The American Spectator

Special Report

"House Republicans, worried about political fallout from the high-profit figures that oil companies released this week, demanded that companies pour those profits into refining more oil for the U.S. market in order to lower prices," reported the Washington Times last month.

"House Speaker J. Dennis Hastert told companies to explain why they are making so much money and what they will do to bring down the cost of gasoline. 'Big Oil needs to do its part in boosting supplies to help ease the pain American families are feeling from high energy prices.'"

There was even talk of a "windfall profits tax" and price controls.

Why is it that no matter who's in charge, Democrats or Republicans, as soon as we have a bump in energy prices, the only thing politicians can think to do is scream about profits and talk of price controls?

There's a simple, two-part formula for an energy crisis: 1) some abrupt event reveals an underlying trend in the availability of resources; and 2) politicians try to cover up the underlying trend by imposing price controls. The result is that consumers never get the message that things are changing and head right off a cliff.

Presidents Nixon and Ford and the Democratic Congress pulled this trick during the time of the Arab Oil Embargo in 1974. President Carter did the same thing during the Gas Shortage of 1979. And California Governor Gray Davis committed hara-kiri over the California Electrical Shortage of 2000.

Now congressional Republicans have been bidding to join this illustrious group.

The Arab Oil Embargo marked a precipitous shift in the world oil market. Although almost no one realized it at the time, America's oil production peaked in 1970 at 10 million barrels a day and has never reached that level again. Demand went right on climbing, however, and in three short years we went from importing 20 percent of our oil to 35 percent. We were sitting ducks. President Nixon didn't help matters by imposing nationwide price controls in 1971.

Then in 1975 Congress extended oil price controls indefinitely and President Ford reluctantly signed on. The oil companies, after all, were responsible for the quadrupling of oil prices and were making "windfall profits." They had to be punished and consumers had to protected from "feeling high energy prices."

The result was no one took the decline of American production seriously and we went right on consuming. Perversely, domestic price controls discouraged American production while encouraging more imports. By 1979 we had pushed imports above 45 percent of our oil and were sitting ducks when the Iranian Revolution temporarily cut supplies again.

California managed to manufacture its own energy crisis. In 1980, Governor Jerry Brown set the state on the "soft path," canceling all future power plants, actually closing down one nuclear plant (Rancho Seco), and concentrating on conservation and "renewable" energy. By 2000 the state was woefully short of electricity. Instead of allowing prices to rise to let Californians know the policy had failed, however, Governor Davis rigidly clung to retail price controls. The result was a yearlong crisis, rolling blackouts, and a bankrupt utility company.

SO WHAT IS THE SITUATION we are facing now? Hurricane Katrina set off a temporary shortage of oil and gas by shutting down two-thirds of our offshore production, which constitutes one-third of our total production (a mere 5.4 million bbd). How could prices not rise? All this may have caused a temporary run-up in profits, but who's going to pay for repairing all the damage? If Congress tries to take away that extra revenue, some of that lost capacity may never get repaired.

Instead of fretting over one quarter's profits, Congress ought to be examining the long term. We now produce only half as much oil as we did in 1970 while consuming 40 percent more. The graph for American production looks from 1980 to 2005 looks like a ski slope. In ten years we may be importing two-thirds of our oil.

Opening up more federal and offshore reserves for exploration is an obvious answer but it won't help that much. The real response is to start easing toward other technologies.

In the last ten years, environmentalists have decided natural gas is the answer to their problems -- which is why we have a gas crisis as well. Until 1988 burning gas in electrical boilers was actually illegal -- a response to the shortages of the 1970s. But the temporary glut that came with 1980s deregulation encouraged environmentalists to think supplies would go on forever. Having already deep-sixed nuclear power, they were stuck with the problem that half our electricity is generated from coal -- the dirtiest fuel ever, source of air pollution, acid rain, and global warming. What to do? They decided natural gas was the answer.

Since 1990, 95 percent of the new power plants in the country have been built to burn natural gas. Utilities and the new merchant companies are happy to oblige. Knowing environmentalists won't object means you can build your plant in less than ten years.

But American gas production peaked in 2001 and probably isn't going to rise again. Almost overnight we were importing 15 percent of our consumption from Canada -- but now the Canadians have peaked as well and are also diverting more gas to development of the Alberta tar sands.

The result has been a fourfold price increase since 1999. That's a huge hit for industrial consumers of natural gas -- the fertilizer industry, plastics, rubber, chemicals, and a dozen others. That wouldn't be so bad except the utilities are crowding them out. Utilities are still guaranteed an automatic pass-through by state regulatory boards and are better able to compete on price. In addition, many liberal states are so excited about "clean energy" that they are rigging special pipeline rates so power plants can buy gas even cheaper.

The results have devastated the manufacturing industry. More than half the fertilizer industry -- centered around gas wells in Louisiana -- has decamped for Mexico and the Middle East. DuPont recently announced it would be moving the "center of gravity" of its plastics manufacturing abroad because of impossibly high gas prices. More than 100 plants in the chemical industry have closed and 100,000 jobs are lost. Goodyear recently cut U.S. tire production 30 percent because it can't get rubber, synthesized with natural gas. Simmons Bedding Company can't find polyurethane foam for its bedding. Business Week recently reported that of 120 large-scale chemical plants under construction around the globe, only one is in the United States.

There's plenty of natural gas left in the world but it's not in North America. If we're going to import from Asia and Africa, we're going to have to build liquid natural gas (LNG) terminals. But as Steven Pearlstein reported in the Washington Post, the Sierra Club alone is stalling every one of the 15 LNG terminals being proposed by the industry. At the same time, of course, they're still encouraging utilities to switch to natural gas.

We've got problems in this country. We're living on a knife's edge as far as energy supplies are concerned and the environmental ethos makes it almost impossible to formulate any suitable response. We need to let high oil prices push consumers into buying hybrid autos. We need to back away from encouraging utilities from burning natural gas. We need to revive nuclear power.

Worrying about what Exxon made last quarter is the least of our problems.

topics:
Business, Environment, Global Warming, Iran, Africa, Energy, Oil