between
the two superpowers of energy are worth considering; they could
enhance not only Saudi and U.S. energy security, but that of much
of the rest of the world as well. It could also help to assure
the smooth operation of market forces and the needed growth in
international oil trade and the energy trade in general. Whats
more, this process could work without either country undermining
its respective partners in OPEC or the IEA.
Negotiation of a bilateral agreement might start by fleshing
out the long-standing Saudi call for a system of "reciprocal
energy security." In return for even modest demonstrations
of goodwill toward their country, Saudi ministers have suggested
that the United States and other consumer nations could gain
guaranteed access to "a fairly priced ocean of oil."
A dialogue between the two countries could focus initially on
short-term mechanisms designed to mitigate the economic damage
caused by extreme oil price volatility. One element could be
bilateral planning for strategic oil storage and use.
- Explore a mechanism promoting a North American or Western
Hemispheric energy agreement. NAFTA in many ways lays
the groundwork for an internationally expanded energy sector.
Trade in energyin oil, natural gas, and electricityis
considered a central feature for the NAFTA agenda. The NAFTA-style
framework could serve as a starting point for extension of its
energy stipulations southwards into Central and Latin America,
at least where energy issues are concerned. The main impediment
to pursuing an expanded NAFTA in energy on a hemispheric and global
basis has resided both in the Mexican political refusal to consider
amending its constitution to permit foreign investment in its
energy sector and in resistance from Canada.
As with Saudi Arabia, the United States has a major decision
to confront with respect to Mexico. Should the United States,
in the process of pursuing more secure access to more energy
resources, more assertively pressure its energy trading partners
to open their sectors to foreign investment? Or should it remain
passive about such a decision, respecting the objectives of
those countries that chose to maintain a monopoly over their
domestic energy resources? Whichever route chosen by the U.S.
government, long-range commercial links will remain critical
to reestablishing market stability in the petroleum sector.
They are equally central to making sure that the next time a
supply glut develops, the burden of adjusting to it is more
equitably spread around the world.
- Form the core of future multilateral agreements through
bilateral or regional arrangements based on improving markets,
ensuring energy security, and guaranteeing investments and trade
on a mutual, reciprocal, and nondiscriminatory basis.
The benefits first captured by the United States and Saudi Arabia
in a bilateral agreement, or by the United States, Canada, and
Mexico in a NAFTA agreement, or by signatories to an Energy Charter,
could be progressively enlarged with similar agreements signed
with other countries.
Building new international institutional arrangements
in the new century will not be easy. But it is by no means impossible.
It need not require the dismantling of OPEC or the IEA. Equally
important, it need not require a politically difficult dialogue
between the two organizations, a broader U.N. forum, or another
setting for grand but fruitless discussions. Yet over time it
could supersede all of these. It could provide the foundation
for a kind of General Agreement of Petroleum and Petroleum Products,
and Natural Gas, and Electricity. Thats how the General
Agreement on Tariffs and Trade emerged from bilateral trade
agreements based on the extension of most-favored nation treatment
to a broad array of countries.
The Task Force recommends a two-part action plan. The first stage consists
of immediate actions to establish appropriate mechanisms to manage potential
supply disruptions and to buffer the economy against harm from price
volatility. The second part, consisting of longer-term actions, tackles
the causes of recent shortfalls and emergencies. These initiatives establish
a framework for developing new supplies and ample capacities along various
linked global energy supply chains, while preserving and enhancing the
There are few options available to government to expand supply in the
short run or to reduce short-term demand. Consequently, immediate actions
should consider all possible means of de-bottlenecking supplies and
reducing obstacles to delivery of supplies, both domestically and internationally.
In addition, the short-term actions must establish permanent machinery
for integrating energy policy with economic, environmental, national
security, and foreign policies. To the degree that new supplies alleviate
energy shortfalls in periods of peak demand, they will provide protection
to consumers against price spikes.
Virtually all actions available to remove obstacles along the supply
chain in the very short term involve tradeoffs with other policy objectives,
including environmental, national security, and foreign policy concerns.
Therefore, tradeoffs must be carefully weighed. Any supply-side relief
also eliminates the only current mechanism for controlling demand: higher
prices. Proper policy must consider measures that will prevent the public
from keeping U.S. energy security perpetually beyond reach. For the
immediate and short term, two sorts of policies need to be considered:
- Those that quickly alleviate supply bottlenecks and damp demand.
- Those that need to be adopted in a timely manner in order to have
a desirable impact in the longer term, given the long lead times required
in order to mobilize capital or new technologies.
Key elements of this plan are designed to:
- safeguard supply in times of accident or disruption to ensure
- ease and eventually eliminate constraints in the energy infrastructure.
- promote diversity of clean, fairly priced, abundant supply
- enhance energy efficiency and curb unbridled growth of energy
- ensure fair competition and market solutions.
- promote restructuring of formal institutions and informal arrangements
for managing international energy relations.
- Deter and manage international supply shortfalls
- Develop a diplomatic program ensuring GCC allies remain prepared
and willing to maintain stable prices for global economic growth
and also to fill any unexpected supply shortfalls in times of
turmoil in the oil markets, whether created by accident or by
adverse political actions on the part of any producing nation.
- Prepare for contingencies and gain agreement on coordination
in the IEA in efforts to deal with any removal of oil by adversary
nations from international markets.
- Minimize public conflicts with OPEC and other independent oil-exporting
countries but emphasize importance of market factors in setting
- While moving to defuse tensions in the Arab-Israeli conflict
through conflict resolution and negotiations, maintain energy
and political issues in U.S.-Middle East relations on separate
- Review policies toward Iraq to lower anti-Americanism in the
Middle East and elsewhere; set the groundwork to eventually ease
Iraqi oil-field investment restrictions.
- Remove bottlenecks and other obstacles to energy supply, both domestically
- Streamline procedures for waiving product specifications.
- Establish procedures to grant Jones Act waivers without adversely
affecting U.S. ship owners or U.S. labor.
- Enact legislation for federal primacy over state regulations
especially with respect to product specifications and pipeline
right of way.
- Enact legislation to facilitate regional solutions to energy
- Investigate whether any changes in U.S. policy would rapidly
facilitate higher Caspian Basin oil exports.
- Take a fresh approach to building and maintaining national strategic
and commercial crude oil and petroleum product inventories.
- Review the size and financing of the SPR.
- Establish professional criteria for managing the SPR.
- Establish clear policy for use of the SPR.
- Review tax, accounting, and other factors affecting industrys
incentives to hold petroleum product and natural gas inventories
with the intent of enhancing inventories before seasonal demand,
and neutralizing any adverse impact of current rules.
- Encourage states to review minimum inventory for fuel switching
where feasible and also fiscal incentives to industry to build
inventories in advance of seasonal demand increases.
- Develop mechanisms for a new national approach to energy policy.
- Create an appropriate interagency process to articulate and
promote energy security policy and integrate energy policy with
overall economic, environmental, and foreign policy.
- Review and streamline the allocation of authorities within
the federal government, especially in areas of land management
- Convene a national energy security summit to help develop a
national consensus on energy policy objectives and means.
- Develop a strategic communications plan on energy security
policy in order to educate the public on the difficulties of achieving
short-term, unilateral solutions to the nations energy dilemmas.
Long-Term Policy Initiatives
- Review international approaches to build, maintain, and use strategic
and commercial crude oil and petroleum product inventories.
- Enhance and modernize IEA strategic stockpile policies in light
of the changed international market, taking into account situations
that technically fall short of a supply disruption as well as
different regulatory authorities among IEA members.
- Encourage key non-IEA countries (e.g., China, India, Brazil)
countries to develop strategic stocks.
- Review IEA membership, taking into account the desirability
of creating a new class of associated members who could be encouraged
to hold minimum stocks and also benefit from direct participation
in other IEA activities.
- Accelerate demand-management efforts at home and internationally.
- Take a proactive government position on demand management.
- Use federal procurement authority to promote use of alternative
fuels and develop programs to introduce new efficiency technologies
into federal buildings and nascent transportation technologies
into government vehicle fleets.
- Use federal procurement authority to achieve other demand management
- Review and establish new and stricter CAFE mileage standards,
especially for light trucks.
- Actively promote the development of energy-efficient technologies,
including fuel-efficient engine and vehicle technologies.
- Maximize efforts to develop every clean source of domestic fuel
- Oil and natural gas
- Accelerate completion of the U.S. oil and natural gas reserve
inventory, as mandated by Congress, paying special attention
to restrictions on resource development. Such an inventory
needs to be completed soon and well before any plan is adopted
to develop particular domestic resources.
- Undertake an accelerated and complete review of tax and
fiscal policy as they impact U.S. oil and gas development,
taking into account the competitive position of the U.S. fiscal
regime internationally, in order to attract more capital to
- Power (Electricity)
- Create an appropriate, comprehensive statutory framework
for electricity restructuring and for reestablishing a capacity
cushion for the nations power supplies. A new framework
needs to overcome the adverse impacts of todays highly
fragmented regime, which has reduced the reliability of power
grid and impeded investment in new generation and transmission
- Work expeditiously to improve the statutory framework for
approvals of the siting of power generation plants, and transmission
and distribution infrastructure.
- Evaluate the need for incentives to stimulate the introduction
of new technologies into the power marketplace, including
distributed generation and co-generation.
- Work with state regulators and regional authorities to
let companies offer long-term contracts for electric power,
and to encourage them to hedge price risks.
- Encourage the development of regional power capacity cushions.
- Recognize that many of the polices required to meet increased
demand are power-source specific.
- Assure that regulations protect open access to electricity
generated by new nontraditional fuel sources.
- Natural Gas
- Apply strong leadership to develop a coherent, comprehensive
strategy promoting efficient development and use of the nations
natural gas resources.
- Endorse the construction of natural gas pipelines from
the Arctic to the lower forty-eight states and work bilaterally
with Canada and the U.S. state of Alaska to address important
issues that need to be resolved.
- Assure regulatory authorities work together to bring about
natural gas market efficiencies, including the provision of
open access to markets by producers and to supply by end-users,
and that allow delivery costs to be determined transparently
by market forces so that commodity values are transparent
to both producers and consumers.
- Invest inor stimulate and encourage private sector
investment inresearch and development of technologies
that focus on safe and cost-effective ultra-deep water production,
smaller drilling footprints, and increased production from
non-conventional sources, including methane hydrates.
- Encourage natural gas exploration and production through
a series of technology-targeted tax incentives that also encourage
use of advanced, environmentally sensitive technologies, and
that provide counter-cyclical support for exploration and
- Initiate a mitigation forum process to evaluate infrastructure
needs and reduce delays in new pipeline and storage facility
- Consider providing incentives to state and local governments
that agree to expedite natural gas infrastructure siting.
- Invest inor stimulate and encourage private-sector
investment intechnologies ensuring pipeline infrastructure
integrity, reliability, flexibility, and safety.
- Foster development of advanced storage technologies to
increase regional storage capacity and serve peak power and
- Evaluate the potential of imported Liquefied Natural Gas
(LNG) as a major additional source of base load as well as
incremental supply, and in the process accelerate environmental
reviews required for siting as well as accommodate the commercial
logistics and other user needs associated with facilities
built or operated by LNG suppliers.
- Coal: Given the nations abundance in coal resources it
is critical to foster the development of clean coal technologies
to promote coal use in power generation, while mitigating the
impacts of coal combustion to meet local, regional, and global
- Support the Nuclear Regulatory Commission to extend plant
life where possible
- Constructively work with stakeholders to resolve nuclear
power plant spent fuel (and high-levels defense waste) disposition
within the next few years, since this is critical to preserving
viable nuclear options for the nation.
- Work to improve the investment climate for new nuclear
power plant construction through NRC streamlining of licensing
procedures and by resolving uncertainties surrounding electricity
deregulation and restructuring.
- Work with Congress to sustain the front-end domestic nuclear
fuel cycle through the next half-decade.
- Work with Japan and allies in Western Europe to shape a
future nuclear fuel cycle that would garner shared support.
- Work with the education system to reinvigorate training
in nuclear science and technology.
- Augment diplomatic initiatives to spur non-OPEC production increases.
- Expand Oil and Gas Forum programs.
- Investigate ways to facilitate increased investment in Mexicos
oil and gas sectors.
- Encourage reforms in Russias energy sector.
- Improve access to information and transparency on comparative
oil and gas fiscal/commercial regimes.
- Initiate diplomatic efforts to encourage the reopening of countries
that have nationalized and monopolized their upstream sectors.
- Review sanctions policies, to identify ways to reduce the negative
impact on energy supplies while accomplishing the objectives for which
the sanctions were imposed.
- Develop a credible international stance on global warming and other
- Conduct a thorough review of the Kyoto Accords and recommend
ways for the United States to revive international discussions
on climate change and also execute bilateral agreements to promote
- Investigate new ways to promote efficiency and clean energy
technologies, including clean coal, expanded natural gas use,
and automobile mileage and emission standards, for use in large
consuming countries in Latin America and Asia, especially China
- Develop a strategy to coordinate with the European Union and
the Association of Southeast Asian Nations (ASEAN) on refined
petroleum product specifications through multilateral dialogue
and bilateral agreements.
- Support efforts to develop and disseminate accurate and timely
and information about the fundamentals of energy market supply and
demand. The administration should recognize that transparency is an
important element in maintaining orderly markets generally and in
times of emergency or unexpected disruption in particular, and thus
should provide a higher budget for the Department of Energys
Energy Information Agency.
- Lay the foundation for new global energy institutions
- Embrace the spirit of the "producer-consumer" dialogue,
but not the framework with which it has been associated.
- With U.S. leadership, foster broad international cooperation
on a host of issues including (1) sharing information on oil market
trends and the basics of evolving environmental standards on petroleum
products and emissions; (2) promoting mechanisms for attracting
investment capital; and (3) coordinating information on investments
in refinery upgrading and in new demand, which would define the
requirements for new grassroots plants.
- Build global energy institutions in three ways:
- Consider using the European Energy Charter as the basis
of an energy institution that the United States should want
to adopt on a global basis.
- Build on overlapping interests and relations between the
worlds largest oil exporter (Saudi Arabia) and the largest
energy-consuming country (the United States).
- Explore a mechanism promoting a North American or Western
Hemispheric energy agreement.
- Form the core of a future multilateral agreement through bilateral
or regional arrangements based on improving markets, ensuring
energy security, and guaranteeing investments and trade on a mutual,
reciprocal, and nondiscriminatory basis
On Environmental Considerations, Coordinated Energy and Environmental
Policy, Federal and State Jurisdictions, and Enhanced Demand-Side Measures
Energy policy is a derivative policyderiving from our security,
economic, and environmental goals. These are often in conflict. It is
therefore difficult to chart an energy policy path that is both coherent
and on which consensus can be achieved. Although supportive of many
conclusions in the report, we are generally more sanguine than the report
regarding the ability of the market, especially under current prices,
to bring forth necessary increases in supply for oil and gas. We would
place primary emphasis on attending to those infrastructure and volatility
issues that are principally governmental in origin and solution. We
would also like to emphasize the need for government action in certain
areas. These include:
- The need to focus international discussions on atmospheric concentrations
of greenhouse gases.
- The development of a coordinated energy and environmental policy
that includes specific attention to carbon dioxide and incentives
for voluntary early action activities. Unless carbon dioxide is addressed,
and addressed in a way that is credible with major domestic constituencies
and with others internationally, the environmental regime will remain
unstable, increasing investment uncertainty and hence raising energy
costsall this quite apart from ones judgments about environmental
- A legislative rebalancing of the boundaries between federal and
state jurisdictions to increase federal and regional influence over
environmentally based standards and within the electric power sector.
The purpose of such a move would be to establish and enforce a consistent
and efficient transmission and reliability regime applicable to all
- Efforts to enhance efficiency. Efficiency has a critical role in
balancing supply and demand. An analysis by the President's Committee
of Advisors on Science and Technology has shown that from 1970 to
2000, improvements in the overall efficiency in the U.S. energy system
(measured as real GNP divided by primary energy supplied) saved two
and one-half times more energy than the growth of all sources of supply
- Increased federal support of research and development related to
energy and environmental technologies on both the demand and supply
sides in order to sustain a stable economic environment for energy,
to accommodate economic growth, and to meet environmental objectives.
Technology has been critical to energy development in the past and
will continue to be so in the future.
- Enhanced demand-side measures, including incentives for the accelerated
introduction of technology. More effective strategies for the deployment
of existing technologies can in particular make a significant difference.
In electric power markets, regulation must make demand sensitive to
the cost of power if those markets are to work properly. In other
markets, the report calls for regulatory intervention to achieve demand
restraint, presumably on the unstated assumption that Americans will
not tolerate the use of taxes even though, we note, taxes would often
be a more efficient instrument of control.
Finally, we caution against using the "crisis" label, which
in the past has been the source of much energy policy mischief. Apart
from the very serious problems in the California and Western electricity
markets, which largely derive from policy, current energy markets are
not in "crisis," and precipitous action should not undermine
thoughtful resolution of our conflicting energy, economic, environmental,
and security concerns. Apart from the very serious problems in the California
and Western electricity markets, most policy made, current energy markets
are not in "crisis" and precipitous action should not undermine
thoughtful resolution of our conflicting energy, economic, environmental,
and security concerns.
Joseph C. Bell
Charles B. Curtis
On Nuclear Energy
Nuclear power is an indigenous source of energyinvented and developed
in America. It is unique in having the capacity to provide enough energy
to last our nationand the worldfor at least a millennium.
And it can do so without emitting greenhouse gases. Nuclear energy should
not be considered as an option, but as a necessity to supply electricity
for the nation now and in the future. The Energy Information Administration
has predicted that between now and 2020, the United States will need
300,000 megawatts of additional generating capacity, or the equivalent
of three hundred large new plants of any type. A minimum of one hundred
fifty of these plants should be nuclear.
Michel T. Halbouty
Between 1973 and 1986, the U.S. economy's energy intensity (energy consumption
per dollar of GDP) declined by 35 percent; since then, the rate of decline
slowed dramatically, amounting to only about 15 percent over the period.
That slowdown raises total national energy costs by about $100 billion
per year. Technologies are in hand to once again accelerate energy efficiency
and associated environmental gains significantly. To realize this in
a timely way requires that integrated fiscal, regulatory, and technology
policies be implemented by the administration and Congress. In addition,
the government should use its own procurement activities far more aggressively
to develop a reasonable domestic market for new clean and efficient
technologies and alternative fuels. It should also work with the private
sector and international financial institutions to advance associated
deployment in developing countries. Such actions, in creating stable
markets adequate to permit private development of alternative technologies
and infrastructure, can be an important element of energy security policy
and reduce upside price volatility. They fall into the category of "public
good" actions addressing market shortcomings. Opportunities are
clearly available in both the transportation and electricity sectors.
Such demand-side initiatives can have a substantially greater impact
than supply-side initiatives on the overall supply/demand balance over
the next several years. However, the importance of stability to the
success of such initiatives requires a pragmatic joint administration-congressional
In regard to dealing with oil-producing nations during periods of oil
price volatility, the report properly emphasizes the importance of quiet
diplomatic discussion and a bedrock principle of reliance on market
forces. However, the administration, confronted with non-market behavior,
also needs to retain the flexibility to use all diplomatic tools of
engagement, including appropriate use of public statements. For example,
such diplomatic engagement during the last year saw significant production
increases while holding in place key international support for use of
the SPR to address inventory shortfalls and associated price volatility.
On Critical Infrastructure Protection
Protecting our energy infrastructure from being disabled is an energy
security concern of increasing importance. Heightened vulnerability
to physical and/or cyber disruption stems from increased infrastructure
interdependence, increased risk of cascading failures, and increased
reliance on information technologies and telecommunications in the energy
infrastructure. An appropriate response demands new forms of cooperation
between the private sector, local governments, and the federal government,
including robust and timely exchange of sensitive information on both
sides. The critical infrastructure protection initiative of the last
few years needs substantial upgrading in order to better coordinate
with infrastructure interdependencies, provide realistic evolving vulnerability
assessments, develop technologies to protect control systems, develop
and deploy integrated multi-sensor detection systems to warn of system
disruption, and lower institutional barriers to the associated public-private
coordination activities. A significant increase in Federal research
and development funding for energy infrastructure protection is needed.
Ernest J. Moniz
Melanie A. Kenderdine
On Tax Incentives, Demand Efficiency, the SPR, and Reserve Capacity
Based on the serious energy supply problems facing the United States
and in view of past national energy policy initiatives (starting in
the Nixon administration), the greatest emphasis has always been focused
on increasing supply of traditional fuels. Also overlooked is the fact
that the tax code has been extraordinarily favorable to the exploration,
production, and development of oil, natural gas, and coal, and that
the federal government has subsidized the development of nuclear power
far more than it has solar, wind, and other clean alternatives.
It is also obvious that there is little need to provide any tax or
other incentive to the oil and gas industry. The major companies are
reporting record profits and prices are at very high levels. Consumersespecially
low- and moderate-income consumersare suffering from the high
cost of natural gas and other heating fuels. Furthermore, many low-income
households are facing utility cutoffs because of the sharp increase
in heating costs. These problems require immediate solutionfrom
sharply increasing low-income heating assistance and weatherization
programs to prohibiting shut-offs.
While the report does recommend demand-side energy efficiency initiatives,
I believe that such initiatives can go much further. Tax incentives
for building energy-efficient homes and buildings, installing energy-efficient
equipment, and purchasing energy-efficient appliances would create a
vigorous market for energy-efficient products. On-the-shelf energy-efficient
technologies are available. Expanding U.S. production of energy-efficient
technologies will also enhance our domestic economy and provide new
opportunities for exports.
While I support the reports recommendations regarding the building
of the SPR, it is also important to define clearly when it should be
used. Essentially, rapid increases in price are a sign of market failure.
An emergency situation calling for use of the SPR could be defined as
a percentage increase in price within a specified period of timesay,
25 percent over ten or fifteen days.
It is also critical to determine a requirement for companies that
refine and import petroleum to hold a certain level of stock. As the
report correctly points out, deregulation and reliance on the market
does not ensure supply security. Previously, companies deemed it to
be in their economic self-interest to hold inventory. Now, companies
seek to hold as little inventory as possible in order to lower costs.
This strategy of just-in-time inventory management has been very costly
to consumers and the economy, and requires intervention by the federal
government. While some may argue that we should rely on market forces
to determine appropriate inventory levels, experience has confirmed
that market forces are not working. Requiring all companies to hold
a minimum level of inventory will provide at least some cushion of supply
during periods of disruption.
A similar strategy ought to be applied to suppliers of natural gas,
propane, and electricity. Deregulation of the electric utility market
has left utility customers at the mercy of independent electricity generators
who, unlike regulated utilities, have no incentive or requirement to
build reserve capacity. The lack of reserve capacity, like the low levels
of oil inventories, is a growing threat to consumers and the economy.
On Demand Restraint
The "energy crisis" described in the report results in large
part from the unconstrained growth of energy consumption. The United
States is unique among the industrialized countries in that it does
not use fiscal measures to limit growth in energy use. This policy must
change to control growth of energy use and maintain environmental quality.
The most efficient mechanism would be broad-based taxes on energy. In
addition, the United States should consider imposing higher taxes on
vehicles to encourage the expedited introduction of more efficient energy-using
technology. These taxes should be introduced in a revenue-neutral fashion.
In addition, regions such as California, which face energy disruptions
due to infrastructure constraints, should consider replacing regressive
sales taxes with taxes on energy designed to offset the infrastructure
On the Use of Strategic Stocks
The authors of the report are to be congratulated for their extensive
discussion of the role of inventories. Industrialized countries must
recognize that the increasingly competitive structure of the global
economy prevents firms in the energy sector from holding reserve capacity
(whether in the form of inventories or reserve generation capacity).
Energy prices will be more volatile as a consequence. Governments must
develop measures to compensate for this structural change if they wish
to moderate the increase in the effect of price volatility. Such incentives
can include more frequent use of governmentally owned inventories or
the provisions of tax incentives to firms to build reserves. In planning
such measures, governments should recognize that mandated stocks or
imposition of reserve requirements by regulation generally are not effective.
It must be understood that the cost of any measure designed to mitigate
price volatility will be borne either by the taxpayer or the consumer.
Efforts should be made to achieve the maximum reduction in volatility
at a minimum cost.
Philip K. Verleger Jr.
On Caspian Energy Export Routes
Which export routes for Caspian energy are most appropriate depends
primarily on which transit countries offer favorable conditions by facilitating
construction of pipelines and charging reasonable transit fees. The
actual pipeline construction cost is only one componentand not
necessarily a large oneof any commercial decision about which
route to use. The record of Russia and most especially Iran is one of
long delays and unreasonable demands. At this stage, the Baku-Ceyhan
project is more advanced than any other oil pipeline project not yet
under construction. In these circumstances, it is inappropriate to assume,
as the report does, that promoting Baku-Ceyhan is at odds with a commercial
approach toward Caspian energy.
David L. Goldwyn
On Alternative Energy Sources, Minimum Petroleum Inventory Standards,
an Organization of Petroleum Importing Countries, Nuclear Energy
U.S. energy policy should be guided by a stronger commitment to developing
alternative energy sources and protecting vulnerable households and
businesses from price shocks resulting from hikes in the costs of heating
oil, gasoline, and diesel fuel.
Mandating minimum standards for petroleum inventories in the United
States and creating an Organization of Petroleum Importing Countries
(OPIC) to stand up to the Organization of Petroleum Exporting Countries
are measures that should be taken to more aggressively protect our oil-dependent
The establishment of federal minimum inventory standards for domestic
wholesalers would buffer consumers from skyrocketing prices associated
with inadequate inventories at times of high demand. In New England,
for example, home heating oil prices went up $1 a gallon in the winter
of 2000, when a severe cold snap combined with low inventories to send
fuel costs through the roof. Similar supply shortages have resulted
in soaring gasoline prices in the Midwest during the summers peak
An OPIC to offset the clout of OPEC would use the threat of sanctions
to keep the cartel from illegally manipulating production quotas to
their advantage and our detriment. Moreover, OPIC would negotiate an
end to radical price fluctuations that hurt producing and consuming
nations alike by supporting a floor price for crude oil in exchange
for OPEC backing of a ceiling price. A floor price of $20 a barrel would
ensure adequate revenues to producing states, which depend on such dividends
for their political, economic, and social stability. A ceiling price
of $25 a barrel would guard against price shocks while encouraging the
development of alternative energy sources in consuming nations.
U.S. policy guided by the goals of expanding nuclear capacity and
exploiting domestic sources of oil and gas will not succeed in the long
run. Energy independence is critical. This cannot be achieved by more
drilling within U.S. borders. The only method is to increase our dependence
on effective and affordable renewable energy sources in addition to
creating a stable pricing environment for all our energy needs.
We must aggressively pursue promising alternative sources of energy
to heat our homes, run our vehicles, and power our businesses. At the
same time, we must take a tougher line toward the oil industry domestically
to protect the most vulnerable, and use our clout internationally with
oil producers to end the price shocks caused by their manipulation of
Joseph P. Kennedy II
TASK FORCE MEMBERS
ODEH ABURDENE is managing partner of Capital Trust S.A. He was a manager
in the International division of the American Security Bank in Washington,
D.C., and served as a Vice President with the First National Bank of
GRAHAM ALLISON is Director of the Belfer Center for Science and International
Affairs at Harvard Universitys John F. Kennedy School of Government,
and Douglas Dillon Professor of Government. In the first term of the
Clinton administration, Allison served as Assistant Secretary of Defense
for Policy and Plans.
JOSEPH C. BELL is a Partner with Hogan & Hartson, L.L.P. Bell was
previously U.S. Designated Representative for the International Energy
Agency, Dispute Settlement Center; Assistant General Counsel of International
Affairs for the Federal Energy Administration (197477); and the
Cabinet Task Force on Oil Import Controls (1969).
PATRICK CLAWSON is Director for Research at the Washington Institute
for Near East Policy, and was previously a Senior Economist at the International
Monetary Fund, the World Bank, and the Defense Department's National
Defense University. He has written or edited twelve books about the
FRANCES D. COOK heads the Ballard Group LLC, a business facilitation
service in Washington. She is a three time former ambassador, including
twice to energy-exporting countries. She twice served as Deputy Assistant
Secretary of State, where her specialty was political-military affairs.
Her regional focus is the Arabian Gulf and Africa.
JACK L. COPELAND is Chairman of Copeland Consulting International,
an investment and geopolitical advisory firm.
CHARLES B. CURTIS is Senior Adviser to the United Nations Foundation
and the President of NTI, a newly formed foundation organized to reduce
the contemporary threat from weapons of mass destruction. He has previously
served as the Deputy Secretary and the Undersecretary of the U.S. Department
of Energy, the Chairman of the Federal Energy Regulatory Commission,
and the Chief Energy Counsel of the U.S. House of Representatives
Energy and Commerce Committee.
TOBY T. GATI is Senior International Adviser at Akin, Gump, Strauss,
Hauer & Feld, L.L.P. She served as Special Assistant to the President
and Senior Director for Russia, Ukraine, and the Eurasian States at
the National Security Council in the White House in 1993, and then as
Assistant Secretary of State for Intelligence and Research until May
LUIS GIUSTI currently serves as Non-Executive Director of "Shell"
Transport and Trading, and as Senior Adviser to the Center for Strategic
and International Studies. Formerly, he was Chairman and CEO of Petróleos
de Venezuela, S.A.
DAVID L. GOLDWYN is the principal of Goldwyn International Strategies,
LLC, an international consulting firm. He served as Assistant Secretary
of Energy for International Affairs and Counselor to the Secretary of
Energy, Senior Adviser to the Permanent Representative to the United
Nations, and Chief of Staff for the Undersecretary of State for Political
Affairs under President Bill Clinton.
MICHEL T. HALBOUTY is an internationally renowned earth scientist and
engineer whose career and accomplishments in the fields of geology and
petroleum engineering have earned him the recognition as one of the
worlds outstanding geo-scientists.
AMY MYERS JAFFE is the senior energy adviser at the James A. Baker
III Institute for Public Policy of Rice University. Prior to joining
the Baker Institute and President of AMJ energy consultants. Jaffe was
the senior economist and Middle East Analyst for Petroleum Intelligence
Weekly. Jaffe is the author of numerous articles on oil geopolitics,
the Middle East, and the Caspian basin region.
MELANIE A. KENDERDINE is the Vice President of the Gas Technology Institute.
Previously she was Director of Policy at the Department of Energy, Senior
Policy Adviser to the Secretary of Energy for oil and gas, Deputy Assistant
Secretary at Department of Energy, and Chief of Staff to Congressman
Bill Richardson (D-N.M.).
JOSEPH P. KENNEDY II is Chairman and President of Citizens Energy Corporation,
a nonprofit firm he founded in 1979 to provide low-cost heating oil
to the poor and the elderly. Before leaving Citizens in 1986 to serve
six terms in the U.S. House of Representatives, Kennedy built the company
into a leading innovator in the electricity, natural gas, and prescription
drug industries, all the while using revenues from the companys
successful for-profit subsidiaries to finance charitable programs for
the poor here in the United States and abroad. Kennedy returned to Citizens
Energy full-time in 1999 and serves on the boards of companies in the
health care, telecommunications, and energy industries.
MARIE-JOSEE KRAVIS is an Economist and Senior Fellow at the Hudson
Institute. She specializes in trade and international financerelated
issues and serves on the Secretary of Energys Advisory Board.
She also sits on the board of the Ford Motor Company, Vivendi Universal,
U.S.A Networks, Hasbro Inc., Hollinger International, and the CIBC.
KENNETH LAY is Chairman and CEO of Enron Corporation. Lay also was
chief executive officer of Enron from 1985 until February 2001. Currently,
Lay serves on the board of directors of Compaq Computer Corporation,
Eli Lilly and Company, i2 Technologies, Inc., and Trust Company of the
West. He is a Vice-Chairman of The Business Council and a member of
the Board of Trustees of Howard University, Eisenhower Exchange Fellowships,
Inc., Resources for the Future, the H. John Heinz III Center for Science,
Economics, and the Environment, the American Enterprise Institute, and
the First United Methodist Church in Houston. Lay is also a member of
The Trilateral Commission and was selected to receive the Private Sector
Councils 1997 Leadership Award, received the 1998 Horatio Alger
Award, and was named by Business Week as one of the top 25 managers
in the world for 1999. Lay is a member of the Texas Business Hall of
JOHN H. LICHTBLAU is Chairman and CEO of Petroleum Industry Research
Foundation, Inc. (PIRINC). He has been a member of the National Petroleum
Council (Advisory Council to the Secretary of Energy) since 1968 and
is also a member of the International Associates of Energy Economics.
JOHN A. MANZONI is Regional President for British Petroleum in the
eastern United States. Prior to being the Regional President, Manzoni
was Group Vice President for the Refining and Marketing business, with
responsibility for European marketing and global downstream planning
and performance. Prior to that Manzoni headed up the BP side of the
BP/Amoco merger directorate.
THOMAS F. MCLARTY III is Vice Chairman of Kissinger McLarty Associates,
an international strategic advisory firm with offices in Washington,
D.C., and New York. McLarty was President Bill Clintons first
Chief of Staff and also served as Counselor to the President and Special
Envoy for the Americas. Prior to joining the Clinton administration,
McLarty was Chairman and CEO of Arkla, Inc.
ERIC D.K. MELBY is a Senior Fellow with the Forum for International
Policy and a principal in the Scowcroft Group. He handled economic and
energy issues on the National Security Council staff from 198793
and was Special Assistant to the Executive Director of the International
Energy Agency from 198185. Has also worked in the Department of
State and Agency for International Development.
SARAH MILLER is Editorial Vice President and Group Editor of the Energy
Intelligence Group. Miller was European Director of McGraw-Hill News
and London bureau chief and energy correspondent for McGraw-Hill World
STEVEN L. MILLER is Chairman of the board of directors, President,
and CEO of Shell Oil Company. He is a member of the National Petroleum
Council and the Business Roundtable.
ERNEST J. MONIZ is a Professor of Physics and former Head of the Department
of Physics at the Massachusetts Institute of Technology. He served as
Associate Director for Science in the Office of Science and Technology
Policy in the Executive Office of the President (199597) and as
Undersecretary for Energy, Science, and Environment in the Department
of Energy (19972001). At the Department of Energy, he also served
as the Secretarys Special Negotiator for Russian Programs.
EDWARD L. MORSE is currently Executive Advisor at Hess Energy Trading
Co., LLC, a proprietary trading firm, with offices in London and New
York. His career in the energy sector spans more than two decades and
includes senior positions in business, government, academia, and publishing.
He joined HETCO in April 1999 after more than a decade as Publisher
of Petroleum Intelligence Weekly. In the winter of 200001
he chaired the joint Task Force, cosponsored by the James A. Baker III
Institute and the Council on Foreign Relations, that prepared this Report.
From 1978 to 1981 Morse was in the U.S. government as Deputy Assistant
Secretary of State for international energy policy. A frequent commentator
on oil market trends, both in writing and for broadcast media, Morse
is the author or co-author of four books on politics, finance, energy,
and international affairs. He has written some four dozen scholarly
articles and numerous other commentaries. He is a member of the Council
on Foreign Relations and of the Oxford Energy Policy Club. He is a trustee
of the Petroleum Industry Research Foundation and a member of the advisory
boards for the energy programs at New York University, the Johns Hopkins
School of Advanced International Studies, and the University of Houston.
SHIRLEY NEFF is an Economist for the Democrats on the Senate Energy
and Natural Resources Committee. She is the senior staff member responsible
for policy and tax issues for oil and gas, electricity and renewable
energy, climate change, and international energy matters. Prior to joining
the committee staff, she was an economist for a state public utility
commission and for an oil and gas company and an electricity utility.
DAVID O'REILLY has been named Chairman of the Board and Chief Executive
Officer for ChevronTexaco. Since January 2000, he has served as Chairman
of the Board and Chief Executive Officer of Chevron Corp. Earlier, O'Reilly
was one of the company's two Vice Chairmen, responsible for Chevron's
worldwide exploration and production and corporate human relations.
KENNETH RANDOLPH is General Counsel and Secretary of Dynegy, Inc, responsible
for all of Dynegys legal and regulatory activities. Prior to joining
Dynegy, Randolph served as an energy attorney for the law firm of Akin,
Gump, Strauss, Hauer & Feld in Washington, D.C.
PETER ROSENTHAL is Chief Correspondent on energy and commodities for
GARY N. ROSS is Chief Executive Officer of the PIRA Energy Group, a
New Yorkbased international energy consultancy retained by some
three hundred companies in more than thirty countries. Ross consults
with many energy ministries around the world on energy markets and public
ED ROTHSCHILD is Principal at the consulting firm of Podesta/Mattoon
in Washington, D.C. Formerly the Energy Policy Director of Citizen Action
and consumer advocate on energy matters from 197197, he is also
the author of numerous reports and studies on natural gas and oil pricing
issues, competition, and concentration in the petroleum industry.
JEFFERSON B. SEABRIGHT is Vice President of Policy Planning for Texaco
Inc. He was formerly the Executive Director of the White House Task
Force on Climate Change, Director of the Office of Energy, Environment
& Technology, U.S. Agency for International Development; on the
Advisory Council, National Renewable Energy Laboratory; and Board Member,
ADAM SIEMINSKI is the Director and Global Energy Strategist at Deutsche
Banc Alex. Brown. From 198897, Sieminski was a Senior Equity Analyst
for NatWest Securities, covering the major U.S.-based international
oil companies. He is a member and past President of both the National
Association of Petroleum Investment Analysts and the Washington chapter
of the International Association for Energy Economics, as well as Chairman
of the Independent Petroleum Association's oil and gas supply/demand
MATTHEW SIMMONS is President of Simmons & Company International,
a specialized energy investment bank. He is a Member of the National
Petroleum Council and Bush-Cheney Energy Transition Advisory Committee,
and past Chairman of the National Ocean Industries Association.
RONALD SOLIGO is a Professor of Economics at Rice University with a
specialty in development and energy economics. He has authored a number
of studies on energy-related topics for the James A. Baker III Institute
for Public Policy at Rice University.
MICHAEL D. TUSIANI has been Chairman and CEO of Poten & Partners
since 1983. Prior to joining Poten in 1973, he was employed by Zapata
Naess Shipping Company. Tusiani has written two books: The Petroleum
Shipping Industry A Non Technical Overview and The Petroleum
Shipping Industry Operations and Practices.
PHILIP K. VERLEGER JR. is President of PK Verleger LLC and a Principal
with the Brattle Group. Verleger served as an energy adviser in the
Ford and Carter administrations and advised President Ronald Reagan
on energy issues. Verleger has been a Visiting Fellow at the Institute
for International Economics and is the author of two books and numerous
articles on the causes of energy price volatility.
ENZO VISCUSI is Group Senior Vice President and Representative for
the Americas of Eni, the Italian-based integrated energy company, where
he also serves as Chairman of Agip Petroleum Co. Inc. He is primarily
involved in promoting international ventures.
CHUCK WATSON is the Chairman and chief executive officer of Houston
Dynegy Inc., a leading provider of energy and communications solutions.
He established NGC Corp, Dynegy's predecessor, in 1985 and served as
president until becoming chairman and chief executive officer in 1989.
Watson currently serves on the National Petroleum Council and is a founding
member of the Natural Gas Council. He is a board member of the Interstate
Natural Gas Association of America and the Edison Electric Institute.
WILLIAM H. WHITE is President of the Wedge Group Inc., a diversified
investment firm with subsidiaries in the oil services, engineering,
hotel, and real estate business. White is chairman of the Houston World
Affairs Council. He served as deputy secretary and chief operating officer
of the U.S. Department of Energy from 1993 to 1995.
DANIEL YERGIN is Chairman of Cambridge Energy Research Associates.
He is author of The Prize, for which he received the Pulitzer
Prize, co-author of The Commanding Heights, and recipient of
the U.S. Energy Award. Yergin is on the Board of Directors of the United
States Energy Association and a member of the National Petroleum Council,
the U.S. Secretary of Energy Advisor Board, and the Bush-Cheney Energy
Transition Advisory Committee.
MINE YÜCEL is Senior Economist and Assistant Vice President, Federal
Reserve Bank of Dallas. Yücel is a member of the U.S. Association
of Energy Economics and the author of numerous articles on energy and
TASK FORCE OBSERVERS
PAUL W. CHELLGREN is Chairman of the Board and Chief Executive Officer
of Ashland, Inc. He is Director or Trustee at PNC Financial Services
Group, Medtronic, Inc., the University of Kentucky, Center College,
and American Petroleum Institute. Chellgren is a member of the Business
Roundtable Policy Committee, the National Petroleum Council, the National
Refiners Association, and the Society of Chemical Industry.
RICHARD N. COOPER is Maurits C. Boas Professor of International Economics
at Harvard University. He was formerly chairman of the National Intelligence
Council, Federal Reserve Bank of Boston, and Undersecretary of State
for Economic Affairs. He is the author of The Economics of Interdependence
and other works.
CHARLES DUNCAN JR. serves on the board of directors of Newfield Exploration
Company, Inc., and The Welch Foundation. He is Treasurer and Director
of Methodist Health Care System, and Chairman of its subsidiary, Methodist
Care, Inc. Duncan was former Secretary of the Department of Energy from
August 1979 until January 1981, and former President of the Coca-Cola
WILLIAM E. HENDERSON III is manager, Joint Venture Coordination, Ashland,
JUDITH KIPPER is an internationally recognized Middle East specialist.
She is the Director of the Council on Foreign Relations Middle East
Forum and the Director of the Middle East Studies program at the Center
for Strategic and International Studies. Kipper is a consultant on international
affairs to ABC News. Previously, she was a guest scholar at The Brookings
Institution and a Resident Fellow at the American Enterprise Institute.
ROBERT A. MANNING is the C.V. Starr Senior Fellow and Director of Asia
Studies at the Council on Foreign Relations. He is the author of The
Asian Energy Factor: Myths and Dilemmas of Energy, Security and the
Pacific Future, and co-author of China, Nuclear Weapons, and
Arms Control: A Preliminary Assessment. From 1989 until 1993, he
was a Policy Adviser to the Assistant Secretary for East Asian and Pacific
Affairs at the Department of State. He has also been an adviser to the
Office of the Secretary of Defense (198889).
RICHARD MURPHY is Hasib J. Sabbagh Senior Fellow for the Middle East
at the Council on Foreign Relations. He held successive appointments
as Ambassador to Mauritania, Syria, the Philippines, and Saudi Arabia.
He served as Assistant Secretary of State for Near Eastern and South
Asian Affairs. President Ronald Reagan nominated him to the rank of
Career Ambassador in 1986.
STEPHEN OXMAN is a Senior Adviser, Morgan Stanley Dean Witter; former
Assistant Secretary of State for European and Canadian Affairs; and
former Partner with James D. Wolfensohn Incorporated. He is a member
of the Advisory Council of the Woodrow Wilson School of Public and International
Affairs at Princeton University.
MICHAEL L. TELSON has been Chief Financial Officer of the U.S. Department
of Energy since October of 1997. Telson was Senior Analyst of the Committee
on the Budget, U.S. House of Representatives, served as the Staff Economist
of the House Ad Hoc Committee on Energy, and on the governing council
of the International Association for Energy Economics (IAEE).
Past Oil Crises and Recent Issues Concerning Petroleum Security Guarantees
||First oil crisis
|Second oil crisis
|Iraq - Iran War
||· Fourth Middle East war
· Embargo by Arab oil producers
|· Iranian revolution
· Rapid oil production decreases in Iran
· Iran-Iraq War
|· Iraq attacks Iran
||· Iraq invades Kuwait
||· 1999 Opec Agreement
and Low Investment
|Supply decrease period
||· About 6 months
||· About 4 months
||· About 5 months
||· About 7 months
||· 12 months plus
|Supply decrease magnitude
||· 4.3-4.5 million B/D (2 months)
· 2.2-2.6 million B/D (2 months)
|· 5.3-5.6 million B/D (2 months)
· 3.8 million B/D (2 months)
|· 3.7-4.1 million B/D (2 months)
· 2.5-3.0 million B/D (3 months)
|· 5.0-5.3 million B/D (2 months)
· 4.0-4.7 million B/D (3 months)
· total loss approx. 400-500 million barrels
|· Over 1 billion barrels sustained Opec production
|Excess production capabilities
||· About 3.75 million B/D
||· About 4.55 million B/D
||· About 6.70 million B/D
||· About 6.20 million B/D
||· 1.0-2.0 million B/D
|No. of days of petroleum stocks in OECD
||· Public: 0
· Private: 70 days
|· Public: 7 days
· Private: 65 days
|· Public: 9 days
· Private: 77 days
|· Public: 25 days
· Private: 61 days
|· Public: 28 days
· Private: 53 days
|Petroleum market structure
||· Majors posting price system
· Majors rights in long-term crude contracts
|· Sales pricing system by governments of oil-producing
· Long-term contracts with oil-producing countries
|· Sales pricing system by governments of oil-producing
· Long-term contracts with oil-producing countries
|· Market-linked pricing system
· Development of oil futures market
· Term contracts with oil-producing countries and expansion of spot
|· Market linked pricing system
· Active oil futures market
· Term contracts tied to spot transactions
Note: In the Gulf Crisis, reduced crude oil supplies continued even
after the war had ended, until Kuwaiti production recovered.
Source: James A. Baker III Institute for Public Policy.
Mar 26, 2001
Copyright © Petroleum Argus, 2001
The 'seventies are back. OPEC producers are warming to the rhetoric
that underlined Third World radicalism 30 years ago. Having suffered
the destabilising consequences of a price collapse in 1998, OPEC members
are demanding a "fair" price for their oil. And what they see as fair
is not what consuming nations accept. Producers are in no mood to do
favours for consumer economies battling against slowdown and recession.
Producers were there two years ago, and consumers not only failed to
mourn, but scarcely even noticed. Revenue -- and the battle over oil's
economic rent -- have once again taken centre stage. And an emboldened
OPEC is pressing home its advantage (see pp 8-11).
As with most revivals, not everything is as it was. Key OPEC producers
Saudi Arabia, Iran and Kuwait are gradually opening up to foreign investment
-- rather than wresting control of their oil industries from the majors
as they did 30 years ago. But the same argument that underlined nationalisation
then is driving OPEC's $25/bl oil policy now. OPEC members, including
Saudi Arabia, believe the industrialised world is denying it justice
in the oil markets. In the 'seventies, the majors prevented producing
nations from receiving a fair income for their national treasure. Now
it is the greed of high-tax consumer governments that is attracting
The language reflects the trauma OPEC producers suffered following
the 1998 price collapse. Those events dominate OPEC thinking, and have
fundamentally changed the attitude of even moderate members. Anti-tax
rhetoric from OPEC is hardly new. But the organisation has rarely been
more united, allowing it to make its position felt. An increasingly
hawkish Saudi Arabia is finding common cause with Venezuela's Hugo Chavez
-- a populist, self-styled champion of the Third World in true 'seventies
fashion. That axis is giving OPEC the solidarity that evaded it for
much of the 'nineties. Output discipline has kept markets tight and
prices high -- turning the screw on consumer governments. When European
consumers rebelled last year against fuel taxes, OPEC scented blood.
"People always talk about revenues of OPEC. They never talk about [oil
tax] revenues of industrialised countries," says Algerian oil minister
and OPEC president Chakib Khelil. "Before [consumer governments] point
a finger at OPEC, they should probably reduce taxes in their own country."
OPEC's more strident position would not be possible without the consent
of Saudi Arabia. It suffered heavily in 1998, and fears a repeat price
collapse as global economies slow. Saudi-U.S. relations -- crucial to
OPEC policy since the United States became a net importer of oil in
the early 'seventies -- are under strain. U.S. support for a bellicose
Israel is acutely embarrassing for the kingdom. OPEC is not about to
wield the oil weapon, 'seventies style. But Saudi Arabia cannot afford
to draw accusations that it is doing the United States a favour by pressing
for oil price moderation. Although the new administration of George
Bush would seem to be the dream team for its Middle East allies, so
far Bush has conspicuously failed to demonstrate any special magic in
his relations with them. The Saudis certainly did the United States
no favours at the OPEC meeting.
When it comes to the impact of energy prices on economic growth, OPEC
is at best non-committal, and at worst seemingly in denial. "Oil is
not that important to economic growth," said OPEC president Chakib Khelil
last week. Riyadh agrees. "We think $25/bl is a fair price," says Saudi
oil minister Ali Naimi.
The concept of a fair price is hard to pin down. But there is such
a thing as a sustainable price. It is, of necessity, a compromise between
buyers and sellers. The difficulty for OPEC's core Mideast Gulf producers
is that $25/bl is needed to sustain the unreconstructed state-driven
economies of the Middle East. But the experience of the 'seventies shows
that high prices eventually unleash a wave of investment in non-OPEC
oil and a massive improvement in energy efficiency. This is not what
OPEC wants, but what it might get.