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 programs
One 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 sectors
Mexico 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 sector
Further 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 regimes
Oil 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 safeguards
A 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 India
Programs 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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