Part 2 of 3
The government should recognize that it has significant impacts on demand through its regulatory, tax and incentives framework. It also has a considerable ability to remove distortions in regulations and to promote market flexibility, with an eye on the impact of its actions on demand management. With 60 percent of U.S. oil consumption focused on transportation, the administration should encourage industry and government investments in technologies to increase the fuel efficiency of the nation’s fleet and to stimulate domestic development and deployment of fuel-efficient vehicles, including gasoline/electric or fuel cell hybrids. Actions could include the following:
Take a proactive government position on demand management. The best way to capture the nation’s attention on demand management is for the President to take leadership in mapping out a demand-management program as part of the nation’s energy strategy. Follow-up positions and speeches by the vice president and secretary of energy could specify the levels of supply savings that are targeted. They should also specify how these targets can be reached and how demand management can impact them (for example, with respect to sectors like transportation, residential, commercial, industrial, and power, and with respect to choice of fuels such as clean coal, cleaner oil, gas, nuclear, renewable sources, and new technologies).
a. Take a proactive government position on demand management. The best way to capture the nation’s attention on demand management is for the President to take leadership in mapping out a demand-management program as part of the nation’s energy strategy. Follow-up positions and speeches by the vice president and secretary of energy could specify the levels of supply savings that are targeted. They should also specify how these targets can be reached and how demand management can impact them (for example, with respect to sectors like transportation, residential, commercial, industrial, and power, and with respect to choice of fuels such as clean coal, cleaner oil, gas, nuclear, renewable sources, and new technologies).
b. Use federal procurement authority to enhance use of alternative fuels and develop programs to introduce new efficiency technologies into federal buildings and nascent transportation technologies into government vehicle fleets. The federal government has an enormous impact on fuel choices in the market through its procurement policies. These policies should be used to invest in alternative fuels, including ethanol, natural gas and hydrogen, or hybrid vehicles, and they should incentivize the development of alternative fuel infrastructures. For example, under most current programs, federal and state agencies have been purchasing vehicles with flexible fuel use rather than vehicles mandated to actually use alternative fuels in question or emerging technology that greatly improves mileage standards. The result has been the perpetuation of gasoline use and traditional engines rather than use of alternative fuels or engine designs. This squanders both the demonstration impact of federal programs as well as the opportunity to create infrastructures for supply and fueling alternative design vehicles.
It should be said, however, that the purchase of alternative design vehicles could be more expensive than conventional vehicles and might encumber unanticipated repair problems. There are clear cautions to worry about. Efforts to mandate dual-fired ethanol cars, for example, to fulfill the alternative vehicle mandates of the Energy Policy Conservation Act, were little more than bones to domestic interest groups rather than scientific efforts at promoting alternative fuels. It is also the case that federal purchasing of a particular design solution or fuel puts the federal government in the business of trying to anticipate future market preferences and benefits. These objections need to be taken into account in designing the federal government’s strategy. But they need not stop the efforts as outlined. These efforts should be viewed as an investment that promotes options of significance for energy security.
c. Use federal procurement authority to achieve other demand management goals. For example, review and rigorously implement minimal targets for mileage standards for the federal automotive fleet, standards for energy conservation in federal buildings, and other current standards already in effect.
d. Review and establish new and stricter CAFE (Corporate Average Fuel Economy) mileage standards, especially for light trucks. There are many good reasons to accelerate efforts to reclassify SUVs and other vehicles (currently classified as "trucks") as "automobiles," for the purposes of application of CAFE as well as emissions standards. For example, mandating CAFE minimum fuel-mileage standards for light trucks of 25 miles per gallon (comparable level to four-door automobiles) could save 925,000 b/d of fuel demand. While the automotive industry has traditionally argued that artificial standards can weaken its profitability and therefore its ability to maintain employment levels and investments in competitive vehicles, it is also the case that such standards can increase their longer-term global competitive position given other suppliers’ efforts in this direction. It must be noted, however, that it takes seven to ten years for the entire U.S. automobile fleet to turn over. Therefore, changes to CAFE standards are not likely to have instantaneous results, which is a good reason to start now. Some tax breaks to consumers who purchase cars with more favorable mileage could hasten the process of moving low-mileage cars off the road quickly. Even without government intervention, hybrid vehicles still could make up as much as 15 to 20 percent of new vehicle purchases, experts predict. This will contribute to a drop in U.S. oil demand of 600,000 b/d. Studies show that tax incentives can hasten and magnify this process.
e. Actively promote the development of energy efficient technologies, including fuel-efficient engine and vehicle technologies to encourage more efficient worldwide use of scarce oil resources. China alone is projected to add more than 150 million automobiles to the road in the next two decades. Efficiency of that fleet has global implications for oil requirements.
3. Maximize Efforts to Develop Clean Sources of Domestic Fuel Supply
There is no doubt that the United States has a premier energy resource base. But it is a mature province whose potential exceeds that of many other conventional resource provinces. In addition, it is physically incapable of rendering this country energy independent given our extremely high energy consumption rates. And, during the past twenty years, while other countries have made more of their resource base available for energy resource exploration and exploitation, the United States is virtually unique in removing significant acreage that was once available for these purposes from energy development.
The United States requires a better-balanced and more integrated approach to maintenance and enhancement of the environment and energy-supply objectives. Twenty years ago, nearly 75 percent of federal lands were available for private lease to oil and gas exploration companies. Since then the share has fallen to about 17 percent. And a significant share of the remaining 17 percent is for all practical purposes unavailable for drilling.
The Bush administration made vocal campaign promises about one major potential oil and gas province—the coastal plain of the Arctic National Wildlife Refuge. (It also supports a pipeline to bring some 49 trillion cubic feet of Prudhoe Bay gas reserves to the lower forty-eight states, a proposal that is designed to expand opportunities for additional gas exploration in Alaska). As the Task Force prepares its proposals, it cautions that unless the administration’s proposals to permit exploration in the ANWR take into account other aspects of policy—including other aspects of land management as well as environmental policy and demand-management policy—the administration could seriously erode support for its ANWR proposals.
The Task Force recommends consideration of the following with respect to domestic resources and energy use. These recommendations recognize that at present domestic drilling is constrained by many factors other than availability of land. They also recognize that sound energy policy must begin at home since, from three perspectives, it is desirable to foster domestic supply: national security, balance of payments, and the comparative advantage of American industry. Even so, lack of equipment and personnel, in particular, will curtail the expansion of domestic and international supplies for a number of years.
A. Oil and Natural Gas
1. Accelerate completion of the U.S. oil and gas reserve inventory, as mandated by Congress, highlighting restrictions on resource development. Such an inventory needs to be completed soon and well before any plan is adopted to develop particular domestic resources. The secretary of the interior has been mandated to conduct an inventory of all onshore federal lands, identifying reserve estimates as well as restrictions on resource development on them. It is critical that this inventory be completed soon and well before any plan is adopted to develop particular domestic resources. It could well turn out, for example, that the estimated 300 trillion cubic feet of natural gas resources in the Rocky Mountain Overthrust could be a more appropriate and cost-effective target for industry exploitation than the distant resources of the ANWR. The virtues of completing the inventory first are that it would provide an information base on which intelligent decision-making concerning land availability can be made. It would also provide a more scientific base for any tradeoffs than need to be accommodated with conflicting environmental and other land-use policies. Additionally, expanding this national effort to an international one that includes Canada and Mexico as well could be an important step in delineating a hemispheric energy policy.
2. Undertake an accelerated and complete review of tax and fiscal policy as they impact oil and gas development in the United States, taking into account the competitive position of the U.S. fiscal regime as compared to international conditions, in order to attract more capital to the sector. While the United States has a mature oil and gas resource base, it also has one of the least efficient tax regimes in the world when it comes to oil and gas development. The main direct tax is the royalty—which has a well-understood negative impact on development and field abandonment. Changes to federal corporate taxes, especially during the 1980s, further exposed the oil and gas industry. The Alternative Minimum Tax has also posed a major problem to development of supply in that its deters activity in a cyclical downturn. Industry has been adverse to a tax review—except with respect to royalty holidays—because of fear that it could lead to even more restrictive policies (especially during a period when the exploration and production sector is reaping record taxes). Yet any effort to enhance domestic supply must be based on what makes for sensible fiscal incentives. The administration should be encouraged, therefore, to undertake this fiscal review as it also reviews its land management policies.
1. Create an appropriate comprehensive statutory framework for electricity restructuring and for reestablishing a capacity cushion for the nation’s power supplies. A new framework needs to overcome the adverse impacts of today’s highly fragmented regime, which has reduced the reliability of the U.S. power grid and impeded investment in new generation and transmission capacity.This is a key conclusion highlighted by the regional and national impacts of the California power crisis on electricity supplies and the economy. The patchwork nature of twenty-five separate state legal and regulatory frameworks has reduced the reliability of the transmission network and impeded investment in new generation and transmission capacity as these jurisdictions have instituted some form of electricity deregulation or restructuring. The uneven landscape of state-by-state deregulation, and growing competition for power supplies between regions, have produced a climate of investment uncertainty that is inhibiting system upgrades and expansion at a time of dramatically increasing electricity demand. Thus, states must work together with each other and with the federal government to ensure that regional power and transmission markets are efficient and competitive. State and federal authorities must also provide for the continued reliability of the interstate bulk power grid. The challenge will be simultaneously to do the following: meet increased demand for reliable and high-quality electric power; create a favorable investment climate to expand the power infrastructure to meet demand; expedite the development of new infrastructure; increase the efficiency of power generation and distribution; and, at the same time, mitigate the ongoing impacts of power generation, distribution, and use on the environment.
2. Work expeditiously to improve the statutory framework for approvals of the siting of power generating plants, as well as transmission and distribution infrastructure. This is likely to require an unprecedented level of cooperation between the federal, state, and local governments, as well as environmental, consumer, and industry stakeholders. Only the federal administration can provide the focus and leadership such an effort requires. The administration thus needs to consider incentives to states and localities to work together to encourage rapid construction of the required infrastructure.
3. Evaluate the need for incentives to stimulate the introduction of new technologies into the power marketplace, including distributed generation and co-generation. Working with industry partners, the administration should work to substantially increase investment in technologies that enhance the efficiency, reliability, and quality of the power transmission and distribution infrastructure. Policy should also focus on reducing the business, regulatory, legal, technological, and institutional barriers to the market introduction of new electricity technologies, such as distributed generation and co-generation. And the administration should continue to promote research and development for alternative sources of power and work with industry to help stimulate deployment of these technologies.
4. Work with state regulators and regional authorities to allow and incentivize companies to offer long-term contracts for electric power and to encourage them to hedge price risks associated with such contracts to maximize the part of the market that will not be susceptible to large shifts in the spot market price. The use of long-term contracts should help protect consumers from wild swings in electricity rates when a shortage occurs in markets. The downside is that companies who aren’t successfully hedged can be forced into bankruptcy by the margin call on adverse market swings or by an unwise hedging program. Experience shows that even the most expert traders can make these errors. Thus, the institution of long-term contracting is only a partial solution.
5. Encourage the development of power capacity cushions on a regional basis. For example, it could consider providing incentives to system operators to buy stand-by power at auction to cover anticipated energy level needs, in order to encourage construction and maintenance of spare capacity. The guaranteed market and forward sale of stand-by power will encourage generators to build up incremental capacity and to maintain spare generation capacity that can be used to smooth out market disruptions or anomalies. Although this will mean that overall costs for electricity might be slightly higher on a long-term basis, it will prevent sudden sharp rises that can be harmful to the public good.
6. Recognize that many of the policies and actions that are needed to meet increased demand for power generation are power source-specific.
7. Assure that regulations protect open access to electricity generated by new, nontraditional fuel sources. This action is necessary to guarantee that new sources cannot be locked out of the transmission system by suppliers using traditional fuels.
C. Natural Gas
1. Apply strong leadership to develop a coherent, comprehensive strategy promoting efficient development and use of the nation’s natural gas resources. National policy can be especially effective in enhancing market efficiencies and in accelerating long-term supply. This was the conclusion of the National Petroleum Council’s report of December 1999 on "Natural Gas: Meeting the Challenge of the Nation’s Growing Natural Gas Demand." There is no doubt that a strong White House role is required to coordinate the array of disparate government departments and independent federal agencies that play a part in decision-making on natural gas. A strong White House role is also required to promote collaboration between federal, state, local, and tribal governments, in order to ensure the availability and deliverability of natural gas to all classes of consumers.
2. Endorse the construction of natural gas pipelines from the Arctic to the lower-forty-eight states and work bilaterally with Canada and the state of Alaska to address important issues that need to be resolved.
U.S.-Canadian relations are critical for delivering natural gas to the Lower Forty-Eight. Without full cooperation from Canada, efforts to harness additional resources from Alaska will be stymied. Critical support for the pipeline would include making the infrastructure permitting process efficient and helping resolve differences surrounding questions of routing, environment, and construction. This calls for a federal role in coordinating authorities in Alaska, within a variety of U.S. federal agencies, and with Canada.
3. Assure that regulatory authorities work together to bring about natural gas market efficiencies, including the provision of open access to markets by producers and to supply by end-users, and that allow delivery costs to be determined transparently by market forces so that commodity values are transparent to both producers and consumers. The regulatory process needs to ensure that delivery systems provide open access to markets by producers and to supply by end-users. Regulators should promote efficiencies that allow delivery costs to be determined by market forces so that commodity values are transparent to both producers and consumers.
Regulations also need to protect open access to electricity generated by new fuels outside the traditional domain, such as fuel cells or biomass. This means that regulators should:
o Carry out regular pipeline rate reviews to assure that cost reductions are passed along to consumers.
o Promote incentive rate-making plans to tie the financial returns of pipelines to efficiency gains and losses. Such plans should also require sharing of efficiency gains with customers.
4. Invest in—or stimulate and encourage private-sector investment in—research and development of technologies that focus on safe and cost-effective ultra-deep water production, smaller drilling footprints, and increased production from non-conventional sources, including methane hydrates. Production of abundant and affordable gas supply in environmentally sensitive ways will depend on technology developments.
5. Encourage natural gas exploration and production through a series of technology-targeted tax incentives that also encourage use of advanced, environmentally sensitive technologies and that provide counter-cyclical support for exploration and production. (E.g., geological and geophysical expensing, deepwater, marginal gas well production, and infrastructure investments in such equipment as drilling rigs.)
6. Initiate a mitigation forum process to evaluate infrastructure needs and reduce delays in new pipelines and storage facility siting. The process should involve regulators, environmentalists, technology developers, landowners, consumer advocates, and industry users. In this manner authorization to construct new pipeline infrastructure should be accomplished without undue delay, consistent with ensuring that environmental factors are fully considered and addressed. This new infrastructure will be needed to meet growing demand and to relieve capacity constraints wherever they exist. The federal government should work with industry and state agencies to re-engineer underground storage facilities.
7. Consider providing incentives to state and local governments that agree to expedite natural gas infrastructure siting.
8. Invest in—or stimulate and encourage private sector investment in—technologies to ensure pipeline infrastructure integrity, reliability, flexibility, and safety.
9. Foster development of advanced storage technologies to increase regional storage capacity and serve peak power and distributed generation markets.
10. Evaluate the potential of imported Liquefied Natural Gas (LNG) as a major additional source of base load as well as incremental supply for the United States, and in the process consider accelerating environmental reviews required for siting as well as accommodating the commercial logistics and other user needs associated with facilities built or operated by LNG suppliers. Accommodation of the commercial logistics and needs associated with LNG regasification facilities will be important where such facilities may be built or operated by LNG suppliers. Government policy will need to address means of accommodating the commercial practicalities that attend supplier-driven LNG facilities.
Given the nation’s abundance of coal resources, it is critical to foster the development of clean coal technologies such as gasification to promote coal use in power generation. At the same time, such development programs should mitigate the environmental impacts of coal combustion to meet local, regional, and global environmental challenges. Coal use continues to grow—it currently supplies 55 percent of U.S. power generation and has increased in absolute volume by 17 percent in the last decade. Its abundance makes it a fuel of choice for national energy security reasons; but its use poses some of the most difficult environmental challenges of energy production. Its worldwide use is also expected to grow dramatically, as it represents an abundant and inexpensive source of fuel for power in numerous fast-growing developing countries, including China and India.
Investment in clean coal technologies continues to pay dividends. For example, in the United States, increased coal use has been accompanied by reduced sulfur emissions. These proven technologies need to be deployed more broadly and further advances in them need to be promoted through a renewed focus on research and development, as well as fiscal incentives that are offered to these ends. The government needs also to find ways to foster entirely new technologies, such as carbon sequestration technologies that could dramatically increase the attraction of coal internationally as a fuel whose use would not generate large greenhouse-gas emissions.
The vital importance of further breakthroughs in the area of clean coal cannot be understated. It could be a major contribution to U.S. and global solutions to energy and environmental needs.
1. Support the Nuclear Regulatory Commission in relicensing expeditiously plants whose licenses will soon expire in order to extend plant life where possible. Nuclear power plants now generate about 20 percent of the country’s power. Existing plants are operating with unprecedented capacity factors of more than 85 percent. The importance of this significant base load has been reinforced by recent events in California. Increased attention to power plant emissions, especially greenhouse gases, may further increase the attractiveness of nuclear power. Licenses of operating plants, some initially granted for forty years, are beginning to expire in 2010. The NRC is beginning to relicense to extend plant life by an additional twenty years.
2. Work constructively with stakeholders to resolve nuclear power plant spent fuel (and high-level defense waste) disposition within the next few years, since this is critical to preserving viable nuclear options for the nation. This will require high-level administration attention. In particular, the scientific study of Yucca Mountain as a repository site and parallel development of engineered barriers will present the President and Congress with the final suitability decision and licensing application in about a year. If the site is deemed suitable based on science and technology, the administration should work with the state of Nevada, the nuclear utilities, and the stakeholders to develop a path forward to resolve current disputes and meet federal responsibilities of accepting spent fuel, as well as disposing of high-level defense waste.
3. Work to improve the investment climate for new nuclear power plant construction, through NRC streamlining of licensing procedures and by resolving uncertainties surrounding electricity deregulation and restructuring. No new nuclear power plants have been ordered in the United States for more than twenty years. But the impact of reactor accidents at Three Mile Island and Chernobyl may well be fading, with the excellent safety record of Western-designed reactors and the availability of more advanced designs and their additional safety features. However, safety alone is not the issue. Uncertainty surrounding deregulation is also a problem, given the very large capital costs of nuclear plants.
4. Work with Congress to sustain the front-end domestic nuclear fuel cycle through the next half-decade. A key element is the development of U.S.-origin competitive enrichment technology. The front-end of the nuclear fuel cycle requires attention. Congress has established a statutory requirement to maintain viable domestic uranium mining, conversion, and enrichment industries, yet all three sectors are unhealthy. Uranium enrichment is particularly sensitive because of its implications for nuclear weapons proliferation, and reliability of American enrichment supply is as important for slowing the spread of enrichment technology as it is for supplying domestic utilities.
5. Work with Western European allies and Japan to shape a future nuclear fuel cycle that would garner shared support. The very large disconnect between U.S. versus European and Japanese fuel-cycle policies is detrimental to sustaining nuclear power as a viable and potentially important option. Unresolved issues concerning spent-fuel isolation plague the choice of an open fuel cycle by the United States (i.e., once-through utilization of nuclear fuel followed by geological disposal). The alternative closed fuel cycle advanced by France, Japan, and others (i.e., reprocessing spent fuel to extract and recycle plutonium) is plagued by large accumulation of separated plutonium and unfavorable economics. The proliferation danger posed by separated plutonium led to the U.S. decision in the 1970s to pursue the open fuel cycle. The administration needs to work actively and closely with allies to help shape a future fuel cycle that would satisfy our nonproliferation concerns and their energy security needs, while minimizing waste issues and enhancing safety.
6. Work with the education system to reinvigorate training in nuclear science and technology. There has been a precipitous drop in the number of American students studying nuclear engineering, and some leading universities are on the threshold of irrevocably cutting out the relevant essential educational programs and infrastructures. The administration needs to work with the university community to sustain nuclear science and technology education during the next decade in order to help preserve the nuclear power option. New technologies such as small innovative reactors promise to offer an alternative to traditional designs and the problems described above.
4. Augment Diplomatic Initiatives to Spur Non- OPEC Production Increases
The more supply that is available on international energy markets and the more diversified their sources, the better equipped markets will be to handle a disruption without a market failure or extreme price response. The United States has a stated policy favoring diversity of oil supply and working to promote oil production from countries outside of OPEC.
a. Expand Oil and Gas Forum programs
One method used to promote investment in non-OPEC resources and to remove fiscal, bureaucratic, or political obstacles thwarting such investment is to convene major trade conclaves involving U.S. energy companies and political leaders from non-OPEC countries. The Departments of Energy, Commerce, and State together have initiated such forums as the China Oil and Gas Forum and the Latin American Oil and Gas Forum, which provide a venue for discussion of investment opportunities and problems among U.S. industry, U.S. government, and non-OPEC industry and government. The budget for such programs should be expanded to cover other important oil-producing countries or regions such as Russia, West Africa, the Caspian, and Indonesia.
b. Investigate ways to facilitate increased investment in Mexico’s oil and gas sectors
Mexico is one of the four largest oil suppliers to the United States and could become a significant natural gas producer if it had the resources to finance additional exploration activities in the Yucatan peninsula. Northern Mexico has strong demand for natural gas and electric power and currently imports a net of 0.25 billion cubic meters of natural gas from the United States. Mexico has an important role to play in North American energy markets, and assistance should be brought to bear in its struggle to finance a higher level of investment in its hydrocarbons sector. Higher production of natural gas in Mexico would not only satisfy demand from northern Mexico, creating a backup for natural gas supply in the United States, but could be an important source to meet rising U.S. demand. At a minimum, the administration should investigate ways to support Mexican government investment in natural gas resources. But the administration may also want to consider leverage tools that could be brought to bear to assist political leaders in Mexico who advocate that Mexico open its energy sector to foreign investment, starting with natural gas. This latter policy would garner the strong support of U.S. energy companies and demonstrate the administration’s commitment to increase natural gas supplies in the hemisphere. Activity that would encourage U.S. participation in Mexico’s energy industry would deflect suggestions that support for Mexico’s oil and gas industry should take a second seat to developing U.S.-based resources.
Ultimately, Mexico’s resources are closer and maybe more economical to develop than those in Alaska. However, Mexico’s constitution blocks ownership participation in oil and gas fields by foreign entities, and Mexico’s oil workers unions are heavily set against any foreign participation in Mexico’s oil and gas activities under any kind of arrangement. Thus, U.S. visibility on this issue could create some political tension with Mexico in the short term, even if it is beneficial for both countries in the longer term. One solution to this dilemma might be to keep discussion of opening Mexico’s natural gas sector within a hemispheric focus, including Canadian and Brazilian oil and gas firms as well as American firms, in order to diffuse attention from the negative aspects of Mexican popular opinion regarding U.S.-led investment in Mexican resources.
c. Encourage reforms in Russia’s energy sector
Further enhancement of the Russian energy sector would help the United States attain the diverse oil and gas supplies that will be needed during the coming years to moderate rising dependence on the Middle East. Without a massive injection of capital, Russia’s production, which has dropped by half since the collapse of the Soviet Union, could continue to stagnate if not fall in the coming years. Russian oil production is projected to rise only marginally to about 6.5 million b/d during the next decade and then only if investments can be increased to twice the current level, according to Russia’s Ministry for Fuel and Energy. Investment scandals, poorly articulated property rights, unstable tax and legal regimes, and bureaucratic barriers have had a chilling effect on foreign investment, scaring away most international investors from Russia’s energy sector. The Gore-Chernomerdyn effort included a rehabilitation package for Russia’s oil and gas industry but many of the funds allocated were not extended due to the significant barriers encountered by U.S. companies trying to operate in the country.
However, there appears to be a major change taking place in Russia under President Vladimir Putin, whose government is showing renewed interest in energy-sector reform, and new oil and gas laws look to be forthcoming. This progress from the Russian side might open the door for a new initiative from the United States on energy trade and investment, as well as the development of a production-sharing agreement law. In particular, the United States should support European initiatives to bring Russia into the European energy charter. (See section on multilateral institutions, recommendations 7 and 9.) However, while energy is a potential area of cooperation between the United States and Russia, other foreign policy and security issues are likely to take precedence. Still, the United States must consider seriously the fact that a declining Russian energy industry, while possibly curbing Russia’s military budget and thereby reducing Moscow’s ability to challenge U.S. interests, will make it extremely difficult for the United States to promote diversity of international supply. Given Russia’s important role as an energy supplier to Europe, U.S.-Russia policy should not be pursued without debate concerning energy supply considerations and consequences.
d. Improve access to information, as well as transparency of comparative oil and gas fiscal commercial regimes
Oil and gas investment in any particular country or region is influenced not only by geology, but also by the fiscal regime and other aspects of government take. Experience has shown that major changes in tax policy can stimulate new investment and delay a decline in oil production or even promote a production increase in mature fields. This was clearly demonstrated through the 1980s in the U.K. sector of the North Sea. Non-OPEC countries must stay abreast of international trends in fiscal terms and other aspects of government take to ensure that their investment terms remain competitive; but competitors may seek to cloud transparency for competitive reasons, making it difficult for countries to know when an improvement in terms is necessary. The United States has a strong interest in promoting transparency and education about trends in oil and gas investment terms in non-OPEC to help keep these countries competitive and attractive for investors. This can be handled via the Oil and Gas Forums mentioned above, through reviving the program of publicly available embassy reports on the oil and gas industries of various host countries, and through U.S. Agency for International Development (AID)–sponsored training programs, as well as through Internet resources such as the Department of Energy website and IEA reports.
5. Initiate Diplomatic Efforts to Spur the Reopening of Countries That Have Nationalized and Monopolized Their Upstream Sectors
Middle East Gulf crude oil currently makes up around 25 percent of world oil supply, but could rise to 30–40 percent during the next decade as the region’s key producers pursue higher investments to capture expanding demand for oil in Asia and the developing world. If political factors were to block the development of new oil fields in the Gulf, the ramifications for world oil markets could be quite severe.
There have been discussions in several important oil producing countries, notably Saudi Arabia and Kuwait, to reopen their upstream oil and gas sectors to foreign investors to garner the necessary finance and technology for the massive investment necessary—estimated at anywhere from $6 to $40 billion. This reopening is important and should be on the bilateral U.S. agenda with these countries. The Department of State, together with the National Security Council, the Department of Energy, and the Department of Commerce should develop a strategic plan to encourage reopening to foreign investment in these important states of the Middle East Gulf. While there is no question that this investment is vitally important to U.S. interests, there is strong opposition to any such reopening among key segments of the Saudi and Kuwaiti populations. This opposition must be taken into account so that pursuit of the investment program does not fuel anti-Americanism in these countries or destabilize their ruling regimes.
6. Review Oil Sanctions Policy to Identify Ways to Reduce the Negative Impact on Energy Supplies While Accomplishing the Objectives for Which the Sanctions Were Imposed.
More oil could likely be brought into the market place in the coming years if oil-field development could be enhanced by participation of U.S. companies in countries where such investments are currently banned, particularly in Libya where frozen U.S. assets remain in limbo. Resources are large and, with major contributions of foreign investment capital, large additions to production rates could be accrued in the coming two to three years.
Efforts should be made through cooperation and collaboration with Congress to phase out or drop sanctions that are no longer relevant to U.S. strategic objectives. Sanctions regimens that are ineffective should be reevaluated and restructured to increase their chances of producing the desired outcomes. An easing of sanctions in any particular country might conflict with other U.S. policy goals and must be reviewed in this context. However, the costs of prolonging these sanctions, both in terms of energy policy and foreign policy, must also be taken into account. The government needs to weigh arguments that sanctions are needed to restrain revenues of regimes whose policies are hostile to U.S. interests against the reality that imposition of oil sanctions on too many regimes at once can be ineffective and can have cumulative adverse effects. When they are effective they can also reduce market competition and contribute to overall higher oil price levels, higher U.S. vulnerability to disruption, and higher revenues for the very same adversaries. The latter can especially be the case when world markets are tight and other suppliers will not or are unable to increase supply to make up for the loss from the sanctioned country.
7. Develop a Credible International Stance on Global Warming and Other Environmental Issues
The United States lacks a clear and consistent policy reconciling energy and environmental objectives, and this is a large deficit in both U.S. domestic and foreign policy. Attempts to integrate energy and environmental policy continue to be hampered by the existence of market externalities, in which the true social costs of consumption of different fuel sources are not reflected in their purchase price. It is important in fashioning policy to clearly define externalities and environmental objectives from the outset. Environmental economic measures must tackle pollution at the point where it occurs, and such measures should also be deemed to have significant effect. They should be based on sound science and not constitute a tax on general economic activity. Thus, some specialists advocate that "green" taxes should be revenue neutral, except when spent on related activities, such as cleanups. Tradable permits can be considered in cases where tax solutions offer a strong policy alternative. Cleaner fuels should face a lower fiscal burden than those that have higher negative environmental consequences and thereby impose real costs and social burdens.
a. Conduct a thorough review of the Kyoto Accords and recommend ways for the United States to revive international discussions on climate change and also execute bilateral agreements with regard to promoting environmental safeguards
A greater U.S. commitment on the global warming issue can help demonstrate seriousness regarding environmental issues, which have become central concerns of the international community. A strong U.S. international commitment can build on the strong U.S. domestic record on environmental matters, especially at a time when some more limited immediate environmental regulations might have to be waived temporarily to defend or de-bottleneck energy supply.
b. Investigate new ways to promote efficiency and clean energy technologies, including clean coal, expanded natural gas use, and automobile mileage and emission standards, for use in large consuming countries in Latin America and Asia, especially China and India
Programs can include joint research on safer, proliferation-proof nuclear technologies, clean coal, renewable technologies, and alternative fuel automotive design. The IEA program on energy efficiency education and technology transfer should be expanded, and education programs on energy conservation practices should be developed not only inside U.S. public schools but also for governments and schools in other countries such as Russia, the Former Soviet Union, China, India, etc.
c. Develop a strategy to coordinate with the European Union and the Association of Southeast Asian Nations (ASEAN) on refined petroleum product specifications through multilateral dialogue and bilateral agreements.
Just as better coordination is required between environmental regulators and energy policy officials nationally, so too should better coordination between these authorities be promoted on an international level. The issue of Market Balkanization referred to earlier in these recommendations exists on an international level as well as on a national level. Lack of coordination on both product specifications and the timing of their introduction into the market have an important impact on trade and on pockets of supply shortages internationally. Better coordination would mean that shortfalls in one country could be rebalanced more easily by exports from another. This will help smooth localized price volatility and create more orderly international products trade.
8. Support Efforts to Develop and Disseminate Timely and Accurate Information about the Fundamentals of Energy Market Supply and Demand.
Market efficiency and the smooth transition to deregulated energy supply and price is highly dependent upon adequate market signals and information. Yet ironically, in the information age, in which technology and communications advances have facilitated the development and dissemination of data, there has been a perceived decline in market transparency.
One of the major roles of public authorities in assuring the smooth functioning of markets now centers on the provision of data and information to facilitate market transparency. So far, this important role for governments has been under-recognized. There are clear obstacles to market transparency, and these will be hard to eliminate. These include the following:
• Restructuring of industry, with new "nontraditional" enterprises emerging that have not reported fundamentals to government (e.g., Independent Power Producer (IPPs in the United States).
• Restructuring of industry, with loss of old reporting functions in some companies.
• Lack of government commitment to collecting data.
• Increased role of non-industrialized societies in the global energy sector, with lack of data collection and development infrastructure.
• Decline of data collection integrity with the collapse of the Soviet Union, at a time when the Russia and other successor states are more integrated into global energy markets.
• Refusal of some governments, most importantly oil producing countries including Saudi Arabia and Venezuela, to provide fundamental transparent information on supplies to markets, capacity to produce, reserves, and levels of inventories.
As a result, neither companies nor governments are receiving adequate and timely information at a time when markets are more volatile and more subject to large price movements. They are often making inappropriate decisions affecting the public good largely because their information base is wrong, threatening stable, affordable energy prices and reliable supply. It is widely agreed that the most reliable data are those compiled by the IEA. Yet there is widespread distrust of the integrity of IEA data, not only in OPEC and in the developing world but within OECD countries as well. Recognizing this, recently the Saudi government proposed establishing a permanent global institution in Riyadh to bridge differences between exporting countries and others. Yet Riyadh has acted in the past to thwart a transparent energy system. The commitment of Saudi Arabia to promote data transparency should be explored and tested by the administration.
• Recognizing that transparency is an important element in maintaining orderly markets generally and in times of energy or unexpected disruption in particular, the administration should provide a higher budget for the Department of Energy’s Energy Information Agency.
The agency needs to strengthen its ability to collect domestic data on all aspects of market fundamentals in order to restore the integrity of information on the U.S. market, a critical step in enhancing market transparency. It should work together with the IEA to improve the worldwide energy database, including data on fundamentals for all primary energy sources, including country specific data. The DOE should also investigate how to support and promote the sharing of accurate data among major oil-producing and oil-consuming countries through private or multilateral Internet publishing, publications, or regional organizations
9. Lay the Foundation for New Global Energy Institutions
If the domestic and international goals of U.S. energy policy are to be maximized, it is time for the United States to consider revitalizing and revamping the international mechanisms governing international investment and trade in energy.
The United States should try to lay the institutional framework of new international energy institutions. The institutions should be designed to achieve such goals as:
• Greater Transparency. If the general goal of U.S. energy policy is the perfection of markets so that investments can be made efficiently on a global basis in energy resources, that goal must start with transparency. (See recommendation 9 above.)
• Rules of Trade and Investment. At an international level, the energy sector has retained far more of the elements of the pre-free trade and investment environment of the 1920s and 1930s than any other sector, save, perhaps, agriculture. It is, at the core, a highly politicized sector. Efforts to defuse those politics have been relatively unsuccessful. There is little doubt that the objectives of securing diversified energy resources on a diversified geographic basis would be fostered by the adoption of international rules governing trade and investment in energy resources. Nor is there much doubt that as societies have abandoned the critical elements of resource nationalism, the basics are increasingly in place for the establishment of such rules.
• Keeping Energy and Other Issues on Separate Tracks. One of the major benefits of establishing institutions through which governments agree to a set of rules governing their mutual arrangements for trade and investment is that through these rules governments would virtually explicitly be renouncing the use of energy as instruments of foreign policy for non-energy purposes. The energy world would parallel the world of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization. Governments would effectively agree to most-favored-nation principles of trade and investment and would thereby forswear the use of energy as an instrument of foreign policy against others party to the agreements. For example, neither oil producers/exporters nor oil importers would be able to embargo or boycott—with impunity—trade or capital flows with other agreed parties. Such a rule would civilize the energy sector much as other sectors of international trade and investment have been civilized, with disputes settled about the sector per se, not about exogenous issues.
The issue for the United States is not so much whether such new international institutions are desirable. Rather, it is how to achieve them. But it is clear that unless the United States assumes a leadership role in the formation of new rules of the game, it will not simply forfeit such a role, which others will assume. It will rather become reactive to initiatives put forth by other governments which, if agreed by others, could leave U.S. firms, U.S. consumers, and the U.S. government in a weaker position than is warranted. This could be already happening, for example, with respect to the establishment of a new information base for energy, given the commitment of the Saudi government to house such a base within its borders. It could also be happening with respect to the European Energy Charter, if Moscow agrees to ratify the Energy Charter treaty. In addition, such an effort would assist in preventing the emergence of international groupings of countries that could be antithetical to U.S. interests—for example an effort by Venezuela, Iraq, and Russia to align their interests against the United States on a host of international energy and non-energy issues.
a. Embrace the spirit of "producer-consumer" dialogue, but not the framework with which it has been associated. The idea of a broadly based and ongoing dialogue of oil producers and consumers, graced by the presence of big oil companies, has increasingly moved back into the international limelight. It has been reinforced by the spirit of cooperation between key OPEC and non-OPEC countries working together on production constraints and working with key oil- importing countries on an implicit understanding over a "just price" for oil. OPEC governments have been pushing this theme for several reasons: volatility in oil prices; the collapse of oil prices and revenues in 1998; and high consumer taxes on petroleum products in Europe and Japan. Producers, including non-OPEC members Mexico and Oman, argued that a handful of relatively poor developing countries were forced to assume unfairly an extraordinary burden of adjustment to lower oil prices. They argued that those benefiting from the lower prices had an obligation to both understand their plight and assist them in doing something about it. It was for this reason that most OPEC countries were sympathetic to the U.S. government’s use of SPR time-swaps in 2000 to help damp the price peaks of the autumn of 2000. OPEC’s position has been straightforward: OPEC cannot, by itself, bring stability to oil markets. Collaboration is needed both with other producing countries and with importing country governments, especially on thorny issues related to information on fundamentals, including the level of and management of inventories. The issues of this dialogue are global; but the framework won’t work: market-based countries such as the United States cannot guarantee price floors; producer countries with limited output capacity cannot guarantee price ceilings. There can be no such bargain. Additionally, most OPEC governments do not want to see markets left to operate without government intervention. Some OPEC countries want not just a floor price, but a gradually rising one, however anti-competitive and administratively difficult this may be to enforce.
b. With U.S. leadership, foster broad international cooperation on a host of issues, including 1) sharing information on oil market trends and the basics on evolving environmental standards on petroleum products and emissions; 2) promoting mechanisms for attracting investment capital; and 3) coordinating information on investments in refinery upgrading and in new demand, which would define the requirements for new grassroots plants. The question is, How should appropriate global arrangements be institutionalized for a globalized world energy sector?
c. Build global energy institutions in three ways:
1. Consider using the European Energy Charter as the basis of the sort of energy institutions that the United States should want to adopt on a global basis. The original idea of a single European energy market extending from the Atlantic to Siberia, put forward in 1990, was that once unleashed by Western investments, ex-Soviet oil and gas resources could make Europe virtually self-sufficient, ending dependence on the Middle East.
The main weakness of the original European scheme has always been that it takes a long time to get from here to there. Ex-Soviet output has languished; the rule of law has yet to be put in place in Russia; and no appropriate administrative procedure has been developed in any of the successors to the Soviet Union. Moscow has yet to ratify the treaty. The United States and Canada and Norway and Japan all had fears of being left in the cold, and wavered between joining and killing off the plan before it took root. But the Energy Charter put in place exactly the genre of rules the United States should want to seek, covering investment, trade, third-party transit, and fundamental environmental standards in member countries. The United States was unable, however, to sign the final texts because the European Union members included certain stipulations—West-West issues as they were known—that were impossible to ratify because they touched on constitutionally fundamental federal/state divisions of labor that were impossible to overcome.
It is time to re-examine the European Energy Charter as the basis of the sort of energy institution that the United States should want to adopt on a global basis. The United States should take the lead to help forge a document that is in line with its interests and free from the problems of the past restrictions.
2. Build on overlapping interests and relations between the world’s largest oil exporter (Saudi Arabia) and the largest energy consuming country (the United States). Immediately after the end of the Gulf War, the two countries had a once-in-a-generation opportunity to put in place the elements of a new institution governing oil trade. They failed to take advantage of that window of opportunity. Nonetheless, the elements of an agreement between the two superpowers of energy are worth considering; they could enhance not only Saudi and U.S. energy security, but that of much of the rest of the world as well. It could also help to assure the smooth operation of market forces and the needed growth in international oil trade and the energy trade in general. What’s more, this process could work without either country undermining its respective partners in OPEC or the IEA.
Negotiation of a bilateral agreement might start by fleshing out the long-standing Saudi call for a system of "reciprocal energy security." In return for even modest demonstrations of goodwill toward their country, Saudi ministers have suggested that the United States and other consumer nations could gain guaranteed access to "a fairly priced ocean of oil." A dialogue between the two countries could focus initially on short-term mechanisms designed to mitigate the economic damage caused by extreme oil price volatility. One element could be bilateral planning for strategic oil storage and use.
3. Explore a mechanism promoting a North American or Western Hemispheric energy agreement. NAFTA in many ways lays the groundwork for an internationally expanded energy sector. Trade in energy—in oil, natural gas, and electricity—is considered a central feature for the NAFTA agenda. The NAFTA-style framework could serve as a starting point for extension of its energy stipulations southwards into Central and Latin America, at least where energy issues are concerned. The main impediment to pursuing an expanded NAFTA in energy on a hemispheric and global basis has resided both in the Mexican political refusal to consider amending its constitution to permit foreign investment in its energy sector and in resistance from Canada.
As with Saudi Arabia, the United States has a major decision to confront with respect to Mexico. Should the United States, in the process of pursuing more secure access to more energy resources, more assertively pressure its energy trading partners to open their sectors to foreign investment? Or should it remain passive about such a decision, respecting the objectives of those countries that chose to maintain a monopoly over their domestic energy resources? Whichever route chosen by the U.S. government, long-range commercial links will remain critical to reestablishing market stability in the petroleum sector. They are equally central to making sure that the next time a supply glut develops, the burden of adjusting to it is more equitably spread around the world.
4. Form the core of future multilateral agreements through bilateral or regional arrangements based on improving markets, ensuring energy security, and guaranteeing investments and trade on a mutual, reciprocal, and nondiscriminatory basis.The benefits first captured by the United States and Saudi Arabia in a bilateral agreement, or by the United States, Canada, and Mexico in a NAFTA agreement, or by signatories to an Energy Charter, could be progressively enlarged with similar agreements signed with other countries.
Building new international institutional arrangements in the new century will not be easy. But it is by no means impossible. It need not require the dismantling of OPEC or the IEA. Equally important, it need not require a politically difficult dialogue between the two organizations, a broader U.N. forum, or another setting for grand but fruitless discussions. Yet over time it could supersede all of these. It could provide the foundation for a kind of General Agreement of Petroleum and Petroleum Products, and Natural Gas, and Electricity. That’s how the General Agreement on Tariffs and Trade emerged from bilateral trade agreements based on the extension of most-favored nation treatment to a broad array of countries.