High Noon for Our Non-Existent Energy Policy

The Persian Gulf crisis has bred two kinds of cynicism: that of people who believe that the conflict is purely “blood for oil” and of those who loftily insist that oil is beside the point.

Such cynicism must yield to pragmatism. Whether the war with Iraq lasts six days or six months--and whatever the outcome--it’s time for an energy policy that creatively balances exploration, innovation, conservation and price. A government that risks hundreds of thousands of troops to defend its vital interests abroad should have the courage to more intelligently manage its energy resources at home.

Being “The Great Deregulator” is clearly not enough. Neither, it appears, is the Department of Energy’s vaunted National Energy Strategy. Market forces are wonderful, but when they are consistently distorted by cartelization, geopolitical confrontation and predatory speculation, they are hardly the engines of beneficence that Adam Smith envisioned. Government has a role to play that goes beyond tax, spend and/or regulate--and it isn’t building multibillion-dollar commercial boondoggles like synfuels.

The aftermath of the gulf war may offer a painfully won opportunity to dramatically improve America’s energy portfolio. We would be fools not to take advantage of it.

“The most fundamental priority from an economics point of view is to do the cheapest things first,” asserts Amory B. Lovins, research director of the Rocky Mountain Institute, a Colorado-based resource policy center. “By far the cheapest is to take work out of the energy we have. . . . Today’s commercial technologies can save three-quarters of our electrical energy and four-fifths of our oil usage.”

In fact, Lovins notes, trimming oil consumption by just 15% would displace all the oil America has been importing from the Persian Gulf.

The best way to do this is not by slapping on oil import fees or gasoline taxes, Lovins argues, it’s by creating market incentives for energy efficiency. For example, use “feebates”--a self-financing blend of fees and rebates--to encourage people to buy fuel-efficient automobiles. When you register a car, you pay a fee or get a rebate depending on its fuel efficiency; i.e., purchasers of cars that get more than 42 miles per gallon get the rebate, those who buy the guzzlers pay the fee. The fees pay for the rebates.

What’s more, calibrate those rebates based on the difference in fuel efficiency between the old car and the new car. That way, says Lovins, you get the most grossly inefficient cars off the road faster. Both Detroit and Tokyo should like that.

The car feebate concept passed in the California Legislature last year but was vetoed by Governor Deukmejian, says Lovins. The conflict that began Wednesday might give California’s current governor another opportunity to sign the measure.

Of course, the feebate model can also be applied to fuel-efficient buildings, electric appliances and other energy-intensive goods.

Lovins has enjoyed more tangible success in encouraging electric utilities to make markets in “negawatts”--his neologism for a saved watt--and trade, swap and sell them to each other and through “energy investment bankers” as if they were pork bellies or T-Bills.

“If you make energy services and efficiencies a fungible commodity,” says Lovins, “you get to the best buys in the most efficient way. . . . It’s astonishing to me how quickly the culture and mission of an electric utility profoundly changes from selling kilowatt hours to customer satisfaction if they get to keep part of the savings.”

This negawatt marketplace doesn’t quite fit like a glove on Adam Smith’s “invisible hand.” In fact, it’s more like a “translucent hand”--a marketplace where market mechanisms--not taxes or subsidies--guide investments in energy efficiency.

At the same time, the government, like a Petroleum Fed, should also play a role in smoothing the volatility associated with the oil markets. “The most important aspect of energy policy now or later is to build surge capability to block the impulse for prices to spike up during disruptions,” says former Department of Energy official Lester P. Silverman, who now leads McKinsey & Co.’s energy practice. “I think the Administration blundered quite badly back in August when it had the opportunity to use the Strategic Petroleum Reserve to stabilize prices.

“There is a failure here to understand how to use the reserve when market forces run riot,” Silverman adds. “When you have free markets, you won’t see a shortage, you’ll see a price hike--so during the days of greatest uncertainty, it makes sense to use the reserve to send explicit signals to the market about prices.”

Indeed, former Energy Secretary James Schlesinger argues that the Strategic Petroleum Reserve is “insufficiently large” and that capacity should be boosted from 570 million barrels to a billion barrels. That might give the more excitable elements of the world oil market pause the next time a crisis materializes.

The Gulf Crisis unavoidably points to the necessity for increased domestic oil production. “We need to slow the decline in U.S. oil production,” says energy consultant Daniel Yergin, author of the recently published oil epic “The Prize.”

“That’s been debilitating,” Yergin says. “We’ve lost 2 million barrels a day since 1986--that’s more than a Venezuela or Kuwait. It’s like losing a major supplier.”

Consequently, the debates surrounding offshore oil drilling and Alaska’s oil potential will intensify. Unpleasant environmental trade-offs may be in the offing. On the other hand, Yergin notes, increased fuel efficiencies and natural gas usage may buy a lot of time.

The nuclear power option still appeals to Schlesinger and former Energy Czar Frank Zarb, but, on balance, the nuclear industry has consistently demonstrated the kind of business judgment and operational skill one typically associates with the savings and loan industry. We’re better off looking elsewhere. Government energy policy has a role there too.

“We’ve really dropped the ball on basic research,” Yergin says. “The history of innovation says that you never no where your next breakthrough is going to come from. We need to spend more on basic energy research.”

“There should be more money for certain types of energy R&D;,” Schlesinger agrees. Indeed, there is exciting, innovative work going on in fuel cells, photovoltaics, batteries and more exotic energy sources. Much of it will have tremendous commercial potential over the next 20 or so years.

But, for now, America remains too dependent on unreliable sources of foreign oil. If that statement remains true after the gulf conflict, we may have won the war but we certainly will have lost the peace.