Why the United States Lacks a Cohesive Energy Policy

Despite the fact that the United States has been a major player in the global oil industry, the country lacks a coherent energy policy. A coherent energy policy can be defined as “a coherent and coordinated set of actions rationally designed to achieve some explicit objective” (Pierce, 1996, p. 279). There are seemingly countless reasons why the United States has failed to develop such a policy. This paper briefly discusses key events in the country’s history of dependence on oil and then examines several of the factors contributing to the country’s lack of an energy policy.

Since the 1850s when rock oil was discovered in Pennsylvania, until the early 1940s, the United States was a major oil producer. In fact, in the 1940s, the US contributed 63 percent of the world’s total oil (Yergin, 2008, p.375). Once oil was discovered in Pennsylvania, oil tycoons quickly developed the oil industry in the US and abroad. During World War I, the United States supplied the allies with oil and thus began basing much of the country’s foreign policies “on ensuring an adequate supply of oil and oil products at reasonable prices to meet American Industrial and military needs” (Randall). By the end of the 1920s, Americans were taking full advantage of the gasoline availability. There were 23.1 million automobiles registered in the country and highways and filling stations were popping up all over the country (Yergin, 2008, p. 191).

On September 1930, Columbus Junior struck the Black Giant in East Texas, the largest discovery of oil in American history (p. 211). Due to rapid production of the vast oil reservoir, the Texas Railroad Commission had to step in and control the production in the East Texas field because producers were flooding the market and prices were falling quickly, threatening the survival of the oil industry. In May of 1933, Standard Oil of California (Socal) began exploring for oil in Saudi Arabia, after much negotiation with the ruler, Ibn Saud, who was wary of oil development in his country because he thought oil development could disrupt its traditional values and relationships (p. 267). Ibn Saud relented because Socal offered payments of gold to build up the ruler’s national treasury just for the right to explore. During the same period, companies discovered large oil deposits in Kuwait.

Throughout the 1930s, the Japanese, “overcome with nationalism and the belief that Japanese culture and imperial institutions were superior” (p. 290), planned to restructure Asia by attacking China. Japan started stockpiling oil and aligning itself with Germany. When the Japanese attacked China, Roosevelt was forced to regulate oil supplies to Japan and he eventually created a virtual embargo that left Japan with only the oil held in its inventories (p. 294). Japan declared war with the United States in 1941, beginning World War II. Once again, the US supplied the Allies with oil for a war.

In the early 1940s, the government became concerned about the country’s dwindling oil reserves and decided the United States should look to the Middle East, specifically Saudi Arabia, for foreign reserves because it was concerned about how an oil shortage would affect the country’s security after witnessing how the Japanese’s fuel shortage led to the emperor’s surrender. In 1943, Roosevelt signed a deal with Ibn Saud so that American companies could participate in oil concessions in Saudi Arabia. It was clear that the “center of gravity of world oil production (was) shifting from the Gulf-Caribbean area to the Middle East -- to the Persian Gulf area” (p. 375).

In 1959, the Soviet Union was focused on selling oil in the West, “slashing prices and making barter deals”. In order to remain in the market Standard Oil of New Jersey decided to cut its posted price of Middle Eastern crudes by about 7 percent. New producers entered the market and added to the surplus of oil. Consumption of oil rose rapidly in the 1950s and 1960s because of the low oil prices that stimulated economic growth (p. 523). The “American oil and gas industry was...hitting its lowest levels in 1970-1971” (p. 571) and the “phrase ‘energy crisis’ began to emerge as part of the American political vocabulary” (p. 572). The increased energy demand in the US was pushing US suppliers to their maximum capacities, so Americans like James Akins were worried about their increasing dependence on oil from the Gulf. He realized that Arab leaders could use oil as a weapon against the US because the US would not be able to produce enough oil to fight back (p. 573).

During the 1973 Yom-Kippur War, OPEC imposed an oil embargo on the US in order to try to persuade the US to discontinue support, financially and politically, to Israel. Arab oil ministers immediately cut production 5% from the September levels and cut production by 5% “in each succeeding month until their objectives were met” (p. 589). Also, the Arab states ceased all shipments to the US. Panic over the availability of oil caused the demand for oil to increase, which drove up the price drastically. The oil embargo scared Americans and Nixon proposed policies to decrease American energy demand and to relax environmental standards with the “goal of energy independence by 1980” (p. 599). The European allies “disassociated themselves from the United States as fast as they could and to assume positions more agreeable to the Arabs” (p. 609). The US was not willing to go to war to force oil prices down, so the country instead worked to “build stability back into the price and let inflation wear it down”. The US tried to build good relations with the Shah. When Carter took office, he assured the Shah about “continued American support”, (p. 627) and the Shah began to weaken his stance on price increases. By 1978, the price was lowered to “about 10 percent below what it had been in 1974” (p. 628).

The Second Oil Shock occurred in 1979 because of a decline in Iran oil production. Consumers rushed to stockpile oil. President Carter announced a decontrol of oil prices and he placed a profits tax on excess oil company earnings, which upset conservatives. Then he tried to get the Saudis to increase their output again in order to fight the global oil disruption and end the massive gas lines at the pump. In July 1979, the Saudis increased their output, which helped ease the shortage over the next few months. Then, Iranian militants took members of the American embassy in Tehran hostage as part of their Iranian Revolution. They were sending a message against the westernization of Iran, blamed on the United States’ influence on the Shah. The militants focused on the return of the Shah, who had been admitted to a hospital in the US for cancer treatments. President Carter did not take an aggressive stance on the hostage situation because he was afraid it would result in American deaths. The Shah left the US and died a year and a half later. Carter had put forth a lot of effort in building a relationship with the Shah, which put the US in a powerful position, in terms of international relations. The hostage situation put the US in a tough spot. Carter placed an embargo on importing Iranian oil into the United States and he froze Iranian assets. The Iranians prohibited exporting its oil to the United States. The embargo on Iranian oil did not really hurt Iran, but the asset freeze did. The hostage situation drove oil prices up again. Even still, the hostage crisis “demonstrated the apparent weakness...of the United States…and it seemed to establish that world mastery really did lie in the hands of the oil exporters” (p.684).

The oil market has flip-flopped back and forth between prices that are too high and too low, causing international relations tensions and economic disarray. A drop in oil prices in the 1990s crippled exporters while oil importing countries’ economies thrived on the low energy costs. The oil industry realized they had to restructure the industry. Companies worked to increase their efficiencies and lower the costs or production. Companies started “mega-projects”, drilling offshore and spending upwards of $10 billion on projects. The industry produced fewer jobs and less interest by job seekers, as their interest was focused on new ventures, like the internet (p. 765).

Now to look at how the United States’ dependence on oil has led to a lack of a coherent energy policy. It is clear that the country has focused much of its foreign policies on maintaining good relationships with oil exporting countries in the Middle East. Many of the United States’ international relations are based solely on maintaining good relationships because the country is afraid of upsetting the oil industry. It may also seem clear that the government should develop a policy to shift away from its energy dependence on fragile foreign nations, but it is not that simple. William Pierce, author of Economics of the Energy Industries, states, “The political process produces laws, not policy” (1996, p.293). A bill is brought to legislature when “it seemed expedient for a majority of congress to endorse it and when the president was willing to go along” (p.294) and it is likely that laws will passed at different times contradict each other.

Even if the government was more inclined to construct policies rather than laws, the country has widely varying interests in the direction that the United States’ energy industry should take. The United States is a large country compared to a country like France, who has a unified energy policy, so it is much more difficult to come to an agreement. Pierce claims, “The main problems are the differences between consumers and producers and the bewildering variety of interests of different firms” (p.296). Aside from the disagreements between oil companies lobbying for more oil investments and solar companies pleading for photovoltaic investments, even states tend to disagree on the direction the country should take. A state like West Virginia that produces coal is going to disagree with a state like Oregon that has no coal interests to protect. Even government agencies have personal interests to protect. For example, the Environmental Protection Agency is most likely going to disagree with proposals to increase fossil fuel power production.

Finally, the government has tended to enact laws regarding energy policy based on reactions to immediate problems. During the mid-to-late 1970s, when the country was experiencing oil crises, “Congress passed laws creating automobile fuel efficiency standards, prohibiting new gas-fired power plants, and requiring utilities to purchase electricity generated by independent entities” but as soon as oil prices dropped in the 1980s, the “urgency of the previous decade evaporated” (Vickerman, 2007) and fuel efficiency standards were lowered, retracting any semblance toward a cohesive energy policy. It appears implausible that the country will come to a decision on an energy policy any time soon, as the issues discussed are inherent to our government and country.

References

Pierce, W. S. (1996). Economics of the Energy Industries. Praeger Publishers.

Randall, S. J. (n.d.). United States Foreign Oil Policy Since World War I. Retrieved March 16, 2010, from McGill-Queen's university Press: http://mqup.mcgill.ca/book.php?bookid=1835

Vickerman, M. (2007, October). A Federal Energy Policy: Can It Happen Here? Retrieved March 16, 2010, from Alt Energy Mag: http://www.altenergymag.com/emagazine.php?issue_number=07.10.01&article=policy

Yergin, D. (2008). The Prize: The Epic Quest for Oil, Money & Power. Free Press.