STRATEGIC ENERGY POLICY CHALLENGES FOR THE 21ST CENTURY
The Task Force recommends a two-part action plan. The first stage consists of immediate actions to establish appropriate mechanisms to manage potential supply disruptions and to buffer the economy against harm from price volatility. The second part, consisting of longer-term actions, tackles the causes of recent shortfalls and emergencies. These initiatives establish a framework for developing new supplies and ample capacities along various linked global energy supply chains, while preserving and enhancing the human habitat.
There are few options available to government to expand supply in the short run or to reduce short-term demand. Consequently, immediate actions should consider all possible means of de-bottlenecking supplies and reducing obstacles to delivery of supplies, both domestically and internationally. In addition, the short-term actions must establish permanent machinery for integrating energy policy with economic, environmental, national security, and foreign policies. To the degree that new supplies alleviate energy shortfalls in periods of peak demand, they will provide protection to consumers against price spikes.
Virtually all actions available to remove obstacles along the supply chain in the very short term involve tradeoffs with other policy objectives, including environmental, national security, and foreign policy concerns. Therefore, tradeoffs must be carefully weighed. Any supply-side relief also eliminates the only current mechanism for controlling demand: higher prices. Proper policy must consider measures that will prevent the public from keeping U.S. energy security perpetually beyond reach. For the immediate and short term, two sorts of policies need to be considered:
Long-Term Policy Initiatives
Considerations, Coordinated Energy and Environmental Policy, Federal and
State Jurisdictions, and Enhanced Demand-Side Measures
Finally, we caution against using the "crisis" label, which in the past has been the source of much energy policy mischief. Apart from the very serious problems in the California and Western electricity markets, which largely derive from policy, current energy markets are not in "crisis," and precipitous action should not undermine thoughtful resolution of our conflicting energy, economic, environmental, and security concerns. Apart from the very serious problems in the California and Western electricity markets, most policy made, current energy markets are not in "crisis" and precipitous action should not undermine thoughtful resolution of our conflicting energy, economic, environmental, and security concerns.
On Nuclear Energy
Nuclear power is an indigenous source of energy—invented and developed in America. It is unique in having the capacity to provide enough energy to last our nation—and the world—for at least a millennium. And it can do so without emitting greenhouse gases. Nuclear energy should not be considered as an option, but as a necessity to supply electricity for the nation now and in the future. The Energy Information Administration has predicted that between now and 2020, the United States will need 300,000 megawatts of additional generating capacity, or the equivalent of three hundred large new plants of any type. A minimum of one hundred fifty of these plants should be nuclear.
Michel T. Halbouty
Between 1973 and 1986, the U.S. economy's energy intensity (energy consumption per dollar of GDP) declined by 35 percent; since then, the rate of decline slowed dramatically, amounting to only about 15 percent over the period. That slowdown raises total national energy costs by about $100 billion per year. Technologies are in hand to once again accelerate energy efficiency and associated environmental gains significantly. To realize this in a timely way requires that integrated fiscal, regulatory, and technology policies be implemented by the administration and Congress. In addition, the government should use its own procurement activities far more aggressively to develop a reasonable domestic market for new clean and efficient technologies and alternative fuels. It should also work with the private sector and international financial institutions to advance associated deployment in developing countries. Such actions, in creating stable markets adequate to permit private development of alternative technologies and infrastructure, can be an important element of energy security policy and reduce upside price volatility. They fall into the category of "public good" actions addressing market shortcomings. Opportunities are clearly available in both the transportation and electricity sectors. Such demand-side initiatives can have a substantially greater impact than supply-side initiatives on the overall supply/demand balance over the next several years. However, the importance of stability to the success of such initiatives requires a pragmatic joint administration-congressional commitment.
In regard to dealing with oil-producing nations during periods of oil price volatility, the report properly emphasizes the importance of quiet diplomatic discussion and a bedrock principle of reliance on market forces. However, the administration, confronted with non-market behavior, also needs to retain the flexibility to use all diplomatic tools of engagement, including appropriate use of public statements. For example, such diplomatic engagement during the last year saw significant production increases while holding in place key international support for use of the SPR to address inventory shortfalls and associated price volatility.
On Critical Infrastructure Protection
Protecting our energy infrastructure from being disabled is an energy security concern of increasing importance. Heightened vulnerability to physical and/or cyber disruption stems from increased infrastructure interdependence, increased risk of cascading failures, and increased reliance on information technologies and telecommunications in the energy infrastructure. An appropriate response demands new forms of cooperation between the private sector, local governments, and the federal government, including robust and timely exchange of sensitive information on both sides. The critical infrastructure protection initiative of the last few years needs substantial upgrading in order to better coordinate with infrastructure interdependencies, provide realistic evolving vulnerability assessments, develop technologies to protect control systems, develop and deploy integrated multi-sensor detection systems to warn of system disruption, and lower institutional barriers to the associated public-private coordination activities. A significant increase in Federal research and development funding for energy infrastructure protection is needed.
Ernest J. Moniz
On Tax Incentives, Demand Efficiency, the SPR, and Reserve Capacity
Based on the serious energy supply problems facing the United States and in view of past national energy policy initiatives (starting in the Nixon administration), the greatest emphasis has always been focused on increasing supply of traditional fuels. Also overlooked is the fact that the tax code has been extraordinarily favorable to the exploration, production, and development of oil, natural gas, and coal, and that the federal government has subsidized the development of nuclear power far more than it has solar, wind, and other clean alternatives.
It is also obvious that there is little need to provide any tax or other incentive to the oil and gas industry. The major companies are reporting record profits and prices are at very high levels. Consumers—especially low- and moderate-income consumers—are suffering from the high cost of natural gas and other heating fuels. Furthermore, many low-income households are facing utility cutoffs because of the sharp increase in heating costs. These problems require immediate solution—from sharply increasing low-income heating assistance and weatherization programs to prohibiting shut-offs.
While the report does recommend demand-side energy efficiency initiatives, I believe that such initiatives can go much further. Tax incentives for building energy-efficient homes and buildings, installing energy-efficient equipment, and purchasing energy-efficient appliances would create a vigorous market for energy-efficient products. On-the-shelf energy-efficient technologies are available. Expanding U.S. production of energy-efficient technologies will also enhance our domestic economy and provide new opportunities for exports.
While I support the report’s recommendations regarding the building of the SPR, it is also important to define clearly when it should be used. Essentially, rapid increases in price are a sign of market failure. An emergency situation calling for use of the SPR could be defined as a percentage increase in price within a specified period of time—say, 25 percent over ten or fifteen days.
It is also critical to determine a requirement for companies that refine and import petroleum to hold a certain level of stock. As the report correctly points out, deregulation and reliance on the market does not ensure supply security. Previously, companies deemed it to be in their economic self-interest to hold inventory. Now, companies seek to hold as little inventory as possible in order to lower costs. This strategy of just-in-time inventory management has been very costly to consumers and the economy, and requires intervention by the federal government. While some may argue that we should rely on market forces to determine appropriate inventory levels, experience has confirmed that market forces are not working. Requiring all companies to hold a minimum level of inventory will provide at least some cushion of supply during periods of disruption.
A similar strategy ought to be applied to suppliers of natural gas, propane, and electricity. Deregulation of the electric utility market has left utility customers at the mercy of independent electricity generators who, unlike regulated utilities, have no incentive or requirement to build reserve capacity. The lack of reserve capacity, like the low levels of oil inventories, is a growing threat to consumers and the economy.
On Demand Restraint
The "energy crisis" described in the report results in large part from the unconstrained growth of energy consumption. The United States is unique among the industrialized countries in that it does not use fiscal measures to limit growth in energy use. This policy must change to control growth of energy use and maintain environmental quality. The most efficient mechanism would be broad-based taxes on energy. In addition, the United States should consider imposing higher taxes on vehicles to encourage the expedited introduction of more efficient energy-using technology. These taxes should be introduced in a revenue-neutral fashion. In addition, regions such as California, which face energy disruptions due to infrastructure constraints, should consider replacing regressive sales taxes with taxes on energy designed to offset the infrastructure constraint.
On the Use of Strategic Stocks
The authors of the report are to be congratulated for their extensive discussion of the role of inventories. Industrialized countries must recognize that the increasingly competitive structure of the global economy prevents firms in the energy sector from holding reserve capacity (whether in the form of inventories or reserve generation capacity). Energy prices will be more volatile as a consequence. Governments must develop measures to compensate for this structural change if they wish to moderate the increase in the effect of price volatility. Such incentives can include more frequent use of governmentally owned inventories or the provisions of tax incentives to firms to build reserves. In planning such measures, governments should recognize that mandated stocks or imposition of reserve requirements by regulation generally are not effective. It must be understood that the cost of any measure designed to mitigate price volatility will be borne either by the taxpayer or the consumer. Efforts should be made to achieve the maximum reduction in volatility at a minimum cost.
Philip K. Verleger Jr.
On Caspian Energy Export Routes
Which export routes for Caspian energy are most appropriate depends primarily on which transit countries offer favorable conditions by facilitating construction of pipelines and charging reasonable transit fees. The actual pipeline construction cost is only one component—and not necessarily a large one—of any commercial decision about which route to use. The record of Russia and most especially Iran is one of long delays and unreasonable demands. At this stage, the Baku-Ceyhan project is more advanced than any other oil pipeline project not yet under construction. In these circumstances, it is inappropriate to assume, as the report does, that promoting Baku-Ceyhan is at odds with a commercial approach toward Caspian energy.
On Alternative Energy Sources, Minimum Petroleum Inventory Standards, an Organization of Petroleum Importing Countries, Nuclear Energy
U.S. energy policy should be guided by a stronger commitment to developing alternative energy sources and protecting vulnerable households and businesses from price shocks resulting from hikes in the costs of heating oil, gasoline, and diesel fuel.
Mandating minimum standards for petroleum inventories in the United States and creating an Organization of Petroleum Importing Countries (OPIC) to stand up to the Organization of Petroleum Exporting Countries are measures that should be taken to more aggressively protect our oil-dependent economy.
The establishment of federal minimum inventory standards for domestic wholesalers would buffer consumers from skyrocketing prices associated with inadequate inventories at times of high demand. In New England, for example, home heating oil prices went up $1 a gallon in the winter of 2000, when a severe cold snap combined with low inventories to send fuel costs through the roof. Similar supply shortages have resulted in soaring gasoline prices in the Midwest during the summer’s peak demand months.
An OPIC to offset the clout of OPEC would use the threat of sanctions to keep the cartel from illegally manipulating production quotas to their advantage and our detriment. Moreover, OPIC would negotiate an end to radical price fluctuations that hurt producing and consuming nations alike by supporting a floor price for crude oil in exchange for OPEC backing of a ceiling price. A floor price of $20 a barrel would ensure adequate revenues to producing states, which depend on such dividends for their political, economic, and social stability. A ceiling price of $25 a barrel would guard against price shocks while encouraging the development of alternative energy sources in consuming nations.
U.S. policy guided by the goals of expanding nuclear capacity and exploiting domestic sources of oil and gas will not succeed in the long run. Energy independence is critical. This cannot be achieved by more drilling within U.S. borders. The only method is to increase our dependence on effective and affordable renewable energy sources in addition to creating a stable pricing environment for all our energy needs.
We must aggressively pursue promising alternative sources of energy to heat our homes, run our vehicles, and power our businesses. At the same time, we must take a tougher line toward the oil industry domestically to protect the most vulnerable, and use our clout internationally with oil producers to end the price shocks caused by their manipulation of oil markets.
Joseph P. Kennedy II
ODEH ABURDENE is managing partner of Capital Trust S.A. He was a manager in the International division of the American Security Bank in Washington, D.C., and served as a Vice President with the First National Bank of Chicago.
GRAHAM ALLISON is Director of the Belfer Center for Science and International Affairs at Harvard University’s John F. Kennedy School of Government, and Douglas Dillon Professor of Government. In the first term of the Clinton administration, Allison served as Assistant Secretary of Defense for Policy and Plans.
JOSEPH C. BELL is a Partner with Hogan & Hartson, L.L.P. Bell was previously U.S. Designated Representative for the International Energy Agency, Dispute Settlement Center; Assistant General Counsel of International Affairs for the Federal Energy Administration (1974–77); and the Cabinet Task Force on Oil Import Controls (1969).
PATRICK CLAWSON is Director for Research at the Washington Institute for Near East Policy, and was previously a Senior Economist at the International Monetary Fund, the World Bank, and the Defense Department's National Defense University. He has written or edited twelve books about the Middle East.
FRANCES D. COOK heads the Ballard Group LLC, a business facilitation service in Washington. She is a three time former ambassador, including twice to energy-exporting countries. She twice served as Deputy Assistant Secretary of State, where her specialty was political-military affairs. Her regional focus is the Arabian Gulf and Africa.
JACK L. COPELAND is Chairman of Copeland Consulting International, an investment and geopolitical advisory firm.
CHARLES B. CURTIS is Senior Adviser to the United Nations Foundation and the President of NTI, a newly formed foundation organized to reduce the contemporary threat from weapons of mass destruction. He has previously served as the Deputy Secretary and the Undersecretary of the U.S. Department of Energy, the Chairman of the Federal Energy Regulatory Commission, and the Chief Energy Counsel of the U.S. House of Representatives’ Energy and Commerce Committee.
TOBY T. GATI is Senior International Adviser at Akin, Gump, Strauss, Hauer & Feld, L.L.P. She served as Special Assistant to the President and Senior Director for Russia, Ukraine, and the Eurasian States at the National Security Council in the White House in 1993, and then as Assistant Secretary of State for Intelligence and Research until May 1997.
LUIS GIUSTI currently serves as Non-Executive Director of "Shell" Transport and Trading, and as Senior Adviser to the Center for Strategic and International Studies. Formerly, he was Chairman and CEO of Petróleos de Venezuela, S.A.
DAVID L. GOLDWYN is the principal of Goldwyn International Strategies, LLC, an international consulting firm. He served as Assistant Secretary of Energy for International Affairs and Counselor to the Secretary of Energy, Senior Adviser to the Permanent Representative to the United Nations, and Chief of Staff for the Undersecretary of State for Political Affairs under President Bill Clinton.
MICHEL T. HALBOUTY is an internationally renowned earth scientist and engineer whose career and accomplishments in the fields of geology and petroleum engineering have earned him the recognition as one of the world’s outstanding geo-scientists.
AMY MYERS JAFFE is the senior energy adviser at the James A. Baker III Institute for Public Policy of Rice University. Prior to joining the Baker Institute and President of AMJ energy consultants. Jaffe was the senior economist and Middle East Analyst for Petroleum Intelligence Weekly. Jaffe is the author of numerous articles on oil geopolitics, the Middle East, and the Caspian basin region.
MELANIE A. KENDERDINE is the Vice President of the Gas Technology Institute. Previously she was Director of Policy at the Department of Energy, Senior Policy Adviser to the Secretary of Energy for oil and gas, Deputy Assistant Secretary at Department of Energy, and Chief of Staff to Congressman Bill Richardson (D-N.M.).
JOSEPH P. KENNEDY II is Chairman and President of Citizens Energy Corporation, a nonprofit firm he founded in 1979 to provide low-cost heating oil to the poor and the elderly. Before leaving Citizens in 1986 to serve six terms in the U.S. House of Representatives, Kennedy built the company into a leading innovator in the electricity, natural gas, and prescription drug industries, all the while using revenues from the company’s successful for-profit subsidiaries to finance charitable programs for the poor here in the United States and abroad. Kennedy returned to Citizens Energy full-time in 1999 and serves on the boards of companies in the health care, telecommunications, and energy industries.
MARIE-JOSEE KRAVIS is an Economist and Senior Fellow at the Hudson Institute. She specializes in trade and international finance–related issues and serves on the Secretary of Energy’s Advisory Board. She also sits on the board of the Ford Motor Company, Vivendi Universal, U.S.A Networks, Hasbro Inc., Hollinger International, and the CIBC.
KENNETH LAY is Chairman and CEO of Enron Corporation. Lay also was chief executive officer of Enron from 1985 until February 2001. Currently, Lay serves on the board of directors of Compaq Computer Corporation, Eli Lilly and Company, i2 Technologies, Inc., and Trust Company of the West. He is a Vice-Chairman of The Business Council and a member of the Board of Trustees of Howard University, Eisenhower Exchange Fellowships, Inc., Resources for the Future, the H. John Heinz III Center for Science, Economics, and the Environment, the American Enterprise Institute, and the First United Methodist Church in Houston. Lay is also a member of The Trilateral Commission and was selected to receive the Private Sector Council’s 1997 Leadership Award, received the 1998 Horatio Alger Award, and was named by Business Week as one of the top 25 managers in the world for 1999. Lay is a member of the Texas Business Hall of Fame.
JOHN H. LICHTBLAU is Chairman and CEO of Petroleum Industry Research Foundation, Inc. (PIRINC). He has been a member of the National Petroleum Council (Advisory Council to the Secretary of Energy) since 1968 and is also a member of the International Associates of Energy Economics.
JOHN A. MANZONI is Regional President for British Petroleum in the eastern United States. Prior to being the Regional President, Manzoni was Group Vice President for the Refining and Marketing business, with responsibility for European marketing and global downstream planning and performance. Prior to that Manzoni headed up the BP side of the BP/Amoco merger directorate.
THOMAS F. MCLARTY III is Vice Chairman of Kissinger McLarty Associates, an international strategic advisory firm with offices in Washington, D.C., and New York. McLarty was President Bill Clinton’s first Chief of Staff and also served as Counselor to the President and Special Envoy for the Americas. Prior to joining the Clinton administration, McLarty was Chairman and CEO of Arkla, Inc.
ERIC D.K. MELBY is a Senior Fellow with the Forum for International Policy and a principal in the Scowcroft Group. He handled economic and energy issues on the National Security Council staff from 1987–93 and was Special Assistant to the Executive Director of the International Energy Agency from 1981–85. Has also worked in the Department of State and Agency for International Development.
SARAH MILLER is Editorial Vice President and Group Editor of the Energy Intelligence Group. Miller was European Director of McGraw-Hill News and London bureau chief and energy correspondent for McGraw-Hill World News.
STEVEN L. MILLER is Chairman of the board of directors, President, and CEO of Shell Oil Company. He is a member of the National Petroleum Council and the Business Roundtable.
ERNEST J. MONIZ is a Professor of Physics and former Head of the Department of Physics at the Massachusetts Institute of Technology. He served as Associate Director for Science in the Office of Science and Technology Policy in the Executive Office of the President (1995–97) and as Undersecretary for Energy, Science, and Environment in the Department of Energy (1997–2001). At the Department of Energy, he also served as the Secretary’s Special Negotiator for Russian Programs.
EDWARD L. MORSE is currently Executive Advisor at Hess Energy Trading Co., LLC, a proprietary trading firm, with offices in London and New York. His career in the energy sector spans more than two decades and includes senior positions in business, government, academia, and publishing. He joined HETCO in April 1999 after more than a decade as Publisher of Petroleum Intelligence Weekly. In the winter of 2000–01 he chaired the joint Task Force, cosponsored by the James A. Baker III Institute and the Council on Foreign Relations, that prepared this Report. From 1978 to 1981 Morse was in the U.S. government as Deputy Assistant Secretary of State for international energy policy. A frequent commentator on oil market trends, both in writing and for broadcast media, Morse is the author or co-author of four books on politics, finance, energy, and international affairs. He has written some four dozen scholarly articles and numerous other commentaries. He is a member of the Council on Foreign Relations and of the Oxford Energy Policy Club. He is a trustee of the Petroleum Industry Research Foundation and a member of the advisory boards for the energy programs at New York University, the Johns Hopkins School of Advanced International Studies, and the University of Houston.
SHIRLEY NEFF is an Economist for the Democrats on the Senate Energy and Natural Resources Committee. She is the senior staff member responsible for policy and tax issues for oil and gas, electricity and renewable energy, climate change, and international energy matters. Prior to joining the committee staff, she was an economist for a state public utility commission and for an oil and gas company and an electricity utility.
DAVID O'REILLY has been named Chairman of the Board and Chief Executive Officer for ChevronTexaco. Since January 2000, he has served as Chairman of the Board and Chief Executive Officer of Chevron Corp. Earlier, O'Reilly was one of the company's two Vice Chairmen, responsible for Chevron's worldwide exploration and production and corporate human relations.
KENNETH RANDOLPH is General Counsel and Secretary of Dynegy, Inc, responsible for all of Dynegy’s legal and regulatory activities. Prior to joining Dynegy, Randolph served as an energy attorney for the law firm of Akin, Gump, Strauss, Hauer & Feld in Washington, D.C.
PETER ROSENTHAL is Chief Correspondent on energy and commodities for Bridge News.
GARY N. ROSS is Chief Executive Officer of the PIRA Energy Group, a New York–based international energy consultancy retained by some three hundred companies in more than thirty countries. Ross consults with many energy ministries around the world on energy markets and public policy.
ED ROTHSCHILD is Principal at the consulting firm of Podesta/Mattoon in Washington, D.C. Formerly the Energy Policy Director of Citizen Action and consumer advocate on energy matters from 1971–97, he is also the author of numerous reports and studies on natural gas and oil pricing issues, competition, and concentration in the petroleum industry.
JEFFERSON B. SEABRIGHT is Vice President of Policy Planning for Texaco Inc. He was formerly the Executive Director of the White House Task Force on Climate Change, Director of the Office of Energy, Environment & Technology, U.S. Agency for International Development; on the Advisory Council, National Renewable Energy Laboratory; and Board Member, Keystone Center.
ADAM SIEMINSKI is the Director and Global Energy Strategist at Deutsche Banc Alex. Brown. From 1988–97, Sieminski was a Senior Equity Analyst for NatWest Securities, covering the major U.S.-based international oil companies. He is a member and past President of both the National Association of Petroleum Investment Analysts and the Washington chapter of the International Association for Energy Economics, as well as Chairman of the Independent Petroleum Association's oil and gas supply/demand committee.
MATTHEW SIMMONS is President of Simmons & Company International, a specialized energy investment bank. He is a Member of the National Petroleum Council and Bush-Cheney Energy Transition Advisory Committee, and past Chairman of the National Ocean Industries Association.
RONALD SOLIGO is a Professor of Economics at Rice University with a specialty in development and energy economics. He has authored a number of studies on energy-related topics for the James A. Baker III Institute for Public Policy at Rice University.
MICHAEL D. TUSIANI has been Chairman and CEO of Poten & Partners since 1983. Prior to joining Poten in 1973, he was employed by Zapata Naess Shipping Company. Tusiani has written two books: The Petroleum Shipping Industry — A Non Technical Overview and The Petroleum Shipping Industry — Operations and Practices.
PHILIP K. VERLEGER JR. is President of PK Verleger LLC and a Principal with the Brattle Group. Verleger served as an energy adviser in the Ford and Carter administrations and advised President Ronald Reagan on energy issues. Verleger has been a Visiting Fellow at the Institute for International Economics and is the author of two books and numerous articles on the causes of energy price volatility.
ENZO VISCUSI is Group Senior Vice President and Representative for the Americas of Eni, the Italian-based integrated energy company, where he also serves as Chairman of Agip Petroleum Co. Inc. He is primarily involved in promoting international ventures.
CHUCK WATSON is the Chairman and chief executive officer of Houston Dynegy Inc., a leading provider of energy and communications solutions. He established NGC Corp, Dynegy's predecessor, in 1985 and served as president until becoming chairman and chief executive officer in 1989. Watson currently serves on the National Petroleum Council and is a founding member of the Natural Gas Council. He is a board member of the Interstate Natural Gas Association of America and the Edison Electric Institute.
WILLIAM H. WHITE is President of the Wedge Group Inc., a diversified investment firm with subsidiaries in the oil services, engineering, hotel, and real estate business. White is chairman of the Houston World Affairs Council. He served as deputy secretary and chief operating officer of the U.S. Department of Energy from 1993 to 1995.
DANIEL YERGIN is Chairman of Cambridge Energy Research Associates. He is author of The Prize, for which he received the Pulitzer Prize, co-author of The Commanding Heights, and recipient of the U.S. Energy Award. Yergin is on the Board of Directors of the United States Energy Association and a member of the National Petroleum Council, the U.S. Secretary of Energy Advisor Board, and the Bush-Cheney Energy Transition Advisory Committee.
MINE YÜCEL is Senior Economist and Assistant Vice President, Federal Reserve Bank of Dallas. Yücel is a member of the U.S. Association of Energy Economics and the author of numerous articles on energy and the economy.
PAUL W. CHELLGREN is Chairman of the Board and Chief Executive Officer of Ashland, Inc. He is Director or Trustee at PNC Financial Services Group, Medtronic, Inc., the University of Kentucky, Center College, and American Petroleum Institute. Chellgren is a member of the Business Roundtable Policy Committee, the National Petroleum Council, the National Refiners Association, and the Society of Chemical Industry.
RICHARD N. COOPER is Maurits C. Boas Professor of International Economics at Harvard University. He was formerly chairman of the National Intelligence Council, Federal Reserve Bank of Boston, and Undersecretary of State for Economic Affairs. He is the author of The Economics of Interdependence and other works.
CHARLES DUNCAN JR. serves on the board of directors of Newfield Exploration Company, Inc., and The Welch Foundation. He is Treasurer and Director of Methodist Health Care System, and Chairman of its subsidiary, Methodist Care, Inc. Duncan was former Secretary of the Department of Energy from August 1979 until January 1981, and former President of the Coca-Cola Company.
WILLIAM E. HENDERSON III is manager, Joint Venture Coordination, Ashland, Inc.
JUDITH KIPPER is an internationally recognized Middle East specialist. She is the Director of the Council on Foreign Relations Middle East Forum and the Director of the Middle East Studies program at the Center for Strategic and International Studies. Kipper is a consultant on international affairs to ABC News. Previously, she was a guest scholar at The Brookings Institution and a Resident Fellow at the American Enterprise Institute.
ROBERT A. MANNING is the C.V. Starr Senior Fellow and Director of Asia Studies at the Council on Foreign Relations. He is the author of The Asian Energy Factor: Myths and Dilemmas of Energy, Security and the Pacific Future, and co-author of China, Nuclear Weapons, and Arms Control: A Preliminary Assessment. From 1989 until 1993, he was a Policy Adviser to the Assistant Secretary for East Asian and Pacific Affairs at the Department of State. He has also been an adviser to the Office of the Secretary of Defense (1988–89).
RICHARD MURPHY is Hasib J. Sabbagh Senior Fellow for the Middle East at the Council on Foreign Relations. He held successive appointments as Ambassador to Mauritania, Syria, the Philippines, and Saudi Arabia. He served as Assistant Secretary of State for Near Eastern and South Asian Affairs. President Ronald Reagan nominated him to the rank of Career Ambassador in 1986.
STEPHEN OXMAN is a Senior Adviser, Morgan Stanley Dean Witter; former Assistant Secretary of State for European and Canadian Affairs; and former Partner with James D. Wolfensohn Incorporated. He is a member of the Advisory Council of the Woodrow Wilson School of Public and International Affairs at Princeton University.
MICHAEL L. TELSON has been Chief Financial Officer of the U.S. Department of Energy since October of 1997. Telson was Senior Analyst of the Committee on the Budget, U.S. House of Representatives, served as the Staff Economist of the House Ad Hoc Committee on Energy, and on the governing council of the International Association for Energy Economics (IAEE).
Note: In the Gulf
Crisis, reduced crude oil supplies continued even after the war had ended,
until Kuwaiti production recovered.
The ’seventies are back. OPEC producers are warming to the rhetoric that underlined Third World radicalism 30 years ago. Having suffered the destabilising consequences of a price collapse in 1998, OPEC members are demanding a "fair" price for their oil. And what they see as fair is not what consuming nations accept. Producers are in no mood to do favours for consumer economies battling against slowdown and recession. Producers were there two years ago, and consumers not only failed to mourn, but scarcely even noticed. Revenue — and the battle over oil’s economic rent — have once again taken centre stage. And an emboldened OPEC is pressing home its advantage (see pp 8-11).
As with most revivals, not everything is as it was. Key OPEC producers Saudi Arabia, Iran and Kuwait are gradually opening up to foreign investment — rather than wresting control of their oil industries from the majors as they did 30 years ago. But the same argument that underlined nationalisation then is driving OPEC’s $25/bl oil policy now. OPEC members, including Saudi Arabia, believe the industrialised world is denying it justice in the oil markets. In the ’seventies, the majors prevented producing nations from receiving a fair income for their national treasure. Now it is the greed of high-tax consumer governments that is attracting OPEC’s ire.
The language reflects the trauma OPEC producers suffered following the 1998 price collapse. Those events dominate OPEC thinking, and have fundamentally changed the attitude of even moderate members. Anti-tax rhetoric from OPEC is hardly new. But the organisation has rarely been more united, allowing it to make its position felt. An increasingly hawkish Saudi Arabia is finding common cause with Venezuela’s Hugo Chavez — a populist, self-styled champion of the Third World in true ’seventies fashion. That axis is giving OPEC the solidarity that evaded it for much of the ’nineties. Output discipline has kept markets tight and prices high — turning the screw on consumer governments. When European consumers rebelled last year against fuel taxes, OPEC scented blood. "People always talk about revenues of OPEC. They never talk about [oil tax] revenues of industrialised countries," says Algerian oil minister and OPEC president Chakib Khelil. "Before [consumer governments] point a finger at OPEC, they should probably reduce taxes in their own country."
OPEC’s more strident position would not be possible without the consent of Saudi Arabia. It suffered heavily in 1998, and fears a repeat price collapse as global economies slow. Saudi-U.S. relations — crucial to OPEC policy since the United States became a net importer of oil in the early ’seventies — are under strain. U.S. support for a bellicose Israel is acutely embarrassing for the kingdom. OPEC is not about to wield the oil weapon, ’seventies style. But Saudi Arabia cannot afford to draw accusations that it is doing the United States a favour by pressing for oil price moderation. Although the new administration of George Bush would seem to be the dream team for its Middle East allies, so far Bush has conspicuously failed to demonstrate any special magic in his relations with them. The Saudis certainly did the United States no favours at the OPEC meeting.
When it comes to the impact of energy prices on economic growth, OPEC is at best non-committal, and at worst seemingly in denial. "Oil is not that important to economic growth," said OPEC president Chakib Khelil last week. Riyadh agrees. "We think $25/bl is a fair price," says Saudi oil minister Ali Naimi.
The concept of a fair price is hard to pin down. But there is such a thing as a sustainable price. It is, of necessity, a compromise between buyers and sellers. The difficulty for OPEC’s core Mideast Gulf producers is that $25/bl is needed to sustain the unreconstructed state-driven economies of the Middle East. But the experience of the ’seventies shows that high prices eventually unleash a wave of investment in non-OPEC oil and a massive improvement in energy efficiency. This is not what OPEC wants, but what it might get.