What's Not to Like About Cheap Gas

RePosted
Wednesday, June 25, 2008 12:00 AM

This RePosted article comes at the suggestion of a reader, Howard Schmitt of Pittsburgh, who recently came across a 1999 Post essay about the perils of cheap gas and praised it for its prescience. That essay, originally published in The Post's Outlook section, is "reposted" below, along with the article that originally accompanied it.

We're grateful for Mr. Schmitt's generosity. He also got us thinking: What other columns or editorials from The Post's archives would you like to read again? Are there past opinion pieces that you think are newly relevant? Do you remember editorials or columns that were spot-on -- or dead wrong? Do you wonder what the Post had to say about a particular historical event that might shed light on what's happening now?

Send your suggestions to reposted@washingtonpost.com. We don't expect you to recall headline, byline and date. And we can't promise that we'll get to every request. But give us as much guidance as you can -- and explain why you think it would be helpful or interesting to read again now. Then we can start digging through the archives.

Where Cheap Gas Takes Us: The Threat Abroad in That Bargain Fill Up

By Teresa Wyszomierski

Mar. 7, 1999

With gasoline prices at less than a dollar a gallon--an all-time low--it's getting easy for Americans to fill up their gas-guzzling Pathfinders or Tahoes without a twinge of worry. But the same low fuel prices have also set two trends in motion overseas that could prove disastrous for the economy of the Middle East, the fortunes of Western oil companies and, ultimately, the pocketbooks of those same American consumers.

First, profit-hungry U.S. energy companies, which aggressively pursued alternative sources of oil after the 1973 Arab oil embargo, are now beginning to seek out cheap investment opportunities in the Persian Gulf. If the trend continues, America could once again become overly dependent on oil from the Middle East. Second, the region's growing economic instability, prompted by the low fuel prices, is fomenting scattered social and political unrest. This could leave Americans more vulnerable to disruptions in supply, such as physical attacks on pipelines and other oil installations.

Despite some attempts to diversify, most Middle Eastern countries have remained "petrodollar" economies, deriving most of their foreign exchange earnings from oil exports. The United Arab Emirates, for example, derives 60 percent of its income from oil sales. In both Yemen and Iran, oil accounts for more than 80 percent of total exports. In Saudi Arabia, oil income has risen steadily since 1993 as a percentage of government revenue, and oil sales now account for 35 to 40 percent of its GDP.

The drop in crude oil prices, due in part to falling demand from the battered economies of Asia and in part to an excessive buildup of oil production, has already had an impact on both Middle Eastern economies and Western oil company profits. Throughout the Persian Gulf, budget deficits have widened dramatically, necessitating both tax increases and significant cuts in government spending.

Iranian ministries have received less than half of their proposed budgets this year. The Yemeni government, which lost half its income, has cut 55 percent from its budget since 1998 and raised taxes significantly despite fierce opposition in parliament. The Saudi government, which lost one-third of its revenues last year and is now $13 billion in the red, has adopted an austerity budget for 1999 that includes cutting state spending by almost 16 percent.

In the West, oil company revenues have also been eroded by a season of economic crises in Asia and several mild winters in North America, creating lower demand for heating oil and gasoline, and thus making it impossible to charge consumers higher retail prices. Chevron's and Texaco's reported incomes declined by between 40 and 50 percent in 1998. Corporate balance sheets have been damaged as well, with petroleum inventories being adjusted to reflect lower and lower market values. And because oil prices are not expected to recover soon, near-term profitability and long-term survival are assured only to those producers that can lower their production costs.

As these financial problems continue, Middle Eastern crude will soon become the preferred choice of multinational oil companies, because the Arab world controls about two-thirds of all known oil reserves and has the lowest extraction costs. This would reverse the trend of the 1980s and early 1990s, when U.S. oil companies shifted away from the Gulf region and focused their investments on high-tech production techniques for existing wells, as well as on developing hot spots for exploration such as Kazakhstan and Turkmenistan in Central Asia.

Moreover, cash-strapped Gulf countries have, of necessity, become more receptive to foreign investment. Only 20 years ago, U.S. oil companies were expelled from Saudi fields in a wave of nationalization and resentment against U.S. support for Israel. Five months ago, in contrast, Saudi Crown Prince Abdullah ibn Abdulaziz and his oil minister traveled to Virginia to meet with U.S. oil executives and discuss the possibility of their investing in exploration and crude oil production.

In turn, Energy Secretary Bill Richardson visited Saudi Arabia last month, the first such trip by an American official since 1990. And although the Saudi oil minister ruled out foreign ownership in lucrative ventures such as oil exploration at this time, he expressed an interest in obtaining foreign investment for less profitable areas, such as refining and petrochemical production. U.S. oil firms, in response, have rushed to submit proposals to develop all areas of Saudi Arabia's energy industry.

Yet these seemingly attractive investment prospects could ultimately backfire if social unrest continues to grow in the Middle East. Indeed, physical disruption of oil production and delivery could spread if oil prices remain low and the region's royal governments do nothing to address several potentially explosive sources of popular discontent.

For the royal families and surrounding elites who control oil ownership in the Gulf states, life continues as usual. Arab sheiks still indulge in conspicuous consumption, driving luxury cars and building palatial homes. Moreover, in countries such as Saudi Arabia, these elites also benefit from a variety of state perquisites, including free electrical power, mail service and domestic air travel.

The poor, on the other hand, have been hit hard. Throughout the Middle East, there have always been sharp disparities between urban wealth and rural poverty, with both incomes and infrastructure lagging far behind in rural areas. But over the past two years, those differences have become far more pronounced. In Saudi Arabia, many people cannot afford basic foodstuffs, and even the urban middle class complains that its standard of living is deteriorating as authorities raise the price of services that thousands of royal family members enjoy at no cost.

The Saudi government's recent move to generate revenue by allowing foreign participation in certain oil activities is a step in the right direction, but it may be too little to mitigate the sting of cutbacks in public services and subsidies. To placate a dissatisfied populace, officials may need to relinquish at least some control over domestic oil production to foreign companies. But Saudi royal families, who benefit from about $2 billion in annual stipends from oil revenues, share the reluctance of many Gulf rulers to give up control of such vital national assets.

Falling oil revenues have also led to rising unemployment, a problem exacerbated by rapid growth in the region's labor force. Today, joblessness in the region ranges from 15 to 40 percent. Most inhabitants of the Gulf states are under age 25; in Saudi Arabia, a startling 75 percent of the population is under 30. And because urban and middle-class inhabitants have come to expect an easy life subsidized by oil revenues, few have developed the skills to replace the foreign workers these desert kingdoms can no longer afford. Labor opportunities are already limited in the stagnant oil sector, and the petrodollar economies have failed to develop much of a non-oil private sector.

The explosive social effect of lost oil revenue became vividly clear last June, when riots erupted in several cities in Yemen after the government discontinued subsidies on bread and fuel. Economic desperation has also led native tribesmen to dramatically step up their long-simmering terrorist campaign against foreign oil companies, hoping to secure a larger proportion of dwindling national oil revenues. In 1998 alone, there were 18 attacks by Yemeni tribesmen against the pipeline that carries nearly half of Yemen's oil output and is operated by the U.S.-based Hunt Oil Co. Repairing damaged equipment has cost the company an average of $120,000 after each attack.

In Bahrain, economic stagnation has reinvigorated popular resentment against the ruling emir, who dissolved the parliament in 1975 and has been governing by decree ever since. Arson attacks on fuel tanks, foreign-owned stores and the police have become more frequent, and a growing political opposition movement is openly criticizing the country's repressive legal system. The conflicts can only increase if unemployment, already at about 15 percent, further cuts into the country's large service and banking sectors.

In 1973, when the Arab oil embargo crippled the U.S. economy, the United States was importing 36 percent of its oil. Today, it imports 56 percent. Unless Western oil companies and their customers exercise more vigilance, they could be in for another expensive lesson. Consumers need to stop topping off their gargantuan gas tanks as if there were no tomorrow. Oil company shareholders should question their firms' new push into Gulf investments, and company officials should continue to develop alternative energy sources and technologies. Otherwise, if they become blinded by the lure of cheap Middle Eastern oil, average Americans may find themselves footing the bill for the imprudent investments of Big Oil.

Teresa Wyszomierski is a Manhattan-based specialist in foreign investments.

Where Cheap Gas Takes Us: More Smog Ahead If We Don't Stop Guzzling

By James J. MacKenzie

Mar. 7, 1999

Did you know that every 15 gallons of gas your car burns releases about 300 pounds of carbon dioxide into the air? Or that for every 10-percent drop in gas prices, there is a 1-percent increase in domestic travel? Or that a Dodge Durango burns about twice as much gas as a Nissan Sentra?

With the current slump in gas prices, those pesky statistics may seem too abstract to concern us much. But all Americans, from commuters who slog through smog-filled rush hours on the Beltway to adventurers who envision roaring off to the Rockies with a cut-rate tiger in their tank, ought to think twice about the broader environmental implications of the new cheap-oil era.

First, more driving means more congestion. That means more road rage, more wear and tear on your car, more summer smog and more gas consumption--hence, more emissions of greenhouse gases. Gasoline is about 85 percent carbon by weight, and while there is some debate about how much impact burning fossil fuels will have on changing the climate, there is no doubt that gas and diesel fumes cause smog.

Wait a minute, you say. What about the broader benefits, the positive ripple effect that lower oil prices have throughout the U.S. economy? They help keep inflation in check. They are salvation to the airline and travel industries, which depend heavily on low fuel costs. They boost sales of minivans, pickup trucks and sport utility vehicles, adding millions of dollars to the economy.

But there are many hidden and protracted costs to these financial windfalls. Over the long term, the proliferation of large, inefficient vehicles commits the country to a long period of higher fuel consumption. About half of new light-duty vehicles purchased for personal use are trucks, which burn much more gas than cars and meet laxer pollution standards. Largely because of the popularity of vans, trucks and SUVs, the average fleet efficiency for new cars and trucks has been declining since its peak in 1987. In short, new vehicles are getting less, not more, efficient.

Higher gasoline consumption leads to more than just greater greenhouse gas emissions. The United States has ratified the United Nations Framework Convention on Climate Change signed at the 1992 earth summit in Rio de Janeiro, and committed itself to returning its greenhouse gas emissions to 1990 levels by the year 2000. Low fuel prices help make achieving this goal virtually impossible. America's transportation carbon dioxide emissions in 1997 were 10 percent higher than in 1990 and have continued to rise, fueled in large part by the popularity of inefficient new trucks.

Moreover, using more gas means importing more oil, and that can mean having to physically protect our access to energy in a politically turbulent region. In 1991, the United States was willing to go to war with Iraq in order to prevent a rogue dictator from gaining control of Persian Gulf oil. And yet, ironically, it is unwilling to take the steps necessary to reduce dependence on that region's oil supply.

There is no getting around the fact that Americans are becoming increasingly dependent on vehicles to meet their simplest needs. If you cannot drive because of age or disability, you are pretty much out of luck. Public transportation is generally practical only for straight-line trips between city jobs and suburban homes, while two-thirds of today's commuting is between suburbs, and the vast majority of personal trips involve multiple stops at malls, schools, medical clinics or sports facilities.

It has taken half a century to create the car-dependent sprawl around us, a trend accelerated by relatively low oil prices, and changing it will not be easy or quick. But there are solutions, some of which are already being developed. For example, metropolitan planners can encourage high-density development around transit stops with mixed residential, retail and commercial uses. Currently in use at some Metrorail stations in the Washington area, this kind of planning reduces the need for so many trips--and the problems associated with oil consumption.

Another solution, although an unpopular one, is to control demand. This can be done by increasing the gas tax, with a corresponding reduction in other taxes such as the income tax. It can also be accomplished through highway tolls that vary with time of day and traffic conditions, helping to bring transportation supply and demand into balance and reducing congestion on the country's beltways.

Over the long haul, the environmental and security threats stemming from our near-total reliance on oil for transportation will require an array of new cars and trucks that use alternative fuel sources. Natural-gas vehicles, while very clean by most standards, still emit greenhouse gases and are not a long-term, sustainable solution. Hybrids (efficient, gasoline-powered vehicles using batteries) are also clean but ultimately, they still emit some carbon dioxide into the air.

In the next century, most vehicles will probably run on some combination of batteries and hydrogen fuel cells. These cells, the darling of the high-tech community, are like batteries in that they produce electricity with no combustion or moving parts. They also produce water, but they emit no fumes.

Unfortunately, these new technologies are still expensive and have a hard time competing against gasoline--especially when it is selling for a dollar per gallon. But today, many people realize that, one way or another, our transportation systems need to be made more environmentally sustainable. At a minimum, fuel manufacturing must soon begin the transition to non-fossil energy forms that can be produced from renewable energy sources. This step alone would greatly cut pollution, lower greenhouse gas emissions and eliminate the international risks arising from dependence on Middle East oil.

The major remaining question is whether we have enough sense to tax ourselves now for the long-term benefits offered by these alternatives.

James MacKenzie, who lives in suburban Maryland, is a senior associate with the Climate, Energy and Pollution program of the World Resources Institute.