How U.S. Policy Missed Chances to Conserve Oil

By Nelson D. Schwartz

Jad Mouawad contributed reporting.

*

Just three years ago, with oil trading at a seemingly frothy $66 a barrel, David O’Reilly made what many experts considered a risky bet.

Outmaneuvering Chinese bidders and ignoring critics who said he overpaid, O’Reilly, the chief executive of Chevron, forked over $18 billion to buy Unocal, a giant whose riches date back to oil fields made famous in the film “There Will Be Blood.”

For Chevron, the deal proved to be a movie-worthy gusher, helping its profits to soar. And while he has warned about tightening energy supplies for years and looks prescient for buying Unocal, even O’Reilly says that he still cannot get his head around current oil prices, which closed above $145 a barrel on Thursday, a record. On Friday, they fell to $144.01.

“We can see how you can get to $100,” he says. “At $140, I just don’t know how to explain it. We’re surprised.”

For the rest of the country, the feeling is more like shock. As gasoline prices climb beyond $4 a gallon, Americans are rethinking what they drive and how and where they live. Entire industries are reeling – airlines and automakers most prominent among them – and gasoline prices have emerged as an important issue in the presidential campaign.

Ninety percent of Americans, meanwhile, expect the pain at the pump to pose a financial hardship in the next six months, according to a recent Associated Press-Yahoo News poll.

Stocks now trade inversely to crude prices, and the Dow Jones industrials are in bear-market territory. Old icons have been written off, with Starbucks boasting nearly twice the market value of General Motors, which some on Wall Street say faces the possibility of bankruptcy.

Outside the thriving oil patch, it makes for a bleak economic picture. But it did not have to be this way.

Over the last 25 years, opportunities to head off the current crisis were ignored, missed or deliberately blocked, according to analysts, politicians and veterans of the oil and automobile industries. What is more, for all the surprise at just how high oil prices have climbed, and fears for the future, this is one crisis we were warned about.

Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.

Even as politicians heatedly debate opening new regions to drilling, corralling energy speculators, or starting an Apollo-like effort to find renewable energy supplies, analysts say the real source of the problem is closer to home. In fact, it’s parked in the driveway.

Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.

So despite the fierce debate over what is behind the recent spike in prices, no one differs on what is really responsible for all that underlying demand here for black gold: the automobile, fueled not only by gasoline but also by Americans’ famous propensity for voracious consumption.

The American appetite for crude oil is only one reason for the recent price surge. But the country’s dependence on imported oil has only kept growing in recent years, undermining the trade balance and putting an added strain on global supplies.

Although the road to $4 gasoline and increased oil dependence has been paved in places like Detroit, Houston and Riyadh, it runs through Washington as well, where policy makers have let the problem make lengthy pit stops.

“Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently,” says Pete Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. “It was a bipartisan failure to act.”

Mike Jackson, the chief executive of AutoNation, the biggest U.S. automobile retailer, is even more blunt. “It was totally preventable,” he says, anger creeping into his affable car- salesman’s tone.

The speed at which gas prices are climbing is forcing a seismic change in long-held American habits, from car-buying to commuting.

Last week, Ford Motor reported that SUV sales were down 55 percent from a year earlier, while demand for its full-size F- series pickup, a gas guzzler that was the country’s best-selling vehicle for 26 consecutive years, is off 40 percent. The only Ford model to show a sales increase was the midsize Fusion.

A Ford spokeswoman says the market shift is “totally unprecedented and faster than anything we’ve ever seen.”

If the latest rise in oil prices is not just another spike – like those of the 1970s and 1980s – but is instead a fundamental repricing of the commodity responsible for much of modern American life, the impact of that change will affect everyone from home builders and homeowners in far-out suburbs to corporate leaders, landlords and commuters in cities.

Although Asian consumers have begun emulating America’s love affair with the automobile, with the commercial booms of China and India playing pivotal roles in increased oil demand, the largest energy appetite in the world is still found in the United States.

Home to only 4 percent of the world’s population, the nation slurps up about a quarter of the planet’s oil – and Americans’ daily use is nearly twice the combined consumption of the Chinese and Indians, according to an annual energy survey published by BP, the British oil giant.

Low-priced gasoline has long been part of the American social contract, according to Newt Gingrich, the former House speaker and Republican leader. While in office, Gingrich battled efforts to modulate demand through tools like increased gas taxes and tighter fuel standards, and he argued that voters would not support such measures even now.

“Our culture,” Gingrich said, “favors driving long distances in powerful vehicles and the car as a social expression.”

Perhaps, but on Capitol Hill, members of both parties now say they are furious with Detroit for fighting so hard, and for so long, against higher fuel-efficiency standards.

Though analysts say automakers who shoveled out highly profitable and highly inefficient road hogs like SUVs and big pickups deserve much of the blame, they also criticize legislators who failed to provide an incentive for consumers to switch to fuel-sipping cars. Some politicians are quick to acknowledge the problem.

“We’ve got to fix it or our standard of living will change within a decade,” says Domenici, who is retiring this year. “Oil was too damn cheap, it’s too high now and it’s going even higher. I hope I’m wrong, but the problem is, we can’t catch up soon enough.”

According to energy policy experts, it was in the late 1980s and early 1990s – during the administrations of Presidents George H.W. Bush and Bill Clinton – that things began to go wrong.

Before that point, the country reaped the benefits of the first fuel-economy standards, passed in 1975, known as corporate average fuel economy, or CAFE. Between 1974 and 1989, the efficiency of a typical car sold in the United States almost doubled, to 27.5 miles per gallon, or 9 liters per 100 kilometers, from 13.8 miles a gallon.

Largely as a result, oil consumption in 1990 totaled 16.9 million barrels, basically on a par with the 17 million barrels consumed in 1980, even as the economy grew substantially. Oil prices were in the middle of a long downward slide that would take them from well above $30 a barrel in 1980 to a low of just under $10 in late 1998 and early 1999, interrupted only by brief spike in 1990 after Iraq’s invasion of Kuwait.

In 1990, Richard Bryan, Democrat of Nevada, teamed up in the Senate with Slade Gorton, Republican of Washington, and proposed lifting fuel standards again over the next decade, with a goal of 40 miles per gallon for cars. Amid furious opposition from Detroit, liberal Democrats from automaking states, like Carl Levin of Michigan, joined conservative Republicans like Jesse Helms of North Carolina to block the new standards. “It was one of the most frustrating issues in my Senate career,” says Gorton, who left the Senate in 2001.

Congressional Republicans made matters worse in 1995, when they attached a rider to a huge appropriations bill forbidding the National Highway Traffic Safety Administration from spending any money to raise fuel standards. That law, in effect until 2001, made any change in the standards impossible, says Representative Edward Markey, Democrat of Massachusetts, who has pushed for fuel efficiency.

As Paul Bledsoe, strategy director of the National Commission on Energy Policy, recalls it, “The 1990s were something of a lost decade for American fuel efficiency.”

With oil prices low, consumers began snapping up pickup trucks and sport utility vehicles, which were governed by less stringent fuel economy standards, thanks to a loophole in the original 1975 law. These carried higher sticker prices and profit margins, and both Detroit and foreign automakers were happy to oblige.

Although oil prices remained low through the 1990s, consumption patterns were taking an ominous turn. By 2000, daily demand reached 19.7 million barrels a day – nearly 3 million more than in 1990, a 17 percent jump in 10 years that wiped out much of the fuel savings that followed the energy crises of the 1970s.

Since then, global consumption has taken off, rising to 85.2 million barrels a day last year from 76.3 million in 2000.

Congress, meanwhile, in its bid to explain soaring fuel prices, is examining the role of speculation and the increased flow of investor money into commodities.

Most energy economists emphasize the fundamental issue of supply and demand, rather than market manipulation, but financial factors like the weak dollar are also exacerbating the situation.

Another financial factor behind the price rise that has not been talked about much on Capitol Hill or elsewhere is reduced hedging by oil companies on futures markets, says Larry Goldstein, a longtime energy analyst. In the past, crude producers would offer buyers a portion of their energy output in future years in order to protect themselves if prices pulled back.

But energy companies got burned as prices kept rising during the last two years and have since cut back on selling untapped production – forcing prices for energy futures even higher.

Now, the prospect of a perpetual climb in oil prices has become part of market psychology, which is notoriously hard to change.

William Brown 3rd, a former Wall Street energy analyst who now consults for hedge funds and financial institutions, says investors have become convinced that the White House and Congress are unlikely to do anything dramatic to bring down prices.

For example, a release of supplies from the Strategic Petroleum Reserve after disruptions in Nigeria or Venezuela might have persuaded the market that Washington was on the case and shaken some complacency out of the market.

“I’ve been a little surprised at what has not been done or what has not been talked about to get a handle on the consumer situation,” Brown says.

Others say that although the push to blame market speculators rather than discuss economic realities is likely to intensify on Capitol Hill as the presidential election draws near, they believe that what the world is confronting is a momentous shift in energy supply and demand.

Originally published by The New York Times Media Group.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.