November 30, 2005

November 30, 2005 | Commentary on Energy and Environment

Increasing the Global Fuel Supply

Gasoline prices may have stabilized -- for now -- but it's time to face an unpleasant reality: Demand for gasoline and kerosene is outstripping supply.

The current situation is unsustainable: Even as demand for these fuels has reached all-time highs, experts say supplies either have leveled off or begun to decline. The resulting high prices and scarcity threaten the global economy with recession or worse. Yet no moves have been made to expand refining, tanker or pipeline capacity or to remove the barriers to investment that prevent us from meeting these growing demands.

Why?

National oil companies control 58 percent of oil and natural gas reserves. In many of those countries, laws actually require that the government own or control significant shares of any oil-exploration ventures. But corruption in those very governments makes the multibillion-dollar investments required for oil exploration too risky.

No one wants to sink billions into a project and see it disappear because of selective taxation, arbitrary laws, conflicting legal codes and unenforced contracts. Russia frightened away many investors by breaking up its major oil company, Yukos, and suing British Petroleum's Russian partner for $790 million in back taxes from 2001. Moreover, pipelines often must cross unstable countries, which make them even less attractive to investors.

Even in the United States, government intervention prevents an aggressive response to the problem. Before a company can seek a permit to build a refinery here, it must fully design the plant and have an environmental impact statement done on the design. This requires an investment of $250 million, according to one petroleum executive. Even then, the permit stands a less-than-even chance of approval. The Senate recently blocked a measure easing environmental guidelines which block new refinery construction -- and nixed drilling for natural gas on the continental shelf along the U.S. coasts.

Small wonder no new refineries have opened in the United States in 30 years. Or that spare capacity is at an all-time low.

But the problem goes deeper still. Even if new refineries opened tomorrow, the tankers that transport oil around the world are operating at essentially full capacity. Worse, international lending institutions are weak in many parts of the world, and significant portions of the funds they do have are diverted to high taxes and corruption, rather than expanding oil and gas supplies.

These problems can be solved, but they will require aggressive action by the Bush administration. Specifically, it should:

  • Change the investment climate. Join with other consumer countries, such as India and China, to urge oil-producing countries to normalize and enforce their foreign-investment laws, break up state monopolies and phase out undue government intervention. Condition the sales of arms and vital equipment, and even such carrots as membership in the World Trade Organization, on oil-producing countries improving the investment climate in the energy sector.
  • Make it easier to build more tankers, pipelines and refineries. Provide economic aid and technical assistance to oil-producing countries that expand in these areas, especially Mexico, Central America and the Caribbean. Encourage shipbuilding companies to expand the tanker fleet. Work with trade organizations such as the WTO, NAFTA and CAFTA to reduce barriers to investment in this sector. And streamline the process in the United States so that it won't be another 30 years before another refinery opens.
  • Look seriously at alternative fuels. Brazil cut its dependence on foreign fuel in half by insisting on fuel-flexible cars that can run on combinations of gas and ethanol. U.S. should cut the current 54-cent tariff on imported ethanol from Latin America and expand the fleet of flex-fuel cars and gas stations.

The real problem when it comes to energy is transportation fuels, not electricity, which can be generated from coal and nuclear reactors. And there are no silver-bullet solutions. Americans aren't going to stop driving. Neither are Chinese or Indians or Europeans or anyone else. But the forces that are squeezing supplies do not abate, either.

So it's time to meet the challenge head-on and do what it takes to expand the transportation fuel supply before it's too late.
    
Ariel Cohen is research fellow for Russian and Eurasian studies at the Kathryn and Shelby Cullom Davis Institute for International Studies at the Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

Distributed nationally on the Knight-Ridder Tribune wire