Gasoline prices may have stabilized -- for now -- but it's time
to face an unpleasant reality: Demand for gasoline and kerosene is
outstripping supply.
The current situation is unsustainable: Even as demand for these
fuels has reached all-time highs, experts say supplies either have
leveled off or begun to decline. The resulting high prices and
scarcity threaten the global economy with recession or worse. Yet
no moves have been made to expand refining, tanker or pipeline
capacity or to remove the barriers to investment that prevent us
from meeting these growing demands.
Why?
National oil companies control 58 percent of oil and natural gas
reserves. In many of those countries, laws actually require that
the government own or control significant shares of any
oil-exploration ventures. But corruption in those very governments
makes the multibillion-dollar investments required for oil
exploration too risky.
No one wants to sink billions into a project and see it disappear
because of selective taxation, arbitrary laws, conflicting legal
codes and unenforced contracts. Russia frightened away many
investors by breaking up its major oil company, Yukos, and suing
British Petroleum's Russian partner for $790 million in back taxes
from 2001. Moreover, pipelines often must cross unstable countries,
which make them even less attractive to investors.
Even in the United States, government intervention prevents an
aggressive response to the problem. Before a company can seek a
permit to build a refinery here, it must fully design the plant and
have an environmental impact statement done on the design. This
requires an investment of $250 million, according to one petroleum
executive. Even then, the permit stands a less-than-even chance of
approval. The Senate recently blocked a measure easing
environmental guidelines which block new refinery construction --
and nixed drilling for natural gas on the continental shelf along
the U.S. coasts.
Small wonder no new refineries have opened in the United States in
30 years. Or that spare capacity is at an all-time low.
But the problem goes deeper still. Even if new refineries opened
tomorrow, the tankers that transport oil around the world are
operating at essentially full capacity. Worse, international
lending institutions are weak in many parts of the world, and
significant portions of the funds they do have are diverted to high
taxes and corruption, rather than expanding oil and gas
supplies.
These problems can be solved, but they will require aggressive
action by the Bush administration. Specifically, it should:
- Change the investment climate. Join with other consumer countries, such as India and China, to urge oil-producing countries to normalize and enforce their foreign-investment laws, break up state monopolies and phase out undue government intervention. Condition the sales of arms and vital equipment, and even such carrots as membership in the World Trade Organization, on oil-producing countries improving the investment climate in the energy sector.
- Make it easier to build more tankers, pipelines and refineries. Provide economic aid and technical assistance to oil-producing countries that expand in these areas, especially Mexico, Central America and the Caribbean. Encourage shipbuilding companies to expand the tanker fleet. Work with trade organizations such as the WTO, NAFTA and CAFTA to reduce barriers to investment in this sector. And streamline the process in the United States so that it won't be another 30 years before another refinery opens.
- Look seriously at alternative fuels. Brazil cut its dependence on foreign fuel in half by insisting on fuel-flexible cars that can run on combinations of gas and ethanol. U.S. should cut the current 54-cent tariff on imported ethanol from Latin America and expand the fleet of flex-fuel cars and gas stations.
The real problem when it comes to energy is transportation
fuels, not electricity, which can be generated from coal and
nuclear reactors. And there are no silver-bullet solutions.
Americans aren't going to stop driving. Neither are Chinese or
Indians or Europeans or anyone else. But the forces that are
squeezing supplies do not abate, either.
So it's time to meet the challenge head-on and do what it takes to
expand the transportation fuel supply before it's too late.
Ariel
Cohen is research fellow for Russian and Eurasian
studies at the Kathryn and Shelby Cullom Davis Institute for
International Studies at the Heritage Foundation.
Distributed nationally on the Knight-Ridder Tribune wire