ONE OF THE most pernicious forces loose in Washington is the widely shared belief in the need for national energy independence. Beguiled by its deceptive allure, we are fashioning policies that would undermine our economy, further weaken our balance-of-payments position, and foist on the American people an unnecessary expansion of government control and cost.
The Carter administration's National Energy Plan raises the quest for energy self-sufficiency to a new plateau of illogic. It amounts to little more than a hastily compiled list of costly expedients for reducing the volume of oil imports. As such, it is not an energy policy at all but a throwback to anti-quated notions of general autarky.
It is time to state the terrifying truth to Messrs. Schlesinger and Carter: The level of oil imports per se doesn't matter. What is important is that the energy needs of the U.S. economy be supplied at the lowest possible cost. In practical terms, this can be achieved by increased production of domestic oil and gas, coal substitution and energy conservation - but only to the extent possible at a cost equal to or less than the prevailing price of energy in the world economy - $13 per barrel equivalent.
To reach this goal of supplying our energy needs at the least cost, we do not need a Project Independence, a National Energy Plan, Department of Energy regulatory programs, mandatory efficiency standards, or subsidized development of "energy alternatives." The market is fully capable of accomplishing this at the world price without the guidance of Congress and the executive branch.
Even at the present artificially low domestic energy prices imposed by oil and gas regulatory controls, the boom in such products as insulation, engineered fireplaces and industrial heat recovery systems demonstrates that both the household and business sectors of the economy will respond to pricing signals.
Indeed, the only major unfinished business in energy policy is the creation of a domestic energy pricing structure tied to the world price of oil. Rapid decontrol of oil and gas prices and the adjustment of utility rate schedules to reflect true costs of providing service to all customers would accomplish this with a minimum of regulatory cost. With a realistic price structure in place, the relentless cost-minimizing pressures of the marketplace would drive domestic energy production to its maximum and reduce consumption to its minimum at cost levels equivalent to the world price.
The result would be a significant reduction in U.S. oil imports. But, unlike the arbitrary displacement imposed by the Carter plan, it would be an efficient and beneficial reduction. The market will forgo $13 imported oil only when coal substitution energy, or conservation energy, or new domestic oil and gas reserves are available at a lower cost. The market will not choose $18 conservation energy, $20 coal conversion or $24 synthetic crude over $13 imported oil. And it shouldn't. The strength of our economy and our international competitive position can be maintained only if we purchase all our energy supplies at the lowest price available - even if that means turning to the world oil market for a significant portion of our needs.
THE MANDATORY coal conversion program is the heart of the administration's oil import reduction program. It is also the best demonstration of the bad economics of the Carter plan.
Coal is cheaper than $13 oil for operating large new utility and industrial boilers, primarily because of the economies of scale involved in coal transport, handling, storage, combustion and pollution control. Not surprisingly, the market already has recognized that coal is the lowest-cost alternative for large new facilities. Virtually all large boilers ordered in the past two years have been coal-fired.
These large new facilities will use coal without bureaucratic prodding. The real brunt of the Carter coal conversion program would fall on existing facilities and small industrial boilers, neither of which could ever be operated on coal for under $13 per barrel equivalent in fully allocated costs. These facilities would be compelled to use up to $20 per barrel coal "conversion energy" in place of $13 oil. The administration's plan would thus impose energy cost structures far in excess of the prevailing world price on large sgements of U.S. industrial production.
The administration isn't the only perpetrator of such bad bargains. Sen. Russell Long's plan to make $16 shale oil competitive via a $3-a-barrel tax credit involves the dubious bargain of spending $16 of national income to save $13.
The truth is that spending $16 or more to save $13 is the essence of the National Energy Plan, Project Independence and all their progeny. Every panacea being pushed in the policy arena today - subsidized acceleration of the fast breeder, federally financed synthetic fuels development, subsidized solar power installation, more draconian conservation measures such as thermal efficiency standards for existing housing, mandatory industrial efficiency standards, gas guzzler taxes - involves the forced feeding of energy into the economy at costs far above world oil prices.
WASHINGTON does not have a great reputation for economic acumen, but the present wholesale stampede to adopt bad economic bargains requires more of an explanation than simple ignorance. The explanation lies in two unsupportable notions that have been incorporated into the conventional wisdom.
The first is that world markets are running out of energy supplies and can't be relied upon much longer - so we must go it alone. The nonsense of this proposition is revealed best by the fact that in the 100-year history of the petroleum age, the world economy has thus far succeeded in consuming only 8 percent of the conservatively estimated resource base of natural gas and 15 percent of oil resources.
Even with today's still imperfect geologic knowledge, using cautious pre-1973 estimates, there are nearly 3,000 trillion barrels of oil and gas left - enough to last the world another half century even at double current rates of consumption. And that is to say nothing of the far more prodigious endowment of lower grade resources - 25,000 trillion barrels of coal and geopressurized gas alone - that could be upgraded to refinery and pipeline quality fuels when price and cost levels warrant it.
The second bit of nonsense is that although the raw supplies may be there, the market mechanism itself has disappeared: OPEC is alleged to have suspended or superseded the economic rules of supply and demand, and what may have once been an international energy marketplace has now become a wholly political arena of intrigue, power plays and peril. Were we to abandon the quest for energy independence, the argument goes, U.S.-stimulated growth of world oil demand would encourage OPEC to substantially increase the price again during the 1980s. Given the oil and gas exploration boom underway all over the globe, this scenario seems wholly unconvincing unless bolstered with fudge-factory numbers like those contained in the now discredited CIA study of last April.
But even if there is some slight probability that OPEC will increase the world oil price significantly during the mid-1980s, the argument is irrelevant. One is tempted to ask Secretary Schlesinger why it is so bad to permit OPEC to inflict an $18 energy price regime on the U.S. economy in 1985, but patriotic and virtuous to empower his department to do the same thing in 1978.
In reality, the only result of the administration's high-cost strategy of oil import abstinence would be to keep the world oil price at $13 for a few years or even a decade longer than otherwise, with most of the benefit accruing to Western Europe and Japan.
There are reasonable prospects, however, that the world price of oil will not rise appreciably in real terms over the next decade or so. It is becoming increasingly clear that there may be an effective ceiling on world energy prices in the range of $18 to $24 a barrel for decades to come. At those price levels, the supply of non-OPEC conventional oil and gas and unconventional fuels of every sort is so enormous, and the opportunities for major gains in consumption efficiences so great, that this ceiling is unlikely to be breached for generations, if ever.
Whether OPEC pushes the price of oil to this economic ceiling in the 1980s by withholding production or allows its output to expand to meet world demand at roughly present real price levels depends almost entirely on whether it wants to make a little or a lot of money from its vast remaining geologic endowment. If it wants to make a lot of money, it will keep the price below the economic ceiling, maximize production and earn an indefinite annual 3 to 4 percent real rate of return on the proceeds by purchasing international assets or investing in domestic economic expansion.
Of course, if Mr. Yamani and his colleagues didn't learn anything at Harvard Business School after all, they may push the oil price up to the ceiling during the next decade, only to find their world markets progressively shrinking in response to a flood of competitive alternatives.
In short, the oil withholding game only works when the world energy market permits oil prices to rise so rapidly that oil in the ground appreciates at a faster real rate than the rate of return available from the proceeds of currently produced oil. That was the unique situation during the first half of this decade.
OPEC leaders are not unmindful that even they have not transcended the rules of the economic game. This was demonstrated at the recent Caracas meeting when they decided to let the real price decline slightly this year rather than incur worsening surpluses.
If OPEC can recognize these things, why can't we? It's time to declare the energy crisis over, finish building the strategic oil reserve to cushion against any short-run contingencies, and abandon our masochistic fling with energy autarky.