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.

It is telling that many oil and other old-energy companies are already working on this assumption, and trying to spread their risks. They are big investors in clean or renewable fuels such as wind, solar, hydrogen, and biomass. Anticipating a new carbon-constrained economy, they are also throwing money at research on "sequestration": ways to remove carbon from the air and store it underground. Nuclear power, assisted by heavy subsidies, is making a comeback. This transformation of the energy business would be less of a gamble for the firms concerned if they could be sure that a year from now the world will not be seeing another oil glut. And that is why some big energy companies are leading rather than resisting calls for a new policy—a coherent, stable blend of taxes, public spending, and regulation—to lessen America's demand for oil.

Devising such a policy will be the challenge for the next energy bill, which is needed soon. Is it simply a matter of America's deciding to follow Europe's lead—to accept the Kyoto treaty on greenhouse-gas emissions and mandate abrupt cuts in oil consumption? With luck, no. That is a bad model. Europe's commitment to the Kyoto process is shallow. Most countries are likely to miss their Kyoto targets, and the few that reach them will do so because of changes (such as Britain's switch from coal to natural gas in power generation) that predate Kyoto and were made for other reasons altogether.

Kyoto is not a good plan for the United States or for any other country. Europe's superior virtue on the issue is mostly affectation. The fact is, attitudes are converging, and policies are likely to follow. Speaking at the Aspen Ideas Festival in July (an event co-sponsored by The Atlantic), Bill Clinton said that the greatest threat facing mankind this century is not nuclear, biological, or chemical terrorism but global warming. He was warmly applauded, and—right or wrong—this is no longer a distinctively European point of view. Responding intelligently to the danger, such as it is, calls not for crushing, top-down controls, as Europe is finding out, but for a more pragmatic blend of private innovation and supportive public policy.

However, the right policies are not in place. Subsidies to encourage oil production, the mainstay of the energy bill, would be wrong even if oil were cheap and industry margins thin. Work on new fuels is worthier of support (but not ethanol, another big energy-bill beneficiary, which isn't very clean). Best and cheapest of all is oil conservation, including the use of hybrid vehicles and other technologies. Supporting such efforts with subsidies, however, is complicated and—given the ingenuity of those seeking subsidy—often wasteful.

There is a simpler way. Burning petroleum imposes costs (insecurity, carbon) on society at large. It is a perfect case of externality—and the best remedy, whatever the price of oil may be, is a tax that pushes those costs back to the consumer. It would raise some badly needed revenue at the same time. That is correct: a gas tax. Its time is coming.