Drilling without illusions

As flip-flops go, President Obama’s reversal on offshore drilling earns a AAA rating. On the other hand, there ought to be some forgiveness when a politician flip-flops from the wrong policy to the right one. Offshore drilling using modern techniques is environmentally responsible. It adds jobs and enhances the security of energy supplies. So (to borrow a phrase) -- drill, baby, drill.

But let’s also drill without illusions.

North America is not a petroleum-rich region of the earth. Yes, the United States was once the world’s leading oil producer – but only because it was the first region explored. As other regions were opened, the U.S. share of global reserves and global production plunged, not because U.S. wells are under-performing, but because other regions possess vastly greater endowments.

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Thus, an oil-dependent future is an energy-insecure future. And even if the US could somehow miraculously provide for all its own oil needs, an oil future would still be insecure, for two reasons:

1) America’s friends, allies, and trading partners would still depend on imported oil. If the U.S. were self-sufficient -- but Germany, Japan and Britain still imported from Russia or Libya or Saudi Arabia – the knife would still press against the neck of the western world.

2) The problem with oil is not only the money we pay. It is the money the oil producers receive. Unsavory regimes in Iran, Venezuela, Russia and elsewhere would use their oil revenues to make mischief whether those revenues were derived from consumers in America, Europe, Japan or India.

For these reasons, offshore drilling has to be seen as an interim step on the path to a world where oil matters less.

What would such a world look like? It could look a very great deal like the present world. There’s no need to imagine a break-through technology that replaces the internal combustion engine. Steady incremental efficiency improvements could take us a long way to the goal.

Here’s a crucial oil fact:

After the oil shocks of the late 1970s, the U.S. dramatically reduced its oil consumption. It wasn’t until 1996 that U.S. oil consumption reached its 1978 level. Oil consumption continued to rise through the 1990s and 2000s, but on the eve of the recession in 2007, the U.S. was still using only 10 percent more oil than in 1978, despite a more than 100 percent increase in economic output and a more than 30 percent increase in population.

How’d we do it? Three ways

1) Americans switched from oil-burning to gas-burning furnaces in their homes.

2) Utilities closed oil-burning power generators, switching primarily to coal.

3) In the 1970s and 1980s, Americans moved to more energy-efficient autos – switching back to less-efficient cars only after the mid-1990s.

When Chrysler introduced the mid-sized K car in 1981 (you may remember it as the Dodge Aries), it was fitted with an 84-horsepower engine. Chrysler’s 300 sedan, introduced in 1999, got similar mileage – while offering 190 horsepower. That’s an impressive engineering improvement. But it leaves you wondering: what kind of mileage could Chrysler have offered in 1999 if American consumers had been content with the same 84 horsepower that had satisfied them 20 years before?

After an era of cheap oil, Americans rediscovered conservation only as oil prices rose after 2004. But what if oil’s price falls again -- as it likely will sooner or later?

A drop in the oil price may seem incredible today, with demand rising sharply in India and China, but it seemed equally incredible in the early 1980s. Yet it happened in 1986, and again in 1997-98, and it would be foolish to presume it won’t happen again.

While rising prices lead inevitably to conservation, since the 1970s, politicians have tried to use regulations to force companies to improve mileage and attain other kinds of energy-efficiencies. The Obama administration is readying another barrage of regulations now.

Bad idea! Price signals will induce faster, more rational and less resented conservation than any government dictated efficiency standard. The superiority of price signals over regulation is best summed up by the old joke about the teenager complaining to his mom: “You can tell me what to do – or how to do it – but not both.” That’s the beginning of all policy wisdom.

For the Obama administration, the best way to promote conservation would be a stand-by tax that puts a floor under the price of oil, assuring both carmakers and consumers that low prices will not return. Instead of dictating, the Obama administration should set a policy target, and then let markets do the work. One simple tax would achieve everything that can be achieved by regulations and more – and accomplish it better and faster.

Yes, that would involve a reversal of the administration’s policy preferences. But flip-flops get easier with practice.