America Needs an Oil Change
“America is addicted to oil.” So said President Bush in this year’s State of the Union. Nice line! Is it true?
Since 1980, the U.S. economy has more than doubled its output, adjusted for inflation.
Over the same period in which the U.S. economy was growing by more than 100%, America’s use of petroleum has risen by some 17%. Does that sound like an addiction to you?
By comparison, the use of renewables other than hydropower has increased by 23% since 1980, coal use has increased by about 50% and the use of nuclear power has increased by 200%. (All statistics from the U.S. Energy Information Agency, www.eia.doe.gov)
More striking still: As late as 1995, the United States was using virtually no more petroleum than it had 15 years before. And since 2004, oil consumption in the U.S. has flattened out again. In other words, almost all of the net increase in the use of oil in the United States during the past quarter-century occurred in just nine years, 1995-2004.
And what did those nine years have in common? I bet you can guess: Those were the years that oil was cheap. And the 16 years in which oil use remained flat? No prizes for this one. Those were the years when oil was costly.
Too much of the commentary on energy seems to regard oil as a unique commodity, exempt from the laws of supply and demand that govern everything else.
Thus, the industry experts project that since the price of oil has risen from US$30 a barrel to US$65 over the past five years, it must surely continue rising to US$100 over the next five.
At the same time, those experts project demand for oil continuing to glide ever upward at the 1995-2004 rate, regardless of the new higher prices.
But those projections cannot be right. At US$65 a barrel, explorers will be drilling for oil all over the planet. And with gas still more than US$2.50 per gallon at the pump, SUV sales in the U.S. are plunging: down 10% overall, with gas-guzzlers like Ford Expedition and Lincoln Navigator sales dropping 28% and 29% respectively in 2005. (Sales of Toyota’s ultra-fuel-efficient Prius hybrid automobile doubled over the same period.)
Those trends suggest that the price of oil should soon stabilize and then drop. That’s good news—but not good enough.
The gravest problem with oil is not the price we are paying—it is the people to whom the price is paid. Aside from third-place Norway, the world’s leading oil exporters constitute like a roll call of the aggressive, the authoritarian, the unstable, the corrupt, and the extremist. The oil slump of the 1990s removed wealth from their mischievous hands. The oil boom has restored it.
Saudi oil revenues have rocketed from $39-billion in 1998 to an estimated $153-billion in 2005 (in constant 2005 U.S. dollars). Iranian oil revenues have risen from $11.2-billion to $46.6-billion.
Some people, notably the influential New York Times columnist Tom Friedman, have argued that the U.S. should raise gasoline prices to help cut into those dangerous revenues. But cutting retail demand for gasoline would hit Norway as well as Iran and Saudi Arabia.
If we are concerned that oil comes from the wrong places, we should be developing policies that bring new oil to market from the right places. One way to achieve that would be for the oil-consuming democracies to form a cartel of their own. Aside from third-ranking China, the top 10 oil importers are all democracies. Six of them—the U.S., Germany, France, Italy, Spain and India—have been targeted victims of Islamic terrorists. Together, these democracies could reshape the world oil market by setting criteria for responsible international behaviour—and then imposing a tariff (say US$12 a barrel) on any oil exporter that failed to live up to those standards.
That inbuilt price advantage for oil producers who co-operate against terrorism and weapons of mass destruction would not much affect an Iraq or a recalcitrant Saudi Arabia when markets are tight, as they are now. But as markets inevitably slacken, a US$12 advantage would gradually redirect oil production away from bad actors to good global citizens—while providing a permanent incentive to oil companies to develop sources like Canada’s oil sands and Mexico’s offshore fields.
The goal of energy policy should not be to pressure consumers to buy less. Market forces alone will see to that. The policy goal should be to constrain the most dangerous producers to sell less. Over the longer run, policy should seek to alter the behavior of those dangerous producers.
For ultimately it is not America’s alleged addiction to oil that threatens the peace of the world. It is the Persian Gulf region’s all too genuine addiction to authoritarianism, extremism, violence and terror.