| Jim Landers: Energy trouble requires difficult decisions 04/16/2001 By Jim Landers / The Dallas Morning News WASHINGTON – If there's an energy crisis in America, it's not because there are shortages of oil, natural gas, coal or other fuels. The crisis – or, if you prefer, the critical situation – is an inability to make hard choices.
Federal geologists say abundant oil and natural gas deposits probably lie beneath the western Gulf of Mexico, but Florida's Gov. Jeb Bush opposes opening the area to drilling because voters there fear oil spills.
Some oil prospectors say there's good potential beneath the Great Lakes, but Energy Secretary Spencer Abraham's home-state Republican allies in Michigan strongly oppose drilling in those waters.
Cheap oil boosts the economy but discourages conservation. Deregulation encourages new players to build electric power plants, but there's no incentive for anyone to build spare capacity that would only be used in a heat wave.
Hard choices abound in a new paper – "Strategic Energy Policy Challenges for the 21st Century" – from the James A. Baker III Institute for Public Policy at Rice University and the Council on Foreign Relations (www.cfr.org).
The paper's authors say two of the more popular approaches to energy problems – leave it to the market, and maximize supplies – won't suffice any longer to fix what ails the country.
They note with some alarm that the ability to explore for oil and gas on federal lands has fallen sharply. Twenty years ago, 75 percent of federal lands were open for exploration. Today, just 17 percent are open.
Yet the authors urge the federal government to inventory the resource potential and restrictions on all federal lands before pushing to open any particular area, such as the Arctic National Wildlife Refuge in Alaska.
They also urge the federal government to impose passenger car gasoline mileage standards on sport utility vehicles, minivans and light trucks, which could save as much oil as Alaska produces.
"We won't solve it solely on the supply side," said Amy Myers Jaffe, project director for the report and senior energy adviser at the Baker Institute. "A critical part has to be demand management."
A number of senior executives with major oil companies – the merging ChevronTexaco, Shell Oil Co. and BP Amoco PLC to name three – participated in the project and shared this conclusion.
Even more intriguing is the number of corporate managers who shared the report's findings on the shortcomings of market-based answers to energy supply and demand.
The pathway to profits over the last decade has been to keep inventories as small as possible. Energy markets are no exception. Deregulation in electric power markets is eliminating the 20 percent capacity cushion regulators compelled utilities to keep available. So when the thermometer spikes in summer, so do electricity prices.
Low inventories
Gasoline inventories are so low they no longer give suppliers the opportunity to wheel extra product to pockets of shortage. Here, too, the result has been price spikes.
Market-based solutions to energy supply worked well when there were large surpluses, whether they were OPEC's spare production capacity or an overhang of natural gas production. Those surpluses are gone, the report warns.
America's energy situation is "like traveling in a car with broken shock absorbers at very high speeds," the report concludes. "As long as the paving on the highway is perfectly smooth, no injury to the driver will result. ... But if the car confronts a large bump or pothole, the injury to the driver could be quite severe."
The lack of spare capacity pushes buyers into the spot market, where incredible price spirals are happening.
Joseph Bell, a partner in the Hogan & Hartson law firm who is a former top federal energy official, says he normally feels the marketplace can handle the bumps in energy.
California's electricity market gives him pause.
"California paid $9 billion for electricity in 1999. It paid $28 billion in 2000, and this year the bill could go to $70 billion," he said. "That market is totally out of control at this stage."
Road to recovery
Putting shock absorbers back on the U.S. energy market involves diplomacy with Middle East oil producers that keeps oil and the Arab-Israeli dispute on separate tracks. It involves re-examining economic sanctions against Libya, Iran and Iraq, to see if U.S. companies should be allowed to invest in projects that will bring spare production capacity onstream.
It involves asking whether the federal government should go beyond the Strategic Petroleum Reserve and the Northeast Heating Oil Reserve to build gasoline stores as well.
And while it is anything but politic to say so, the report's authors warn that energy prices may have to go higher.
"Even the current price we have today might not be high enough to meet the needs we have," said energy investment banker Matthew Simmons. "It was the historical norm that basically rotted away our energy infrastructure."
Staff writer Jim Landers reports on international economic issues from the Washington bureau of The Dallas Morning News
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