How to Reduce Oil-Import Dependance and Climate-Change Risks at the Same Time

How to Reduce Oil-Import Dependance and Climate-Change Risks at the Same Time

The recent substantial increase in world oil prices and its reverberations in US fuel markets underline the dangers of price shocks and supply interruptions associated with this country's rising dependence on mported oil. In 1985, less than 30 percent of US oil was imported; today the figure is around 55 percent. Half of these imports currently come from the Organization of Oil Exporting Countries (OPEC); half of that -a quarter of the total-comes from the politically volatile Persian Gulf.

Renewed recognition by policy makers that this excessive dependence on imported oil poses both economic and national-security problems has sparked a variety of proposals for reducing our vulnerability.  Some call for removing all restraints from domestic oil exploration and production, including opening up the coastal plain of the Arctic National Wildlife Refuge (ANWR) to drilling. Others stress the potential for reducing US oil demand by increasing the efficiency of oil use and by substituting other energy sources for oil. Still others, focusing directly on costs to consumers, propose reducing state and federal taxes on gasoline.

These proposals are not all equally promising. In shaping a portfolio of measures to reduce US oil-import vulnerability, policymakers should consider the leverage of each approach in relation to its costs and risks.  Decisionmakers should also consider the effects of different oil-import-reduction measures on other energy related problems, especially climate change. High priority should be given to cost-effective measures that can substantially reduce oil-import dependence and reduce greenhouse gas emissions at the same time.

Some measures to expand domestic oil production are worthwhile, even though this approach does not help with greenhouse gases. Research and development over the past few decades have led to improvements in seismic exploration, horizontal drilling, and enhanced recovery that have increased domestic oil production and reduced its environmental impacts compared to what would have occurred without these improvements. But not every measure to increase domestic oil production is worth its costs. Opening up ANWR, for example, poses significant environmental risks to a unique region, in exchange for the possibility of finding resources that could supply the equivalent of only six months to two years of US consumption at the current rate.

Displacing oil consumption through efficiency improvements and substitution can save far more oil than enhancing domestic production can supply. The oil-price shocks of the 1970s boosted equally the incentives to save oil and to produce more domestically, but domestic crude oil production still fell from 9.2 million barrels per day in 1973 to 5.9 million barrels per day in 1999, while reductions in the oil intensity of the economy in the same period were saving, by 1999, the equivalent of 15 million barrels per day.

The potential for further reductions in oil intensity in the next few decades is clearly immense. A 1997 White House study estimated that achievable improvements in the fuel economy of cars and trucks alone could reduce projected US oil use in 2030 by 6 million barrels per day. Substituting natural gas and biomass fuels for oil over the same time frame could likewise save millions of barrels of oil per day. These changes would reduce greenhouse gas emissions substantially while reducing US dependence on imported oil.

The beneficial changes that are possible will not actually happen, however, without incentives for sensible choices from today's array of energy supply and energy end-use options and without adequate research and development to improve the menu of options over time. Low prices for oil and petroleum products are counterproductive in these respects, as appealing as they seem in the short term. They lead to under-investment in efficiency and alternative energy sources and thus to higher prices in the long term, as over-dependence on imports and a tightening world oil market eventually put us even more at the mercy of OPEC.

Cutting state and federal gasoline taxes to compensate for increased world oil prices is ,therefore, not the right answer. In fact, the vulnerability of US consumers to future oil price shocks and the vulnerability of the planet to global climate disruption would be easier to address if gas taxes were somewhat higher rather than lower. The antipathy of consumers to higher energy taxes needs to be tempered with recognition that higher taxes on energy now would mean lower total costs of energy later. It should also be remembered that the revenues from energy taxes-unlike those from OPEC price hikes-stay in the US, where we can choose to use the money to reduce the disproportionate impacts of price increases on the poor, to reduce other taxes and to support research, development, demonstration and accelerated deployment of improved energy options.