Comment October 2005

Does Oil Have a Future?

Even the industry has its doubts

The energy bill that emerged from Congress this past summer could be the last of its kind. Certainly it ought to be. Missing the point at such an inordinate expense of effort, words, and dollars is plain bad government.

At only a little under 2,000 pages, the new legislation is exhausting but, surprisingly, by no means exhaustive. Somewhere in the vast spaces of the Energy Policy Act, you might think, room could have been found for actions that actually addressed the two main energy-policy challenges of the next decade: global warming and the national-security implications of dependence on imported oil. But no, the authors of this purportedly comprehensive law mostly chose to concentrate on other issues. Severely pressed for time (remember, they had been working on this for years), they had urgent battles to win on subsidies and tax breaks for their respective energy-producing constituencies.

None of this is new, admittedly. Energy bills have been that way for as long as anybody can remember. So why are things likely to be different when the next energy bill gets written? Because, for the first time, economics and politics are starting to align to that end.

Economics starts with the price of oil. When this sits at around $50 a barrel or higher—and, more important, is expected to stay there—ambitious efforts to conserve the stuff look attractive. Businesses and consumers economize. Firms invest in oil-saving technologies, including new fuels. Oil producers respond as well, adding to refining capacity (the chief bottleneck of late), spending more on exploration, and, as the frontier of profitable extraction advances, bringing previously marginal sources on-stream. In the past demand and supply have both responded to higher prices even more powerfully than expected.

This raises the question whether future increases in price will merely be curbed, or whether the price might even drop sharply again—say, to $20 a barrel or less. In such a strange nonmarket this is always possible. At the moment, oil traders are contemplating the potentially awesome appetites of China and India, and betting against it.

The prospect of expensive oil for the foreseeable future, and the risk that the price will go far higher yet, have put the industrial economies, including the United States, in the mood to save oil.

What is interesting is that thanks to shifting politics, this is no longer regarded as bad news. Moderating America's thirst for oil is widely seen nowadays as a good thing, regardless of price. Security is one reason. Dependence on imported oil exposes America to political risk in the most turbulent part of the world. Whatever one's views about the war in Iraq—or about 9/11, for that matter—oil dependence is part of what lies behind those events, and the connection is widely understood. Geopolitical types, including some from the right, increasingly want to pursue energy efficiency, and oil efficiency in particular, as a matter of national security.

These voices are now oddly in harmony with those of environmentalists, mostly on the left, who are calling for drastic measures to curb emissions of greenhouse gases. The science of global warming is nothing like as settled as the environmental movement's spokesmen and media followers would have people believe: projections of future warming are still uncertain, and exactly what one ought to do about greenhouse-gas emissions, even if those uncertainties go away, would be hard to say. Nonetheless, a political alliance of greens and geostrategists has formed, and continues to grow, around the idea that America must use less oil.

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