Americans Love Cheap Gasoline And Big SUVs. That's Why Foreign Oil Producers Have Us ...

OVER A BARREL

By Bob Davis and Bhushan Bahree
Staff Reporters of The Wall Street Journal

All seven presidents of the past 30 years have tried to wean the U.S. off imported oil. All have failed. And President Bush isn't likely to do much better.

Despite an increasingly energy-efficient economy, the U.S. remains hooked on foreign oil for two reasons. The Organization of Petroleum Exporting Countries-especially Saudi Arabia and its Persian Gulf neighbors-manages oil prices in a way that maintains America's dependence. And the U.S. lacks the political will to do what's necessary to weaken OPEC or reduce the American appetite for oil.

With another military conflict raging in the Persian Gulf-a region that dominates oil exports and holds two-thirds of the world's oil reserves-the implications of America's oil dependency are starker than ever. The U.S. relies on some of the world's most volatile countries to supply a raw material that is critical to its economy and lifestyle. Of the 19.5 million barrels of oil Americans consume every day, about 11.5 million are imported. Roughly half the oil consumed in the U.S. goes for cars and trucks.

The primary issue is price. OPEC-a cartel composed of 11 oil-producing countries-carefully manages its production levels to try to keep prices higher than they would be if they were set in a free market, but low enough to make alternative fuels and technologies uncompetitive.

"If we force Western countries to invest heavily in finding alternative sources of energy, they will," Saudi Arabia's oil minister, Sheik Ahmed Zaki Yamani, said in a 1981 speech. "This will take them no more than seven to 10 years and will result in their reduced dependence on oil as a source of energy, to a point which will jeopardize Saudi Arabia's interests."

One avenue for the U.S. to reduce its need for imported oil is to target domestic demand. For example, the U.S. could make laws to force Americans to use less oil, or achieve the same goal by raising the price through import tariffs or taxes. One of President Bush's favorite economists, Harvard University's Martin Feldstein, suggests that the government cap overall gasoline sales and distribute fuel vouchers electronically. Owners of gas guzzlers would buy vouchers from owners of fuel-efficient cars, creating an incentive to use less gasoline and develop fuel-efficient technologies without new taxes.

But neither the White House nor the Democrats are interested in the idea. That's because cheap oil, imported or not, benefits the U.S. Having the lowest gasoline prices in the industrialized world boosts auto sales, tourism and suburban construction. Lower diesel-fuel prices reduce trucking costs and help businesses along the supply chain save money. Those economic benefits make cheap, imported oil hard to resist.

"If you let the price of oil go artificially high, it will hurt our economy," says Commerce Secretary Don Evans, a former Texas oil executive.

Forget About It

But reliance on imported oil makes the U.S. more vulnerable to instability in Venezuela and the Middle East, and gives a foreign cartel leverage over a key segment of our economy. Every recession since 1973 has been preceded by a big run-up in oil prices. And while only about 20% of U.S. oil imports comes directly from Persian Gulf members of OPEC, the Gulf effectively sets global prices, because it produces the lowest-priced oil and has 90% of the world's extra capacity.

The only time in the past three decades that U.S. oil imports have declined substantially was between 1979 and 1983, when they fell by 40%. One reason was the recession, which cut demand for energy. Another was the almost-simultaneous rise in oil prices after the Iranian revolution of 1979 and in the fuel efficiency of American autos. Prices hit $40 a barrel in 1979-$100 a barrel at today's prices, after accounting for inflation-and were expected to double during subsequent years. To reduce dependence on imports, President Jimmy Carter championed an $88 billion plan to develop synthetic oil from abundant U.S. reserves of coal and shale.

At that point, Saudi Arabia began to worry that high oil prices would backfire. So the Saudis started selling oil at prices several dollars a barrel lower than the OPEC $34-a-barrel standard. Then, in 1985, as the cartel was facing increasing competition from Alaskan and North Sea oil fields, Saudi Arabia and Kuwait engineered a price crash, and OPEC producers agreed to go after market share rather than prop up prices. At low prices, the Persian Gulf countries have an unbeatable edge over other oil producers, because their production costs are much lower.

Indeed, the world-wide price decline, to $12 a barrel, devastated the economies of Texas, Louisiana and other oil-rich U.S. states. The OPEC move was a warning to the U.S.: Forget about energy independence. Over the years, OPEC has adjusted its target range periodically and now generally aims for between $22 and $28 a barrel.

OPEC's strategy has largely worked. Since the mid-1980s, the U.S. thirst for oil has increased. True, the U.S. is far more energy-efficient than it was in 1973. But most of the gains in fuel efficiency came in the early 1980s when oil prices were high. Electric utilities and other large customers switched to natural gas, which was seen as a cheaper and cleaner alternative, and less vulnerable to disruption because it was produced in the U.S. and Canada. In 1979, 13.5% of electricity was produced by oil; that figure dropped to 4.1% in 1985 and about 3% today. Home heating went through a similar transformation, from oil to natural gas.

As oil prices declined after 1985, so did the momentum for energy efficiency. The U.S. became somewhat less dependent on oil mostly because of long-term changes in the structure of the economy, not because of energy-saving technology. In the 1990s, OPEC was determined to keep prices relatively low to retain market share and scare off producers in other regions. The U.S. government didn't require further increases in automobile fuel efficiency. With the economy surging, consumers flocked to minivans, SUVs and other fuel hogs. Gasoline prices fell below 1973 levels, adjusting for inflation.

Political Poison

To lessen dependence on oil, economists say, the U.S. would have to raise the price of gasoline substantially. It would take an additional $1-a-gallon tax, on top of the average current tax of 41 cents, to reduce gasoline consumption by about one-fourth, according to Congressional Budget Office estimates.

But even small gasoline-tax increases are political poison in the U.S. The senior President Bush agreed to a five-cent-a-gallon tax increase in 1990 despite his famous "no new taxes" pledge. Partly because of that, he lost his re-election bid. President Clinton pressed for a broad energy tax in 1993, but settled for a modest 4.3-cent-a-gallon levy. Officials in the current Bush administration say they considered higher gas taxes when they put together their first energy plan in 2001, but quickly rejected them in any form.

Boosting supplies of oil outside the Persian Gulf would also help make the U.S. less dependent on OPEC. But the Bush administration has had trouble winning support to start oil drilling in the Alaska National Wildlife Reserve, and environmental regulations have put much of the Rockies, along with the Atlantic and Pacific coasts, off-limits for new rigs. Oil companies are using technology to extend the lives of old fields, but domestic supply continues to decline.

Elsewhere, Russia, central Asia and Africa are expected to broadly expand production over the coming decades. Even when taken together, however, these oil regions don't have the reserves to shake U.S. reliance on the Persian Gulf, which has the bulk of the world's reserves in cheap, easy-to-tap fields. OPEC nations, says Vito Stagliano, an energy official in the first Bush administration, "are back in charge."