The National Interest

SOUND BITES and sloganeering just won’t cut it anymore. Energy security—defined as reliable supplies at reasonable cost obtained in an environmentally sustainable manner—is no longer assured. All the presidential candidates loudly proclaim that they will reduce our dependence on foreign oil and, as a bonus, curb carbon emissions. Yet these same politicians, for the most part, have overlooked a serious problem. In so doing, they risk missing an important opportunity.

We are on the verge of an oil-production crunch—in which the growth in the global demand for oil will outpace supply. This is expected to occur, if present trends continue, after 2012.

It is important to note that the world is not “running out” of oil. This is, rather, a problem of production capacity, due, in part, to disappointing exploration results in recent years as well as inadequate investment by producing countries. When combined with massive and continuing demand in the United States and soaring new demand in Asia and the Middle East, conditions have been created for a supply crunch. The U.S. appetite for gasoline and surging Chinese oil and gas demand both have proven surprisingly resistant to high prices. The world currently consumes about eighty-five million barrels a day, up from eighty-three million a decade ago, and will need evermore oil in the future.

The result of a supply crunch will be energy insecurity—unreliable supply at sharply higher prices. There will be nostalgia for the days of three-dollars-per-gallon gasoline. But the ramifications would be far more serious. When OPEC quadrupled its prices between 1973 and 1975, the United States experienced a sixteen-month recession with a GDP decline of almost 5 percent and 9 percent unemployment rates. A deep economic recession around the world could exacerbate and deepen international instability, with the potential for conflict over supplies between OECD countries and large emerging users such as China and India.

Without major energy-conservation efforts (not least in the United States), the impact of a supply crunch will be enormous, with sharp price increases leading to a major economic contraction and dislocation. Governments would maneuver to secure scarce oil supplies, with potentially devastating geopolitical results. These trends are already evident: All the producing countries now feel more confident and less dependent on the traditional powers. Roles are suddenly reversed. It is the energy importers who are now the supplicants. When President Hu Jintao of China left Washington in spring 2006, his destination was Nigeria. Likewise, the Japanese prime minister, Shinzo Abe, flew to Saudi Arabia after his recent U.S. visit.

It is time for politicians to start planning now, with a cold, sober and uncompromising approach. Can we, however, have any confidence that this will happen? We have already seen how, when fuel prices have risen sharply, enraged consumers have resisted added costs for energy and environmental programs and politicians have been tempted to offer quick fixes to reduce the pain. Indeed, since the energy crisis of the 1970s and early 1980s, Washington has pursued a feckless energy policy of encouraging consumption and discouraging production. Politicians encouraged consumption by keeping energy cheap and creating incentives to buy gas-guzzlers, drive more and build larger, more-inefficient homes.

On the supply side, they made huge swaths of onshore and offshore acreage off-limits to oil and gas production. The United States is the only country—even including such environmentally sensitive countries as the United Kingdom, Norway and France—to limit oil and gas exploration to this extent. Tracts of the eastern Gulf of Mexico that hold billions of barrels of oil and gas are inaccessible for purely political reasons. Appeasing Florida’s real-estate and tourism industries has been more important than U.S. energy security.

In addition, politicians throw red meat to the crowd by promising to punish the oil industry for its huge profits, overlooking the small problem that much of this profit is not even made in the United States. In fact, it is not the oil companies, but producing countries like Venezuela, Mexico, Iran and Russia that are provoking the pending production crunch through lack of investment. National oil companies now control nearly 80 percent of worldwide reserves, leaving major Western multinationals with full access to only 6 percent. Populist cheers notwithstanding, international oil companies are the most efficient producers of energy. Wrong policies toward them may have the unintended consequence of reducing production and raising prices. “Windfall” taxes would almost certainly reduce domestic production, hardly an intelligent outcome when we face a production crunch.

Politicians have embraced ethanol as a policy that is good for consumers, the environment and farmers. Let’s be honest: ethanol is a great farm-subsidy program, but it is a multibillion-dollar distraction as an energy solution, and a mistake for both food prices and the environment. Corn prices have more than tripled since the end of 2005 despite record harvests, and ethanol’s net environmental benefits look increasingly dubious when we examine the large amounts of energy, water and fertilizer our farmers use to produce corn. Yet Congress—like King Canute commanding the tides—now wants biofuels production increased from seven to thirty-six billion gallons per year. Regrettably, we do not have the technology, land or water to produce that volume.

The brutal fact is that we do not know how to offset oil with other fuels on the scale that is required. Let me repeat this: there is no alternative energy elixir just waiting in the wings. So, if we cannot increase the supply of oil, then we must cut demand—ideally through efficiency and conservation.

But once again we see politics trumping economics. Government policy should encourage outcomes, but not mandate specific solutions and technologies—especially not those pushed by lobbyists.

Ironically, politicians have an important opportunity that they control but have largely mismanaged—energy research. While all the candidates support energy research and want to expand it, they ignore the meager results we have to show for the government’s over $50 billion investment over the last twenty-five years. The wasted money is unfortunate, but the wasted time is tragic. Congress views energy research as political pork to be spread out across pet projects and districts. For example, solar-research funding is distributed, often in small amounts, across dozens of institutions with varying levels of competence in different congressional districts. To be successful, however, energy research requires a focused program with clear priorities, managed by serious, knowledgeable people who use innovation, competition and collaboration to solve problems. There have been successful government initiatives from the Manhattan Project in the 1940s to the space program of the 1960s and the Defense Advanced Research Projects Agency creating the Internet. Success is only possible with minimal political interference.

Political posturing is inevitable in every campaign, and energy and the environment will of course receive their share. But after this year’s election we must immediately start work on energy solutions that will be neither easy nor painless. Intelligent energy and environmental policy will combine maintaining supply, improving efficiency, reducing emissions intensity and focusing research. Producers, utilities, environmentalists and consumers must agree on workable and nonpartisan policy solutions.

And though this crunch could lead to international conflict, we also need international cooperation. Energy policy is no longer a “domestic” issue, and the United States cannot be “independent.” Oil is a global market affecting every country. The United States and its partners will have to forge more-constructive relationships with energy-producing nations—and a lecturing, hectoring approach will not work. OPEC has shown at its recent meetings that it will not be badgered into increasing production simply because Washington asks. The fact is that today OPEC has very little capacity to increase production.

We need a greater willingness to pool efforts, manage research and share technologies—including those which promote greater energy efficiency and environmental productivity—with a variety of consuming nations, including states like China and India, with whom the United States may have significant differences of opinion on other international issues. Confidence must be created that we will cooperate on energy and not compete.

All of this will require more leadership and maturity than either party has shown to date. Change, a mantra of the campaigns, must come, not only in making sensible energy and environmental policy, but also in finding the political will to carry it out.

J. Robinson West is a former assistant secretary of the Department of the Interior and the chairman of PFC Energy, Inc., strategic advisors in global energy. He is also a member of the advisory council of The National Interest.