Archive for Tuesday, September 19, 2000

Energy crisis doesn’t exist

September 19, 2000

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It drives me nuts when I hear people carrying on about the current "energy crisis." There is no energy crisis.

That phrase had heft when it was used to describe the efforts by OPEC oil producers in the 1970s to blackmail the West with an oil embargo. But today? Who can talk seriously about an energy crisis when there are no gasoline lines and every other vehicle tanking up is a gas-guzzling SUV?

If there is a crisis at hand regarding energy supplies in the West, it is a reality crisis. Especially in the United States.

Americans, who use a quarter of the world's daily oil consumption, seem to think that cheap oil is a birthright. They have forgotten the real oil crises of the 1970s, which scared Congress into passing laws to encourage conservation and forced Jimmy Carter to turn down the White House thermostat. Conservation vanishes from the political agenda during the good times.

In the United States, speed limits are up, large cars are back in, SUVs get exempted from gas mileage requirements. In a hot economy, even one whose base has shifted from heavy manufacturing to microchips, energy use keeps rising.

America's amnesia has been helped by the long-term downward trend in retail gas prices, which dipped as low as 95 cents a gallon in 1999. According to the energy expert Daniel Yergin, this price, when inflation-adjusted, was lower than at any time since recorded prices began.

So it has become easy for politicians and the public to ignore a basic economic lesson: Even if prices are dropping long-term, they can still fluctuate if supply gets out of whack with demand. And it doesn't take a war or an embargo to send low prices into reverse.

The history of the current price spike dates back to late 1997, when OPEC nations decided to increase production just as the Asian economic flu hit. When Asian economies tanked, their energy use plunged. The combination of greater supply and less demand sent oil prices spiraling downward to $9 to $10 a barrel.

"Nobody thought of what the dropping prices were doing to the budgets of oil exporters," notes Robert Ebel, an energy expert at Washington's Center for Strategic and International Studies. Persian Gulf oil states and other OPEC producers are unhealthily dependent on oil revenues, so they decided in 1999 to act together to bring production down and prices up.

OPEC produces only about one-third of the world's oil supplies, and few believed its quarrelsome members could still act in concert. They did, at an economic juncture that magnified their impact. While they were cutting production, the United States and European economies kept on growing and Asian economies mounted a robust comeback.

With global supply dropping, and demand mounting, reality bit. Crude oil prices tripled in less than two years and may be heading towards $40 a barrel. Even though the OPEC cartel has raised production by nearly 3 billion barrels a day since the beginning of the year, and scheduled another boost this week, prices are still rising. So far, the growing supply is being outpaced by the booming international economy.

Prices may continue to rise for a while, and Northeasterners will see spikes in their home heating bills if the winter is cold. Eventually the market will correct itself. Prices will drop as more oil comes on line, or if the Asian recovery slows, or as demand slackens on account of high prices.

But this is not a crisis, even though the Clinton administration may try to push prices down by releasing some Strategic Petroleum Reserve, which was created to fend off a real crisis like an Arab oil embargo. OPEC is not making war on the West. The industrialized countries have brought this mess on their own heads by poor energy planning.

European leaders, who do better at conservation (in part, by imposing gas taxes), are facing popular revolts because those taxes are "too high. Europeans pay two to three times more per liter of gasoline than do Americans. Most of the difference goes for taxes, which are now rising with the price of oil.

U.S. leaders face public wrath because they won't tell voters the truth: Oil is a commodity whose price responds to supply and demand. Consumers must choose between unbridled use and higher prices, or conservation and more stable costs.

We can cut demand if the next president has the guts to introduce a serious policy on conservation that penalizes gas-guzzling vehicles as a start. Or we can keep on doing nothing. In which case, let's stop talking about crises and OPEC when the enemy is definitely us.

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