Drain America First
Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics at Columbia University and was Chairman of the Council of Economic Advisers to President Clinton and Chief Economist and Senior Vice President at the World Bank.
One of the more surreal sessions at this year’s World Economic Forum in Davos had oil industry experts explaining how the melting of the polar ice cap—which is occurring faster than anyone anticipated—represents not only a problem, but also an opportunity: vast amounts of oil may now be accessible.
Similarly, these experts concede that the fact that the United States has not signed the Law of the Sea, the international convention determining who has access to offshore oil and other maritime mineral rights, presents a risk of international conflict. But they also point to the upside: the oil industry, in its never-ending search for more reserves, need not beg Congress for the right to despoil Alaska.
President George W. Bush has an uncanny ability not to see the big message. For years, it has become increasingly clear that much is amiss with his energy policy. Scripted by the oil industry, even members of his own party referred to an earlier energy bill as one that “left no lobbyist behind.” While praising the virtues of the free market, Bush has been only too willing to give huge handouts to the energy industry, even as the country faces soaring deficits.
There is a market failure when it comes to energy, but government intervention should run in precisely the opposite direction from what the Bush administration has proposed. The fact that Americans do not pay the full price for the pollution—especially enormous contributions to greenhouse gases—that results from their profligate energy use means that energy is under-priced, in turn sustaining excessive consumption.
The government needs to encourage conservation, and intervening in the price system—namely, through taxes on energy—is an efficient way to do it. But, rather than encouraging conservation, Bush has pursued a policy of “drain America first,” leaving America more dependent on external oil in the future. Never mind that high demand drives up oil prices, creating a windfall for many in the Middle East who are not among America’s friends.
Now, more than four years after the terrorist attacks of September 2001, Bush appears to have finally woken up to the reality of America’s increasing dependence; with soaring oil prices, it was hard for him not to note the consequences. But, again, his administration’s faltering moves will almost surely make matters worse in the immediate future. Bush still refuses to do anything about conservation, and he has put very little money behind his continuing prayer than technology will save us.
What, then, to make of Bush’s recent declaration of a commitment to make America 75% free of dependence on Middle East oil within 25 years? For investors, the message is clear: do not invest more in developing reserves in the Middle East, which is by far the lowest-cost source of oil in the world.
But without new investment in developing Middle East reserves, unbridled growth of energy consumption in the U.S., China and elsewhere implies that demand will outpace supply. If that were not enough, Bush’s threat of sanctions against Iran poses the risks of interruptions of supplies from one of the world’s largest producers.
With world oil production close to full capacity and prices already more than double their pre-Iraq War level, this portends still higher prices, and still higher profits for the oil industry—the only clear winner in Bush’s Middle East policy.
To be sure, one shouldn’t begrudge Bush for having at last recognized that there is a problem. But, as always, a closer look at what he is proposing suggests another sleight of hand by his administration. Aside from refusing to recognize the importance of global warming, encourage conservation, or devote enough funds to research to make a real difference, Bush’s grandiose promise of a reduction of dependence on Middle East oil means less than it appears. With only 20 percent of US oil coming from the Middle East, his goal could be achieved by a modest shift of sourcing elsewhere.
But surely, one would think, the Bush administration must realize that oil trades on a global market. Even if America were 100 percent independent of Middle East oil, a reduction in supply of Middle East oil could have devastating effects on the world price—and on the American economy.
As is too often the case with the Bush administration, there is no flattering explanation of official policy. Is Bush playing politics by pandering to anti-Arab and anti-Iranian sentiment in America? Or is this just another example of incompetence and muddle? From what we have seen over the past five years, the correct answer probably contains more than a little bad faith and sheer ineptitude.
Copyright: Project Syndicate, 2006.