Balancing The National Energy Strategy

This past February, the Administration released its long-awaited National Energy Strategy, laying out a range of options for federal energy policy that could reduce the nation's dependence on imported oil, especially from unstable sources like the Mideast. The proposal contains programs designed to increase the nation's domestic energy production, to improve the efficiency of energy consumption, and to encourage the use of alternative fuels.

Yet today these options are being hotly debated—and many policymakers object to proposals that would increase domestic energy production, in particular the exploration and development of a small portion of the Arctic National Wildlife Refuge (ANWR) and those portions of the outer continental shelf that were not closed off to oil and natural gas leasing by the Administration last July. Instead, they are proposing that more aggressive conservation measures and the greater use of alternative forms of energy be used as substitutes for the domestic production of oil.

In fact, however, many of these proposals are unrealistic in economic terms—they do not take into consideration the real costs of conservation and alternative fuel measures.

Before the nation adopts any energy policy, it must ask if it is possible for the United States to change its consumption and investment patterns so it will be able to halt growth in—or reduce—energy consumption while maintaining a reasonable rate of economic growth and a broad array of choices for its citizens.

Similarly, it must realistically assess the economic and technological viability of fuel switching.

Energy policies which mandate changes in America's energy habits will necessarily bump up against fundamental economic realities: first, that the nation depends on the output of its industries and cannot quickly or easily change the energyusing capital equipment that runs them. Second, that it relies on a complex transportation network for commercial and private vehicles.

And, third, that it cannot quickly or easily change the tens of millions of private investment decisions ordinary citizens have chosen to make on the location and size of their homes, the number and kind of automobiles they own, and how they get to work.

While cost-effective conservation is an important part of any energy strategy, aggressive conservation measures that seek to reduce en- ergy consumption without regard to the burden they impose on the economy and consumers can be counterproductive.

API has closely studied the causeand- effect relationship between energy demand and economic performance, and we have found that maintaining constant energy use with a growing economy would be painful to Americans and, as a practical matter, difficult to achieve. Just to hold U.S. energy consumption constant at 1987 levels through the year 2000, the overall price of energy— the weighted average of the prices for oil, natural gas, and coal— would have to rise, in real terms, to three to four times its current level.

That means that real energy prices (in 1990 dollars) would have to rise, at least within the United States, to as much as $55 per barrel in oil equivalent terms over the period.

To reduce aggregate U.S. energy consumption by 10 percent in the same time frame, the real weighted average energy price would have to rise to five or six times present levels, or to as much as $87 per barrel.

Of course, these dollar amounts represent the average price of all energy—the actual price of oil would be even higher.

These higher energy prices could dramatically slow economic growth and therefore reduce the disposable income of all Americans. Even small differences in economic growth rates, if they persist, result in large differences in absolute family income over the long term.

If the nation were to reduce energy use by as much as some have urged through government-imposed limits, normal rates of economic growth could be maintained only if the "saved" energy was replaced through an increase in the proportion of GNP going for investment.

This increase in investment would have to be on the order of 50 percent— that's approximately $500 billion of aggregate investment— and consumption of goods and services would have to be reduced by about 16 percent.

From this, it is clear that the conservation goals being proposed would require enormous sacrifice on the part of individual Americans, if economic growth is also to continue.

If instead we accepted slower economic growth rates, there would be fewer jobs and a reduced standard of living.

Similarly, alternative fuels must play a key role in any balanced energy policy—but to be effective they must be affordable and technologically viable. Proposals that simply mandate the widespread introduction and use of alternative fuels ignore the technical and economic aspects of introducing these fuels, including the costs of changing the infrastructure of the U.S.

transportation system.

Many oil companies have a large stake in alternative fuels research and development, including solar energy, hydrogen, shale, coal gasification, geothermal energy, and new uses for electricity as a source of transportation energy. Yet all these alternatives are currently constrained by economic, environmental, or technological limitations—and, although they have been on the market for quite a few years, their combined share of our energy market is still less than 1 percent. If the United States is to maintain a healthy and growing economy, it must not force uneconomic alternative fuels into use. Achieving our nation's goals for economic growth requires that alternative fuels satisfy costeffectiveness criteria.

Clearly, both uneconomic conservation measures and the widespread mandating of expensive alternative fuels would have a punitive effect on the U.S. economy and on the lives of American citizens. It is clear that if the United States seriously wishes to reduce its dependence on insecure sources of imported oil and at the same time maintain a healthy economy, it must take steps to increase opportunities for domestic oil and gas production. Unfortunately, recent trends have gone the other way, and domestic oil production has continued to fall—by more than 25 percent in the past 10 years— to 7.2 million barrels a day.

The Administration's proposals are a start towards turning this trend around. It has proposed that the coastal plain of Alaska's Arctic National Wildlife Refuge be opened to oil and gas leasing. It has proposed responsible exploration and development of portions of the outer continental shelf—though not those most promising offshore areas of California, Florida, and other states that were closed this past July. It has proposed leasing of Naval Petroleum Reserves and oil pipeline deregulation. And it has proposed options that would increase natural gas use.

Over the next 10 years, for example, untapped domestic reserves of oil and natural gas on government lands could add the equivalent of from 2 million to more than 4 million barrels of oil a day to domestic production. That is a significant amount. During the last week of this past January, for comparison, U.S. oil imports totaled 6.6 million barrels a day.

At the same time, development of these reserves will help strengthen the economy. In ANWR alone, the amount of oil that potentially could be found will make the costs of exploration and development economically feasible. Moreover, according to a recent economic analysis prepared by Wharton Econometrics Forecasting Associates, developing ANWR coastal plain oil could boost the gross national product by $50.4 billion and increase employment nationwide by about 735,000jobs by the year 2005. That study predicted that ANWR oil development would "stimulate U.S. investment, moderately temper the growth in world oil prices and significantly reduce U.S.

petroleum imports and improve the U.S. trade balance." Opening the ANWR coastal plain to environmentally sound exploration and development is clearly one of the Administration's most important energy initiatives, as it can serve not only to reduce the nation's dependence on imported oil, but also to bolster the nation's economy. At the same time, we hope and expect that this proposal could open debate on a similarly positive approach to development of parts to the nation's outer continental shelf that have been placed off limits by government leasing moratoria.

These are goals worthy of a national energy strategy. We can only hope that as Congress debates and evaluates the Administration's options, it will reach a consensus on positive, realistic steps that will contribute to the nation's energy security and economic well being.