| 4. Develop Mechanisms 
      for a New National Approach to Energy Policy 
      If the energy policy goals of the 
      country are to be articulated coherently and implemented effectively, 
      steps need to be taken to build as wide a consensus politically as 
      possible, especially if the tradeoffs among conflicting internal 
      objectives of policy are to be successfully worked out. This means that 
      constituencies must be brought together at several levels: within the 
      federal government administration, between the administration and 
      Congress, between the federal government and state governments, and 
      between the federal government and the public at large. In order to 
      further this end, as series of steps should be considered:  
        Create an appropriate 
        interagency process to articulate and promote energy security policy and 
        integrate energy policy with overall economic, environmental, and 
        foreign policy. For energy policy to be 
        integrated with overall economic policy, environmental policy, and 
        foreign policy, it needs to be vetted and articulated through a 
        "permanent" interagency process that brings those responsible for these 
        areas together. The Bush administration has moved rapidly in this 
        direction through the creation of the White House Energy Policy 
        Development Group headed by Vice President Dick Cheney. That group 
        appropriately includes representations from the Departments of Energy, 
        Interior, Commerce, Treasury, and State as well as representation from 
        the Environmental Protection Agency and the FEMA (Federal Emergency 
        Management Agency). As this process unfolds, the administration should 
        find ways to establish a permanent framework for articulating energy 
        policy, perhaps including representation from the Department of Defense 
        as well. The secretary of energy should then be empowered to carry 
        forward and implement the policy recommendations of the Policy 
        Development Group. 
         Review and streamline 
        the allocation of authorities within the federal government, especially 
        in areas of land management and energy. The 
        federal government has been institutionally hampered in its ability to 
        articulate and implement a coherent national energy policy by the 
        allocation of disparate and overlapping authorities across government 
        departments. For example, the fact that land management for resource 
        exploitation is managed by the Department of the Interior rather than 
        the Department of Energy has created inefficiency in government 
        decision-making that should be reevaluated. The White House Energy 
        Policy Development Group should, in the process of its work, review such 
        discrepancies in authority and make recommendations for streamlining 
        them. 
         Convene a National 
        Energy Summit to help develop a national consensus on energy policy 
        objectives and means. The administration 
        should use whatever mechanisms are at its disposal to educate the public 
        concerning its views on how the nation’s energy problems can be dealt 
        with. It should use similar mechanisms to forge the kind of domestic 
        consensus that is likely to be required if its energy policy goals are 
        to be implemented. One possible way to do this is by convening a 
        nonpartisan, multi-industry summit, possibly chaired by the vice 
        president, to review its national energy plan as developed by the Energy 
        Policy Development Group. The summit should be designed not only to vet 
        energy proposals to as wide a group of responsible companies and 
        institutionalized interest groups as possible, but also to elicit 
        proposals from those represented. 
         Develop a Strategic 
        Communications Plan on Energy Security Policy in order to educate the 
        public on the difficulties of achieving short-term, unilateral solutions 
        to the nation’s energy dilemmas. The 
        administration should conduct a thorough survey of constituency and 
        advocacy groups within the country in order to develop initiatives 
        concerning ways to build a national consensus on energy policy. It 
        should unfold a strategic communications plan with the goal of gaining 
        support of environmental groups and congressional leadership on whatever 
        tradeoffs may be involved in its energy policy. For example, it should 
        indicate its resolve to produce cleaner fuels if in its judgment it is 
        also recommending temporary delays in new restrictions (such as sulfur 
        production) or other environmental goals for compelling economic and 
        national security requirements.  Long Term Policy Initiatives
 1. Review 
      International Approaches to Build, Maintain, and Use Strategic and 
      Commercial Crude Oil and Petroleum Product Inventories The administration should, in 
      parallel with a review of our national approach to strategic and 
      commercial petroleum and petroleum product inventories, conduct a review 
      of other approaches both in the International Energy Agency and by non-IEA 
      members. The United States needs to work together with other oil consuming 
      and importing countries to assure that there are adequate strategic 
      stockpiles available globally to manage future disruptions, beginning with 
      a new definition of "adequate." Two significant problems need to be 
      reviewed and dealt with:  
        First, the entire structure 
        for managing supply disruptions is built around the notion that physical 
        shortfalls can be measured independent of prices and in volumetric terms 
        alone. The assumption that release of global strategic stocks could be 
        triggered by a volumetric shortfall that was to be coordinated by an oil 
        supply-sharing facility is outdated. It was predicated on a world of 
        regulated trade flows that disappeared with market deregulation in the 
        1970s and 1980s. Instead, planning needs to be based on today’s 
        fast-paced global market and on the sorts of disruptions that are most 
        apt to face us now, rather than those that were most likely in 1975.
Second, the mechanisms for 
        dealing with disruptions are built almost exclusively within the 
        institution and membership of the IEA. IEA or OECD countries dominated 
        global oil trade when the IEA was founded in 1974. Today its share is 
        rapidly falling. Between 1985 and 2000, East Asian countries alone 
        increased their share of global oil consumption from less than 20 
        percent to more than 27 percent, as the region represented 80 percent of 
        the total increase in worldwide demand. As IEA oil use continues to 
        stagnate and as developing countries increase their individual oil 
        consumption and share of global consumption, mechanisms need to be 
        developed to encourage these high-demand growth countries to build their 
        own strategic stockpiles. They also need to participate in the global 
        planning that occurs within the IEA.  
        Enhance and 
        modernize IEA strategic stockpile policies in light of the changed 
        international market, taking into account situations that technically 
        fall short of a supply disruption as well as different regulatory 
        authorities among IEA members. 
        
        The IEA should initiate a 
        strategic review related to the size of strategic stockpiles as well as 
        their management. The review should recognize that the divergent 
        approaches taken within the organization to strategic stock management 
        make harmonization difficult. This is especially true for the 
        relationship between the European Union, with its requirement that 
        refiners should hold stocks related to seventy-five days of consumption 
        (sixty-five days for non-refiners) and the IEA, with its requirement 
        that countries cover ninety days of net imports. It should also try to 
        find ways to harmonize the differences that exist between those 
        countries that hold government strategic stocks (essentially the United 
        States, Germany, and to some degree Japan) and the others, which require 
        inventories be held by companies.  Harmonization of plans within 
        the IEA need to take into account the following issues, among others:
        
         
          Situations requiring 
          international coordination of stock release, short of a full supply 
          disruption.
The differences between 
          those that hold crude oil stocks and those that hold products, given 
          the fact that release into the market of crude oil supplies affects 
          markets indirectly, while release into the market of products, affects 
          markets directly and immediately.
Differences between those 
          with authority to use strategic oil on an exchange basis (essentially 
          only the United States) and those permitted to use it only in an 
          emergency. Efforts should be made to harmonize authorities in case 
          decisions are made to release stocks in situations not covered by a 
          shortfall that is fully defined as a supply disruption.   Encourage key non-IEA 
        countries (e.g., China, India, Brazil) to develop strategic stocks.The International Energy Agency was created a quarter of a century ago 
        as a mutual-protection society of OECD countries. Designed as a 
        political grouping to prevent any oil-producing countries from using oil 
        exports as a political instrument to influence the foreign policies of 
        IEA members, the IEA was formed at a time when the OECD countries 
        dominated global energy consumption. Today it excludes the most rapidly 
        growing energy-consuming countries in the world—China, India, and Brazil 
        among them. And, as a result, these new consumers become vulnerable 
        economically in times of disruptions as well as vulnerable potentially 
        to political pressures of producers.
 Part of the problem relates to free-riding. Countries that do not belong 
        to the IEA can and do free-ride at present. Any country that releases 
        stocks or undertakes policies to reduce its exposure to price shocks 
        will bear the costs of that action but the benefits accrue to all 
        consumers including the large consuming countries that are not members, 
        such as China, India, Pakistan, and Brazil. But part of the problem 
        relates to what countries with rapidly growing oil demand and imports 
        should do for their own economic well-being and to prevent spillover of 
        economic problems they might encounter to the large industrial 
        countries. Moreover, at present some IEA members, Japan in particular, 
        are working bilaterally with neighboring states to do this.
  Review IEA 
        membership, taking into account the desirability of creating a new class 
        of associated members who could be encouraged to hold minimum stocks and 
        also benefit from direct participation in other IEA activities.
        
        Although informal programs to 
        encourage stocking by developing world countries would have a positive 
        impact, such efforts cannot replace the more effective tool of 
        centralized coordination with the IEA. Centralized efforts are needed so 
        that international norms and standards can be met during a crisis. This 
        would be the case even if Japan opts to finance such stocking activities 
        by Asian countries on its own. The United States should initiate a 
        review of ways the IEA can work with key countries that are not members 
        of the IEA to encourage them to define their strategic oil stockpile 
        requirements and to build strategic stocks (or to create minimum 
        inventory requirements for industry). The IEA should also consider 
        creating a new class of associated members, who, in exchange for making 
        commitments to hold minimum stocks would gain direct benefit from 
        participating in certain IEA activities. 2. Accelerate Demand 
      Management Efforts at Home and Internationally The United States has trailed 
      other industrialized societies when it comes to oil-demand management. 
      Most other industrialized countries have used fiscal policy to curb the 
      growth in oil demand by heavily taxing petroleum products. While those 
      efforts can be criticized on numerous grounds—as they have been by 
      oil-producing countries—there is little doubt about their effectiveness in 
      limiting the exposure of the economy to oil price shocks and promoting 
      energy efficiency and conservation. Still, it remains the case in the 
      United States that demand management has in recent years been the 
      rhetorical stepchild of national energy policy, even with the 
      implementation of CAFE standards, appliance standards and tax credits for 
      a range of investments. Yet it is clear that active 
      demand-management policies could have less expensive and equally large 
      impacts on the balance between supply and demand as supply-side solutions. 
      Moreover, it is almost certainly the case that any supply-side efforts 
      will need to be joined with vigorous demand-management actions to gain 
      congressional approval as an overall energy legislative package. The government should recognize 
      that it has significant impacts on demand through its regulatory, tax and 
      incentives framework. It also has a considerable ability to remove 
      distortions in regulations and to promote market flexibility, with an eye 
      on the impact of its actions on demand management. With 60 percent of U.S. 
      oil consumption focused on transportation, the administration should 
      encourage industry and government investments in technologies to increase 
      the fuel efficiency of the nation’s fleet and to stimulate domestic 
      development and deployment of fuel-efficient vehicles, including 
      gasoline/electric or fuel cell hybrids. Actions could include the 
      following:  
        Take a proactive 
        government position on demand management. The 
        best way to capture the nation’s attention on demand management is for 
        the President to take leadership in mapping out a demand-management 
        program as part of the nation’s energy strategy. Follow-up positions and 
        speeches by the vice president and secretary of energy could specify the 
        levels of supply savings that are targeted. They should also specify how 
        these targets can be reached and how demand management can impact them 
        (for example, with respect to sectors like transportation, residential, 
        commercial, industrial, and power, and with respect to choice of fuels 
        such as clean coal, cleaner oil, gas, nuclear, renewable sources, and 
        new technologies). 
         Use federal 
        procurement authority to enhance use of alternative fuels and develop 
        programs to introduce new efficiency technologies into federal buildings 
        and nascent transportation technologies into government vehicle fleets. 
        The federal government has an enormous impact on fuel choices in the 
        market through its procurement policies. These policies should be used 
        to invest in alternative fuels, including ethanol, natural gas and 
        hydrogen, or hybrid vehicles, and they should incentivize the 
        development of alternative fuel infrastructures. For example, under most 
        current programs, federal and state agencies have been purchasing 
        vehicles with flexible fuel use rather than vehicles mandated to 
        actually use alternative fuels in question or emerging technology that 
        greatly improves mileage standards. The result has been the perpetuation 
        of gasoline use and traditional engines rather than use of alternative 
        fuels or engine designs. This squanders both the demonstration impact of 
        federal programs as well as the opportunity to create infrastructures 
        for supply and fueling alternative design vehicles. 
        It should be said, however, 
        that the purchase of alternative design vehicles could be more expensive 
        than conventional vehicles and might encumber unanticipated repair 
        problems. There are clear cautions to worry about. Efforts to mandate 
        dual-fired ethanol cars, for example, to fulfill the alternative vehicle 
        mandates of the Energy Policy Conservation Act, were little more than 
        bones to domestic interest groups rather than scientific efforts at 
        promoting alternative fuels. It is also the case that federal purchasing 
        of a particular design solution or fuel puts the federal government in 
        the business of trying to anticipate future market preferences and 
        benefits. These objections need to be taken into account in designing 
        the federal government’s strategy. But they need not stop the efforts as 
        outlined. These efforts should be viewed as an investment that promotes 
        options of significance for energy security.  Use federal 
        procurement authority to achieve other demand management goals. 
        For example, review and rigorously implement minimal 
        targets for mileage standards for the federal automotive fleet, 
        standards for energy conservation in federal buildings, and other 
        current standards already in effect. 
         Review and establish 
        new and stricter CAFE (Corporate Average Fuel Economy) mileage 
        standards, especially for light trucks. There 
        are many good reasons to accelerate efforts to reclassify SUVs and other 
        vehicles (currently classified as "trucks") as "automobiles," for the 
        purposes of application of CAFE as well as emissions standards. For 
        example, mandating CAFE minimum fuel-mileage standards for light trucks 
        of 25 miles per gallon (comparable level to four-door automobiles) could 
        save 925,000 b/d of fuel demand. While the automotive industry has 
        traditionally argued that artificial standards can weaken its 
        profitability and therefore its ability to maintain employment levels 
        and investments in competitive vehicles, it is also the case that such 
        standards can increase their longer-term global competitive position 
        given other suppliers’ efforts in this direction. It must be noted, 
        however, that it takes seven to ten years for the entire U.S. automobile 
        fleet to turn over. Therefore, changes to CAFE standards are not likely 
        to have instantaneous results, which is a good reason to start now. Some 
        tax breaks to consumers who purchase cars with more favorable mileage 
        could hasten the process of moving low-mileage cars off the road 
        quickly. Even without government intervention, hybrid vehicles still 
        could make up as much as 15 to 20 percent of new vehicle purchases, 
        experts predict. This will contribute to a drop in U.S. oil demand of 
        600,000 b/d. Studies show that tax incentives can hasten and magnify 
        this process. 
         Actively promote the 
        development of energy efficient technologies, including fuel-efficient 
        engine and vehicle technologies to encourage 
        more efficient worldwide use of scarce oil resources. China alone is 
        projected to add more than 150 million automobiles to the road in the 
        next two decades. Efficiency of that fleet has global implications for 
        oil requirements.  3. Maximize Efforts 
      to Develop Clean Sources of Domestic Fuel Supply There is no doubt that the United 
      States has a premier energy resource base. But it is a mature province 
      whose potential exceeds that of many other conventional resource 
      provinces. In addition, it is physically incapable of rendering this 
      country energy independent given our extremely high energy consumption 
      rates. And, during the past twenty years, while other countries have made 
      more of their resource base available for energy resource exploration and 
      exploitation, the United States is virtually unique in removing 
      significant acreage that was once available for these purposes from energy 
      development. The United States requires a 
      better-balanced and more integrated approach to maintenance and 
      enhancement of the environment and energy-supply objectives. Twenty years 
      ago, nearly 75 percent of federal lands were available for private lease 
      to oil and gas exploration companies. Since then the share has fallen to 
      about 17 percent. And a significant share of the remaining 17 percent is 
      for all practical purposes unavailable for drilling. The Bush administration made 
      vocal campaign promises about one major potential oil and gas province—the 
      coastal plain of the Arctic National Wildlife Refuge. (It also supports a 
      pipeline to bring some 49 trillion cubic feet of Prudhoe Bay gas reserves 
      to the lower forty-eight states, a proposal that is designed to expand 
      opportunities for additional gas exploration in Alaska). As the Task Force 
      prepares its proposals, it cautions that unless the administration’s 
      proposals to permit exploration in the ANWR take into account other 
      aspects of policy—including other aspects of land management as well as 
      environmental policy and demand-management policy—the administration could 
      seriously erode support for its ANWR proposals. The Task Force recommends 
      consideration of the following with respect to domestic resources and 
      energy use. These recommendations recognize that at present domestic 
      drilling is constrained by many factors other than availability of land. 
      They also recognize that sound energy policy must begin at home since, 
      from three perspectives, it is desirable to foster domestic supply: 
      national security, balance of payments, and the comparative advantage of 
      American industry. Even so, lack of equipment and personnel, in 
      particular, will curtail the expansion of domestic and international 
      supplies for a number of years. A. Oil and Natural 
      Gas  
        Accelerate 
        completion of the U.S. oil and gas reserve inventory, as mandated by 
        Congress, highlighting restrictions on resource development. Such an 
        inventory needs to be completed soon and well before any plan is adopted 
        to develop particular domestic resources. 
        The secretary of the interior has been mandated to conduct an inventory 
        of all onshore federal lands, identifying reserve estimates as well as 
        restrictions on resource development on them. It is critical that this 
        inventory be completed soon and well before any plan is adopted to 
        develop particular domestic resources. It could well turn out, for 
        example, that the estimated 300 trillion cubic feet of natural gas 
        resources in the Rocky Mountain Overthrust could be a more appropriate 
        and cost-effective target for industry exploitation than the distant 
        resources of the ANWR. The virtues of completing the inventory first are 
        that it would provide an information base on which intelligent 
        decision-making concerning land availability can be made. It would also 
        provide a more scientific base for any tradeoffs than need to be 
        accommodated with conflicting environmental and other land-use policies. 
        Additionally, expanding this national effort to an international one 
        that includes Canada and Mexico as well could be an important step in 
        delineating a hemispheric energy policy. 
         Undertake an 
        accelerated and complete review of tax and fiscal policy as they impact 
        oil and gas development in the United States, taking into account the 
        competitive position of the U.S. fiscal regime as compared to 
        international conditions, in order to attract more capital to the 
        sector. While the United States has a 
        mature oil and gas resource base, it also has one of the least efficient 
        tax regimes in the world when it comes to oil and gas development. The 
        main direct tax is the royalty—which has a well-understood negative 
        impact on development and field abandonment. Changes to federal 
        corporate taxes, especially during the 1980s, further exposed the oil 
        and gas industry. The Alternative Minimum Tax has also posed a major 
        problem to development of supply in that its deters activity in a 
        cyclical downturn. Industry has been adverse to a tax review—except with 
        respect to royalty holidays—because of fear that it could lead to even 
        more restrictive policies (especially during a period when the 
        exploration and production sector is reaping record taxes). Yet any 
        effort to enhance domestic supply must be based on what makes for 
        sensible fiscal incentives. The administration should be encouraged, 
        therefore, to undertake this fiscal review as it also reviews its land 
        management policies.  B. Electricity
       
        Create an 
        appropriate comprehensive statutory framework for electricity 
        restructuring and for reestablishing a capacity cushion for the nation’s 
        power supplies. A new framework needs to overcome the adverse impacts of 
        today’s highly fragmented regime, which has reduced the reliability of 
        the U.S. power grid and impeded investment in new generation and 
        transmission capacity. This is a key 
        conclusion highlighted by the regional and national impacts of the 
        California power crisis on electricity supplies and the economy. The 
        patchwork nature of twenty-five separate state legal and regulatory 
        frameworks has reduced the reliability of the transmission network and 
        impeded investment in new generation and transmission capacity as these 
        jurisdictions have instituted some form of electricity deregulation or 
        restructuring. The uneven landscape of state-by-state deregulation, and 
        growing competition for power supplies between regions, have produced a 
        climate of investment uncertainty that is inhibiting system upgrades and 
        expansion at a time of dramatically increasing electricity demand. Thus, 
        states must work together with each other and with the federal 
        government to ensure that regional power and transmission markets are 
        efficient and competitive. State and federal authorities must also 
        provide for the continued reliability of the interstate bulk power grid. 
        The challenge will be simultaneously to do the following: meet increased 
        demand for reliable and high-quality electric power; create a favorable 
        investment climate to expand the power infrastructure to meet demand; 
        expedite the development of new infrastructure; increase the efficiency 
        of power generation and distribution; and, at the same time, mitigate 
        the ongoing impacts of power generation, distribution, and use on the 
        environment. 
         Work expeditiously 
        to improve the statutory framework for approvals of the siting of power 
        generating plants, as well as transmission and distribution 
        infrastructure. This is likely to require 
        an unprecedented level of cooperation between the federal, state, and 
        local governments, as well as environmental, consumer, and industry 
        stakeholders. Only the federal administration can provide the focus and 
        leadership such an effort requires. The administration thus needs to 
        consider incentives to states and localities to work together to 
        encourage rapid construction of the required infrastructure. 
        
         Evaluate the need 
        for incentives to stimulate the introduction of new technologies into 
        the power marketplace, including distributed generation and 
        co-generation. Working with industry 
        partners, the administration should work to substantially increase 
        investment in technologies that enhance the efficiency, reliability, and 
        quality of the power transmission and distribution infrastructure. 
        Policy should also focus on reducing the business, regulatory, legal, 
        technological, and institutional barriers to the market introduction of 
        new electricity technologies, such as distributed generation and 
        co-generation. And the administration should continue to promote 
        research and development for alternative sources of power and work with 
        industry to help stimulate deployment of these technologies. 
        
         Work with state 
        regulators and regional authorities to allow and incentivize companies 
        to offer long-term contracts for electric power and to encourage them to 
        hedge price risks associated with such 
        contracts to maximize the part of the market that will not be 
        susceptible to large shifts in the spot market price. The use of 
        long-term contracts should help protect consumers from wild swings in 
        electricity rates when a shortage occurs in markets. The downside is 
        that companies who aren’t successfully hedged can be forced into 
        bankruptcy by the margin call on adverse market swings or by an unwise 
        hedging program. Experience shows that even the most expert traders can 
        make these errors. Thus, the institution of long-term contracting is 
        only a partial solution. 
         Encourage the 
        development of power capacity cushions on a regional basis. 
        For example, it could consider providing incentives 
        to system operators to buy stand-by power at auction to cover 
        anticipated energy level needs, in order to encourage construction and 
        maintenance of spare capacity. The guaranteed market and forward sale of 
        stand-by power will encourage generators to build up incremental 
        capacity and to maintain spare generation capacity that can be used to 
        smooth out market disruptions or anomalies. Although this will mean that 
        overall costs for electricity might be slightly higher on a long-term 
        basis, it will prevent sudden sharp rises that can be harmful to the 
        public good. 
         Recognize that 
        many of the policies and actions that are needed to meet increased 
        demand for power generation are power source-specific.
        
         Assure that 
        regulations protect open access to electricity generated by new, 
        nontraditional fuel sources. This action 
        is necessary to guarantee that new sources cannot be locked out of the 
        transmission system by suppliers using traditional fuels. 
         C. Natural Gas
       
        Apply strong 
        leadership to develop a coherent, comprehensive strategy promoting 
        efficient development and use of the nation’s natural gas resources. 
        National policy can be especially effective in enhancing market 
        efficiencies and in accelerating long-term supply. This was the 
        conclusion of the National Petroleum Council’s report of December 1999 
        on "Natural Gas: Meeting the Challenge of the Nation’s Growing Natural 
        Gas Demand." There is no doubt that a strong White House role is 
        required to coordinate the array of disparate government departments and 
        independent federal agencies that play a part in decision-making on 
        natural gas. A strong White House role is also required to promote 
        collaboration between federal, state, local, and tribal governments, in 
        order to ensure the availability and deliverability of natural gas to 
        all classes of consumers. 
         Endorse the 
        construction of natural gas pipelines from the Arctic to the 
        lower-forty-eight states and work bilaterally with Canada and the state 
        of Alaska to address important issues that need to be resolved.
        
        U.S.-Canadian relations are 
        critical for delivering natural gas to the Lower Forty-Eight. Without 
        full cooperation from Canada, efforts to harness additional resources 
        from Alaska will be stymied. Critical support for the pipeline would 
        include making the infrastructure permitting process efficient and 
        helping resolve differences surrounding questions of routing, 
        environment, and construction. This calls for a federal role in 
        coordinating authorities in Alaska, within a variety of U.S. federal 
        agencies, and with Canada.  Assure that 
        regulatory authorities work together to bring about natural gas market 
        efficiencies, including the provision of open access to markets by 
        producers and to supply by end-users, and that allow delivery costs to 
        be determined transparently by market forces so that commodity values 
        are transparent to both producers and consumers. 
        The regulatory process needs to ensure that delivery 
        systems provide open access to markets by producers and to supply by 
        end-users. Regulators should promote efficiencies that allow delivery 
        costs to be determined by market forces so that commodity values are 
        transparent to both producers and consumers. 
        Regulations also need to 
        protect open access to electricity generated by new fuels outside the 
        traditional domain, such as fuel cells or biomass. This means that 
        regulators should: 
         
          Carry out regular pipeline 
          rate reviews to assure that cost reductions are passed along to 
          consumers.
Promote incentive 
          rate-making plans to tie the financial returns of pipelines to 
          efficiency gains and losses. Such plans should also require sharing of 
          efficiency gains with customers.   Invest in—or 
        stimulate and encourage private-sector investment in—research and 
        development of technologies that focus on safe and cost-effective 
        ultra-deep water production, smaller drilling footprints, and increased 
        production from non-conventional sources, 
        including methane hydrates. Production of abundant and affordable gas 
        supply in environmentally sensitive ways will depend on technology 
        developments. 
         Encourage natural 
        gas exploration and production through a series of technology-targeted 
        tax incentives that also encourage use of advanced, environmentally 
        sensitive technologies and that provide counter-cyclical support for 
        exploration and production. (E.g., 
        geological and geophysical expensing, deepwater, marginal gas well 
        production, and infrastructure investments in such equipment as drilling 
        rigs.) 
         Initiate a 
        mitigation forum process to evaluate infrastructure needs and reduce 
        delays in new pipelines and storage facility siting. 
        The process should involve regulators, environmentalists, technology 
        developers, landowners, consumer advocates, and industry users. In this 
        manner authorization to construct new pipeline infrastructure should be 
        accomplished without undue delay, consistent with ensuring that 
        environmental factors are fully considered and addressed. This new 
        infrastructure will be needed to meet growing demand and to relieve 
        capacity constraints wherever they exist. The federal government should 
        work with industry and state agencies to re-engineer underground storage 
        facilities. 
         Consider providing 
        incentives to state and local governments that agree to expedite natural 
        gas infrastructure siting. 
         Invest in—or 
        stimulate and encourage private sector investment in—technologies to 
        ensure pipeline infrastructure integrity, reliability, flexibility, and 
        safety. 
         Foster development 
        of advanced storage technologies to increase regional storage capacity 
        and serve peak power and distributed generation markets.
        
         Evaluate the 
        potential of imported Liquefied Natural Gas (LNG) as a major additional 
        source of base load as well as incremental supply for the United States, 
        and in the process consider accelerating environmental reviews required 
        for siting as well as accommodating the commercial logistics and other 
        user needs associated with facilities built or operated by LNG 
        suppliers. Accommodation of the commercial 
        logistics and needs associated with LNG regasification facilities will 
        be important where such facilities may be built or operated by LNG 
        suppliers. Government policy will need to address means of accommodating 
        the commercial practicalities that attend supplier-driven LNG 
        facilities.  D. Coal Given the nation’s 
      abundance of coal resources, it is critical to foster the development of 
      clean coal technologies such as gasification to promote coal use in power 
      generation. At the same time, such development programs should mitigate 
      the environmental impacts of coal combustion to meet local, regional, and 
      global environmental challenges. Coal use continues to grow—it 
      currently supplies 55 percent of U.S. power generation and has increased 
      in absolute volume by 17 percent in the last decade. Its abundance makes 
      it a fuel of choice for national energy security reasons; but its use 
      poses some of the most difficult environmental challenges of energy 
      production. Its worldwide use is also expected to grow dramatically, as it 
      represents an abundant and inexpensive source of fuel for power in 
      numerous fast-growing developing countries, including China and India. Investment in clean coal 
      technologies continues to pay dividends. For example, in the United 
      States, increased coal use has been accompanied by reduced sulfur 
      emissions. These proven technologies need to be deployed more broadly and 
      further advances in them need to be promoted through a renewed focus on 
      research and development, as well as fiscal incentives that are offered to 
      these ends. The government needs also to find ways to foster entirely new 
      technologies, such as carbon sequestration technologies that could 
      dramatically increase the attraction of coal internationally as a fuel 
      whose use would not generate large greenhouse-gas emissions. The vital importance of further 
      breakthroughs in the area of clean coal cannot be understated. It could be 
      a major contribution to U.S. and global solutions to energy and 
      environmental needs.
 E. Nuclear
 
        Support the Nuclear 
        Regulatory Commission in relicensing expeditiously plants whose licenses 
        will soon expire in order to extend plant life where possible.
        Nuclear power plants now generate about 20 percent of the 
        country’s power. Existing plants are operating with unprecedented 
        capacity factors of more than 85 percent. The importance of this 
        significant base load has been reinforced by recent events in 
        California. Increased attention to power plant emissions, especially 
        greenhouse gases, may further increase the attractiveness of nuclear 
        power. Licenses of operating plants, some initially granted for forty 
        years, are beginning to expire in 2010. The NRC is beginning to 
        relicense to extend plant life by an additional twenty years. 
        
         Work constructively 
        with stakeholders to resolve nuclear power plant spent fuel (and 
        high-level defense waste) disposition within the next few years, since 
        this is critical to preserving viable nuclear options for the nation. 
        This will require high-level administration attention. In particular, 
        the scientific study of Yucca Mountain as a repository site and parallel 
        development of engineered barriers will present the President and 
        Congress with the final suitability decision and licensing application 
        in about a year. If the site is deemed suitable based on science and 
        technology, the administration should work with the state of Nevada, the 
        nuclear utilities, and the stakeholders to develop a path forward to 
        resolve current disputes and meet federal responsibilities of accepting 
        spent fuel, as well as disposing of high-level defense waste. 
        
         Work to improve the 
        investment climate for new nuclear power plant construction, through NRC 
        streamlining of licensing procedures and by resolving uncertainties 
        surrounding electricity deregulation and restructuring. 
        No new nuclear power plants have been ordered in the United States for 
        more than twenty years. But the impact of reactor accidents at Three 
        Mile Island and Chernobyl may well be fading, with the excellent safety 
        record of Western-designed reactors and the availability of more 
        advanced designs and their additional safety features. However, safety 
        alone is not the issue. Uncertainty surrounding deregulation is also a 
        problem, given the very large capital costs of nuclear plants. 
        
         Work with Congress to 
        sustain the front-end domestic nuclear fuel cycle through the next 
        half-decade. A key element is 
        the development of U.S.-origin competitive enrichment technology. The 
        front-end of the nuclear fuel cycle requires attention. Congress has 
        established a statutory requirement to maintain viable domestic uranium 
        mining, conversion, and enrichment industries, yet all three sectors are 
        unhealthy. Uranium enrichment is particularly sensitive because of its 
        implications for nuclear weapons proliferation, and reliability of 
        American enrichment supply is as important for slowing the spread of 
        enrichment technology as it is for supplying domestic utilities. 
        
         Work with Western 
        European allies and Japan to shape a future nuclear fuel cycle that 
        would garner shared support. The 
        very large disconnect between U.S. versus European and Japanese 
        fuel-cycle policies is detrimental to sustaining nuclear power as a 
        viable and potentially important option. Unresolved issues concerning 
        spent-fuel isolation plague the choice of an open fuel cycle by the 
        United States (i.e., once-through utilization of nuclear fuel followed 
        by geological disposal). The alternative closed fuel cycle advanced by 
        France, Japan, and others (i.e., reprocessing spent fuel to extract and 
        recycle plutonium) is plagued by large accumulation of separated 
        plutonium and unfavorable economics. The proliferation danger posed by 
        separated plutonium led to the U.S. decision in the 1970s to pursue the 
        open fuel cycle. The administration needs to work actively and closely 
        with allies to help shape a future fuel cycle that would satisfy our 
        nonproliferation concerns and their energy security needs, while 
        minimizing waste issues and enhancing safety. 
         Work with the 
        education system to reinvigorate training in nuclear science and 
        technology. There has been a 
        precipitous drop in the number of American students studying nuclear 
        engineering, and some leading universities are on the threshold of 
        irrevocably cutting out the relevant essential educational programs and 
        infrastructures. The administration needs to work with the university 
        community to sustain nuclear science and technology education during the 
        next decade in order to help preserve the nuclear power option. New 
        technologies such as small innovative reactors promise to offer an 
        alternative to traditional designs and the problems described above.
         4. Augment Diplomatic Initiatives to Spur Non- OPEC Production 
      Increases
 The more supply that is available 
      on international energy markets and the more diversified their sources, 
      the better equipped markets will be to handle a disruption without a 
      market failure or extreme price response. The United States has a stated 
      policy favoring diversity of oil supply and working to promote oil 
      production from countries outside of OPEC.  
        Expand Oil and Gas 
        Forum programsOne method used to promote investment in non-OPEC resources and to 
        remove fiscal, bureaucratic, or political obstacles thwarting such 
        investment is to convene major trade conclaves involving U.S. energy 
        companies and political leaders from non-OPEC countries. The Departments 
        of Energy, Commerce, and State together have initiated such forums as 
        the China Oil and Gas Forum and the Latin American Oil and Gas Forum, 
        which provide a venue for discussion of investment opportunities and 
        problems among U.S. industry, U.S. government, and non-OPEC industry and 
        government. The budget for such programs should be expanded to cover 
        other important oil-producing countries or regions such as Russia, West 
        Africa, the Caspian, and Indonesia.
  Investigate ways to 
        facilitate increased investment in Mexico’s oil and gas sectorsMexico is one of the four largest oil suppliers to the United States and 
        could become a significant natural gas producer if it had the resources 
        to finance additional exploration activities in the Yucatan peninsula. 
        Northern Mexico has strong demand for natural gas and electric power and 
        currently imports a net of 0.25 billion cubic meters of natural gas from 
        the United States. Mexico has an important role to play in North 
        American energy markets, and assistance should be brought to bear in its 
        struggle to finance a higher level of investment in its hydrocarbons 
        sector. Higher production of natural gas in Mexico would not only 
        satisfy demand from northern Mexico, creating a backup for natural gas 
        supply in the United States, but could be an important source to meet 
        rising U.S. demand. At a minimum, the administration should investigate 
        ways to support Mexican government investment in natural gas resources. 
        But the administration may also want to consider leverage tools that 
        could be brought to bear to assist political leaders in Mexico who 
        advocate that Mexico open its energy sector to foreign investment, 
        starting with natural gas. This latter policy would garner the strong 
        support of U.S. energy companies and demonstrate the administration’s 
        commitment to increase natural gas supplies in the hemisphere. Activity 
        that would encourage U.S. participation in Mexico’s energy industry 
        would deflect suggestions that support for Mexico’s oil and gas industry 
        should take a second seat to developing U.S.-based resources.
 Ultimately, Mexico’s resources 
        are closer and maybe more economical to develop than those in Alaska. 
        However, Mexico’s constitution blocks ownership participation in oil and 
        gas fields by foreign entities, and Mexico’s oil workers unions are 
        heavily set against any foreign participation in Mexico’s oil and gas 
        activities under any kind of arrangement. Thus, U.S. visibility on this 
        issue could create some political tension with Mexico in the short term, 
        even if it is beneficial for both countries in the longer term. One 
        solution to this dilemma might be to keep discussion of opening Mexico’s 
        natural gas sector within a hemispheric focus, including Canadian and 
        Brazilian oil and gas firms as well as American firms, in order to 
        diffuse attention from the negative aspects of Mexican popular opinion 
        regarding U.S.-led investment in Mexican resources.  Encourage reforms in 
        Russia’s energy sectorFurther enhancement of the Russian energy sector would help the United 
        States attain the diverse oil and gas supplies that will be needed 
        during the coming years to moderate rising dependence on the Middle 
        East. Without a massive injection of capital, Russia’s production, which 
        has dropped by half since the collapse of the Soviet Union, could 
        continue to stagnate if not fall in the coming years. Russian oil 
        production is projected to rise only marginally to about 6.5 million b/d 
        during the next decade and then only if investments can be increased to 
        twice the current level, according to Russia’s Ministry for Fuel and 
        Energy. Investment scandals, poorly articulated property rights, 
        unstable tax and legal regimes, and bureaucratic barriers have had a 
        chilling effect on foreign investment, scaring away most international 
        investors from Russia’s energy sector. The Gore-Chernomerdyn effort 
        included a rehabilitation package for Russia’s oil and gas industry but 
        many of the funds allocated were not extended due to the significant 
        barriers encountered by U.S. companies trying to operate in the country.
 However, there appears to be a 
        major change taking place in Russia under President Vladimir Putin, 
        whose government is showing renewed interest in energy-sector reform, 
        and new oil and gas laws look to be forthcoming. This progress from the 
        Russian side might open the door for a new initiative from the United 
        States on energy trade and investment, as well as the development of a 
        production-sharing agreement law. In particular, the United States 
        should support European initiatives to bring Russia into the European 
        energy charter. (See section on multilateral institutions, 
        recommendations 7 and 9.) However, while energy is a potential area of 
        cooperation between the United States and Russia, other foreign policy 
        and security issues are likely to take precedence. Still, the United 
        States must consider seriously the fact that a declining Russian energy 
        industry, while possibly curbing Russia’s military budget and thereby 
        reducing Moscow’s ability to challenge U.S. interests, will make it 
        extremely difficult for the United States to promote diversity of 
        international supply. Given Russia’s important role as an energy 
        supplier to Europe, U.S.-Russia policy should not be pursued without 
        debate concerning energy supply considerations and consequences.  Improve access to 
        information, as well as transparency of comparative oil and gas fiscal 
        commercial regimesOil and gas investment in any particular country or region is influenced 
        not only by geology, but also by the fiscal regime and other aspects of 
        government take. Experience has shown that major changes in tax policy 
        can stimulate new investment and delay a decline in oil production or 
        even promote a production increase in mature fields. This was clearly 
        demonstrated through the 1980s in the U.K. sector of the North Sea. 
        Non-OPEC countries must stay abreast of international trends in fiscal 
        terms and other aspects of government take to ensure that their 
        investment terms remain competitive; but competitors may seek to cloud 
        transparency for competitive reasons, making it difficult for countries 
        to know when an improvement in terms is necessary. The United States has 
        a strong interest in promoting transparency and education about trends 
        in oil and gas investment terms in non-OPEC to help keep these countries 
        competitive and attractive for investors. This can be handled via the 
        Oil and Gas Forums mentioned above, through reviving the program of 
        publicly available embassy reports on the oil and gas industries of 
        various host countries, and through U.S. Agency for International 
        Development (AID)–sponsored training programs, as well as through 
        Internet resources such as the Department of Energy website and IEA 
        reports.
 5. Initiate 
      Diplomatic Efforts to Spur the Reopening of Countries That Have 
      Nationalized and Monopolized Their Upstream Sectors Middle East Gulf crude oil 
      currently makes up around 25 percent of world oil supply, but could rise 
      to 30–40 percent during the next decade as the region’s key producers 
      pursue higher investments to capture expanding demand for oil in Asia and 
      the developing world. If political factors were to block the development 
      of new oil fields in the Gulf, the ramifications for world oil markets 
      could be quite severe. There have been discussions in 
      several important oil producing countries, notably Saudi Arabia and 
      Kuwait, to reopen their upstream oil and gas sectors to foreign investors 
      to garner the necessary finance and technology for the massive investment 
      necessary—estimated at anywhere from $6 to $40 billion. This reopening is 
      important and should be on the bilateral U.S. agenda with these countries. 
      The Department of State, together with the National Security Council, the 
      Department of Energy, and the Department of Commerce should develop a 
      strategic plan to encourage reopening to foreign investment in these 
      important states of the Middle East Gulf. While there is no question that 
      this investment is vitally important to U.S. interests, there is strong 
      opposition to any such reopening among key segments of the Saudi and 
      Kuwaiti populations. This opposition must be taken into account so that 
      pursuit of the investment program does not fuel anti-Americanism in these 
      countries or destabilize their ruling regimes. 6. Review Oil 
      Sanctions Policy to Identify Ways to Reduce the Negative Impact on Energy 
      Supplies While Accomplishing the Objectives for Which the Sanctions Were 
      Imposed. More oil could likely be brought 
      into the market place in the coming years if oil-field development could 
      be enhanced by participation of U.S. companies in countries where such 
      investments are currently banned, particularly in Libya where frozen U.S. 
      assets remain in limbo. Resources are large and, with major contributions 
      of foreign investment capital, large additions to production rates could 
      be accrued in the coming two to three years. Efforts should be made through 
      cooperation and collaboration with Congress to phase out or drop sanctions 
      that are no longer relevant to U.S. strategic objectives. Sanctions 
      regimens that are ineffective should be reevaluated and restructured to 
      increase their chances of producing the desired outcomes. An easing of 
      sanctions in any particular country might conflict with other U.S. policy 
      goals and must be reviewed in this context. However, the costs of 
      prolonging these sanctions, both in terms of energy policy and foreign 
      policy, must also be taken into account. The government needs to weigh 
      arguments that sanctions are needed to restrain revenues of regimes whose 
      policies are hostile to U.S. interests against the reality that imposition 
      of oil sanctions on too many regimes at once can be ineffective and can 
      have cumulative adverse effects. When they are effective they can also 
      reduce market competition and contribute to overall higher oil price 
      levels, higher U.S. vulnerability to disruption, and higher revenues for 
      the very same adversaries. The latter can especially be the case when 
      world markets are tight and other suppliers will not or are unable to 
      increase supply to make up for the loss from the sanctioned country. 7. Develop a Credible 
      International Stance on Global Warming and Other Environmental Issues The United States lacks a clear 
      and consistent policy reconciling energy and environmental objectives, and 
      this is a large deficit in both U.S. domestic and foreign policy. Attempts 
      to integrate energy and environmental policy continue to be hampered by 
      the existence of market externalities, in which the true social costs of 
      consumption of different fuel sources are not reflected in their purchase 
      price. It is important in fashioning policy to clearly define 
      externalities and environmental objectives from the outset. Environmental 
      economic measures must tackle pollution at the point where it occurs, and 
      such measures should also be deemed to have significant effect. They 
      should be based on sound science and not constitute a tax on general 
      economic activity. Thus, some specialists advocate that "green" taxes 
      should be revenue neutral, except when spent on related activities, such 
      as cleanups. Tradable permits can be considered in cases where tax 
      solutions offer a strong policy alternative. Cleaner fuels should face a 
      lower fiscal burden than those that have higher negative environmental 
      consequences and thereby impose real costs and social burdens. 
        Conduct a thorough 
        review of the Kyoto Accords and recommend ways for the United States to 
        revive international discussions on climate change and also execute 
        bilateral agreements with regard to promoting environmental safeguardsA greater U.S. commitment on the global warming issue can help 
        demonstrate seriousness regarding environmental issues, which have 
        become central concerns of the international community. A strong U.S. 
        international commitment can build on the strong U.S. domestic record on 
        environmental matters, especially at a time when some more limited 
        immediate environmental regulations might have to be waived temporarily 
        to defend or de-bottleneck energy supply.
  Investigate new ways 
        to promote efficiency and clean energy technologies, including clean 
        coal, expanded natural gas use, and automobile mileage and emission 
        standards, for use in large consuming countries in Latin America and 
        Asia, especially China and IndiaPrograms can include joint research on safer, proliferation-proof 
        nuclear technologies, clean coal, renewable technologies, and 
        alternative fuel automotive design. The IEA program on energy efficiency 
        education and technology transfer should be expanded, and education 
        programs on energy conservation practices should be developed not only 
        inside U.S. public schools but also for governments and schools in other 
        countries such as Russia, the Former Soviet Union, China, India, etc.
  Develop a strategy to 
        coordinate with the European Union and the Association of Southeast 
        Asian Nations (ASEAN) on refined petroleum product specifications 
        through multilateral dialogue and bilateral agreements.Just as better coordination is required 
        between environmental regulators and energy policy officials nationally, 
        so too should better coordination between these authorities be promoted 
        on an international level. The issue of Market Balkanization referred to 
        earlier in these recommendations exists on an international level as 
        well as on a national level. Lack of coordination on both product 
        specifications and the timing of their introduction into the market have 
        an important impact on trade and on pockets of supply shortages 
        internationally. Better coordination would mean that shortfalls in one 
        country could be rebalanced more easily by exports from another. This 
        will help smooth localized price volatility and create more orderly 
        international products trade.
 8. Support Efforts to 
      Develop and Disseminate Timely and Accurate Information about the 
      Fundamentals of Energy Market Supply and Demand. Market efficiency and the smooth 
      transition to deregulated energy supply and price is highly dependent upon 
      adequate market signals and information. Yet ironically, in the 
      information age, in which technology and communications advances have 
      facilitated the development and dissemination of data, there has been a 
      perceived decline in market transparency. One of the major roles of public 
      authorities in assuring the smooth functioning of markets now centers on 
      the provision of data and information to facilitate market transparency. 
      So far, this important role for governments has been under-recognized. 
      There are clear obstacles to market transparency, and these will be hard 
      to eliminate. These include the following:  
        Restructuring of industry, 
        with new "nontraditional" enterprises emerging that have not reported 
        fundamentals to government (e.g., Independent Power Producer (IPPs in 
        the United States).
Restructuring of industry, 
        with loss of old reporting functions in some companies.
Lack of government commitment 
        to collecting data.
Increased role of 
        non-industrialized societies in the global energy sector, with lack of 
        data collection and development infrastructure.
Decline of data collection 
        integrity with the collapse of the Soviet Union, at a time when the 
        Russia and other successor states are more integrated into global energy 
        markets.
Refusal of some governments, 
        most importantly oil producing countries including Saudi Arabia and 
        Venezuela, to provide fundamental transparent information on supplies to 
        markets, capacity to produce, reserves, and levels of inventories.
         As a result, neither companies 
      nor governments are receiving adequate and timely information at a time 
      when markets are more volatile and more subject to large price movements. 
      They are often making inappropriate decisions affecting the public good 
      largely because their information base is wrong, threatening stable, 
      affordable energy prices and reliable supply. It is widely agreed that the 
      most reliable data are those compiled by the IEA. Yet there is widespread 
      distrust of the integrity of IEA data, not only in OPEC and in the 
      developing world but within OECD countries as well. Recognizing this, 
      recently the Saudi government proposed establishing a permanent global 
      institution in Riyadh to bridge differences between exporting countries 
      and others. Yet Riyadh has acted in the past to thwart a transparent 
      energy system. The commitment of Saudi Arabia to promote data transparency 
      should be explored and tested by the administration.  
        Recognizing that 
        transparency is an important element in maintaining orderly markets 
        generally and in times of energy or unexpected disruption in particular, 
        the administration should provide a higher budget for the Department of 
        Energy’s Energy Information Agency. 
        
        The agency needs to strengthen 
        its ability to collect domestic data on all aspects of market 
        fundamentals in order to restore the integrity of information on the 
        U.S. market, a critical step in enhancing market transparency. It should 
        work together with the IEA to improve the worldwide energy database, 
        including data on fundamentals for all primary energy sources, including 
        country specific data. The DOE should also investigate how to support 
        and promote the sharing of accurate data among major oil-producing and 
        oil-consuming countries through private or multilateral Internet 
        publishing, publications, or regional organizations 9. Lay the Foundation 
      for New Global Energy Institutions If the domestic and international 
      goals of U.S. energy policy are to be maximized, it is time for the United 
      States to consider revitalizing and revamping the international mechanisms 
      governing international investment and trade in energy. The United States should try to 
      lay the institutional framework of new international energy institutions. 
      The institutions should be designed to achieve such goals as: 
        Greater Transparency.
        If the general goal of U.S. energy policy is 
        the perfection of markets so that investments can be made efficiently on 
        a global basis in energy resources, that goal must start with 
        transparency. (See recommendation 9 above.) Rules of Trade and 
        Investment. At an international level, the 
        energy sector has retained far more of the elements of the pre-free 
        trade and investment environment of the 1920s and 1930s than any other 
        sector, save, perhaps, agriculture. It is, at the core, a highly 
        politicized sector. Efforts to defuse those politics have been 
        relatively unsuccessful. There is little doubt that the objectives of 
        securing diversified energy resources on a diversified geographic basis 
        would be fostered by the adoption of international rules governing trade 
        and investment in energy resources. Nor is there much doubt that as 
        societies have abandoned the critical elements of resource nationalism, 
        the basics are increasingly in place for the establishment of such 
        rules. Keeping Energy and 
        Other Issues on Separate Tracks. One of the 
        major benefits of establishing institutions through which governments 
        agree to a set of rules governing their mutual arrangements for trade 
        and investment is that through these rules governments would virtually 
        explicitly be renouncing the use of energy as instruments of foreign 
        policy for non-energy purposes. The energy world would parallel the 
        world of the General Agreement on Tariffs and Trade (GATT) and the World 
        Trade Organization. Governments would effectively agree to 
        most-favored-nation principles of trade and investment and would thereby 
        forswear the use of energy as an instrument of foreign policy against 
        others party to the agreements. For example, neither oil 
        producers/exporters nor oil importers would be able to embargo or 
        boycott—with impunity—trade or capital flows with other agreed parties. 
        Such a rule would civilize the energy sector much as other sectors of 
        international trade and investment have been civilized, with disputes 
        settled about the sector per se, not about exogenous issues. 
         The issue for the United States 
      is not so much whether such new international institutions are desirable. 
      Rather, it is how to achieve them. But it is clear that unless the United 
      States assumes a leadership role in the formation of new rules of the 
      game, it will not simply forfeit such a role, which others will assume. It 
      will rather become reactive to initiatives put forth by other governments 
      which, if agreed by others, could leave U.S. firms, U.S. consumers, and 
      the U.S. government in a weaker position than is warranted. This could be 
      already happening, for example, with respect to the establishment of a new 
      information base for energy, given the commitment of the Saudi government 
      to house such a base within its borders. It could also be happening with 
      respect to the European Energy Charter, if Moscow agrees to ratify the 
      Energy Charter treaty. In addition, such an effort would assist in 
      preventing the emergence of international groupings of countries that 
      could be antithetical to U.S. interests—for example an effort by 
      Venezuela, Iraq, and Russia to align their interests against the United 
      States on a host of international energy and non-energy issues. 
        Embrace the spirit of 
        "producer-consumer" dialogue, but not the framework with which it has 
        been associated. The idea of a broadly based 
        and ongoing dialogue of oil producers and consumers, graced by the 
        presence of big oil companies, has increasingly moved back into the 
        international limelight. It has been reinforced by the spirit of 
        cooperation between key OPEC and non-OPEC countries working together on 
        production constraints and working with key oil- importing countries on 
        an implicit understanding over a "just price" for oil. OPEC governments 
        have been pushing this theme for several reasons: volatility in oil 
        prices; the collapse of oil prices and revenues in 1998; and high 
        consumer taxes on petroleum products in Europe and Japan. Producers, 
        including non-OPEC members Mexico and Oman, argued that a handful of 
        relatively poor developing countries were forced to assume unfairly an 
        extraordinary burden of adjustment to lower oil prices. They argued that 
        those benefiting from the lower prices had an obligation to both 
        understand their plight and assist them in doing something about it. It 
        was for this reason that most OPEC countries were sympathetic to the 
        U.S. government’s use of SPR time-swaps in 2000 to help damp the price 
        peaks of the autumn of 2000. OPEC’s position has been straightforward: 
        OPEC cannot, by itself, bring stability to oil markets. Collaboration is 
        needed both with other producing countries and with importing country 
        governments, especially on thorny issues related to information on 
        fundamentals, including the level of and management of inventories. The 
        issues of this dialogue are global; but the framework won’t work: 
        market-based countries such as the United States cannot guarantee price 
        floors; producer countries with limited output capacity cannot guarantee 
        price ceilings. There can be no such bargain. Additionally, most OPEC 
        governments do not want to see markets left to operate without 
        government intervention. Some OPEC countries want not just a floor 
        price, but a gradually rising one, however anti-competitive and 
        administratively difficult this may be to enforce. 
         With U.S. leadership, 
        foster broad international cooperation on a host of issues, including 1) 
        sharing information on oil market trends and the basics on evolving 
        environmental standards on petroleum products and emissions; 2) 
        promoting mechanisms for attracting investment capital; and 3) 
        coordinating information on investments in refinery upgrading and in new 
        demand, which would define the requirements for new grassroots plants. 
        The question is, How should appropriate global arrangements be 
        institutionalized for a globalized world energy sector? 
         Build global energy 
        institutions in three ways: 
        
          Consider using 
          the European Energy Charter as the basis of the sort of energy 
          institutions that the United States should want to adopt on a global 
          basis. The original idea of a single 
          European energy market extending from the Atlantic to Siberia, put 
          forward in 1990, was that once unleashed by Western investments, 
          ex-Soviet oil and gas resources could make Europe virtually 
          self-sufficient, ending dependence on the Middle East. 
          The main weakness of the 
          original European scheme has always been that it takes a long time to 
          get from here to there. Ex-Soviet output has languished; the rule of 
          law has yet to be put in place in Russia; and no appropriate 
          administrative procedure has been developed in any of the successors 
          to the Soviet Union. Moscow has yet to ratify the treaty. The United 
          States and Canada and Norway and Japan all had fears of being left in 
          the cold, and wavered between joining and killing off the plan before 
          it took root. But the Energy Charter put in place exactly the genre of 
          rules the United States should want to seek, covering investment, 
          trade, third-party transit, and fundamental environmental standards in 
          member countries. The United States was unable, however, to sign the 
          final texts because the European Union members included certain 
          stipulations—West-West issues as they were known—that were impossible 
          to ratify because they touched on constitutionally fundamental 
          federal/state divisions of labor that were impossible to overcome. It is time to re-examine the 
          European Energy Charter as the basis of the sort of energy institution 
          that the United States should want to adopt on a global basis. The 
          United States should take the lead to help forge a document that is in 
          line with its interests and free from the problems of the past 
          restrictions.  Build on 
          overlapping interests and relations between the world’s largest oil 
          exporter (Saudi Arabia) and the largest energy consuming country (the 
          United States). Immediately after the 
          end of the Gulf War, the two countries had a once-in-a-generation 
          opportunity to put in place the elements of a new institution 
          governing oil trade. They failed to take advantage of that window of 
          opportunity. Nonetheless, the elements of an agreement between the two 
          superpowers of energy are worth considering; they could enhance not 
          only Saudi and U.S. energy security, but that of much of the rest of 
          the world as well. It could also help to assure the smooth operation 
          of market forces and the needed growth in international oil trade and 
          the energy trade in general. What’s more, this process could work 
          without either country undermining its respective partners in OPEC or 
          the IEA. 
          Negotiation of a bilateral 
          agreement might start by fleshing out the long-standing Saudi call for 
          a system of "reciprocal energy security." In return for even modest 
          demonstrations of goodwill toward their country, Saudi ministers have 
          suggested that the United States and other consumer nations could gain 
          guaranteed access to "a fairly priced ocean of oil." A dialogue 
          between the two countries could focus initially on short-term 
          mechanisms designed to mitigate the economic damage caused by extreme 
          oil price volatility. One element could be bilateral planning for 
          strategic oil storage and use.  Explore a 
          mechanism promoting a North American or Western Hemispheric energy 
          agreement. NAFTA in many ways lays the 
          groundwork for an internationally expanded energy sector. Trade in 
          energy—in oil, natural gas, and electricity—is considered a central 
          feature for the NAFTA agenda. The NAFTA-style framework could serve as 
          a starting point for extension of its energy stipulations southwards 
          into Central and Latin America, at least where energy issues are 
          concerned. The main impediment to pursuing an expanded NAFTA in energy 
          on a hemispheric and global basis has resided both in the Mexican 
          political refusal to consider amending its constitution to permit 
          foreign investment in its energy sector and in resistance from Canada.
          
          As with Saudi Arabia, the 
          United States has a major decision to confront with respect to Mexico. 
          Should the United States, in the process of pursuing more secure 
          access to more energy resources, more assertively pressure its energy 
          trading partners to open their sectors to foreign investment? Or 
          should it remain passive about such a decision, respecting the 
          objectives of those countries that chose to maintain a monopoly over 
          their domestic energy resources? Whichever route chosen by the U.S. 
          government, long-range commercial links will remain critical to 
          reestablishing market stability in the petroleum sector. They are 
          equally central to making sure that the next time a supply glut 
          develops, the burden of adjusting to it is more equitably spread 
          around the world.  Form the core of 
          future multilateral agreements through bilateral or regional 
          arrangements based on improving markets, ensuring energy security, and 
          guaranteeing investments and trade on a mutual, reciprocal, and 
          nondiscriminatory basis. The benefits 
          first captured by the United States and Saudi Arabia in a bilateral 
          agreement, or by the United States, Canada, and Mexico in a NAFTA 
          agreement, or by signatories to an Energy Charter, could be 
          progressively enlarged with similar agreements signed with other 
          countries. 
          Building new 
          international institutional arrangements in the new century will not 
          be easy. But it is by no means impossible. It need not require the 
          dismantling of OPEC or the IEA. Equally important, it need not require 
          a politically difficult dialogue between the two organizations, a 
          broader U.N. forum, or another setting for grand but fruitless 
          discussions. Yet over time it could supersede all of these. It could 
          provide the foundation for a kind of General Agreement of Petroleum 
          and Petroleum Products, and Natural Gas, and Electricity. That’s how 
          the General Agreement on Tariffs and Trade emerged from bilateral 
          trade agreements based on the extension of most-favored nation 
          treatment to a broad array of countries. 
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