Markets can't create oil: U.S. needs a real national energy policy
The United States has bet its economic future on the ability of market forces to take care of energy supply problems. The current run-up in oil prices is a result and, according to free-market ideology, a corrective reaction will eventually follow: Growing demand has caused prices to rise, and high prices will encourage conservation, innovation and increased production. But the invisible hand of the market promises to slap Americans in the face before it puts cheap gas in their tanks.
A laissez-faire approach to energy relieves people and governments of responsibility to avoid waste or plan for the future. Congress and the president can approve an energy bill stuffed with subsidies and pork, and declare their work done. The 20-year absence of improvements in the fuel efficiency of the nation's cars and trucks can be accepted as a rational response to consumer preferences. A faith in the power of markets to optimize the allocation of resources leads to a belief that any meaningful intervention in the self-balancing mechanism of supply and demand is futile at best, harmful at worst.
But as the price of gasoline edges toward $3 a gallon, it's time for Americans to start asking serious questions: What if energy - specifically, petroleum - were subject to geological constraints as well as market forces? And what if the world oil market operates in ways that put the United States at a permanent disadvantage?
Evidence supports both these possibilities. Oil discoveries peaked worldwide in the early 1960s and have been declining ever since; oil is now being consumed at about twice the rate of discovery. Most oil being pumped today was found more than 30 years ago; the last massive oil field discovery came in 1968.
High prices will trigger more exploration and will make previously marginal oil fields profitable, but they can't bring new resources into being. The world consumed an average of 84 million barrels of oil each day in 2002, up from 79 million in 2001. The daily production capacity of old oil wells declines by about 4 million barrels a year worldwide. Each year, to satisfy growing demand and compensate for depletion, the world must increase its daily oil-production capacity by about 6 million barrels - the equivalent of adding two new Venezuelas annually.
As Chevron, the United States' No. 2 oil company, says in its advertising, "the era of easy oil is over." World oil production will peak eventually, creating a seller's market for increasingly scarce supplies. Declining world oil production will have far-reaching economic and social consequences for which the United States is unprepared.
The transition to a seller's market will also find the United States at a growing disadvantage. Domestic production peaked 35 years ago and has been declining ever since. Consumption has continued to increase, requiring ever-rising quantities of imported oil - foreign suppliers satisfy two-thirds of the nation's appetite for petroleum. Only a few oil sheikdoms use more oil per capita than the United States, amplifying the effect of price increases on individuals.
The approaching peak of world oil production, combined with the United States' sensitivity to price and supply shocks, points to the inadequacy of a market-based energy policy. Once an oil field is past its peak, increased production can't be obtained at any price. By waiting for the market, through higher prices, to impose limits on consumption, encourage efficiency and promote the development of alternative energy sources, the United States resigns itself to the inevitability of economic pain, places itself at the mercy of foreign suppliers and cedes ground to less energy-intensive competitors.
The United States' near-exclusive reliance on the free market to solve the world's energy problems threatens to leave the country unprotected against severe blows to its economy, security and way of life. Americans did not rely on the free market to put astronauts on the moon, or to create a system of universal education. A similarly ambitious effort is needed now to get the nation ready for a future that will require more efficient use of energy and a diversified portfolio of supplies. It's necessary to anticipate the market rather than merely having faith in it, because waiting for the market to do the job means waiting too long.