September 21, 2001 | Lecture on National Security and Defense
EDWIN J. FEULNER: As all of you know and as the world in general knows, suddenly we're forced to look down an uncertain and possibly treacherous path into the future. At this time, it's important for us to reconsider our priorities, our plans, and our purpose. We need to reevaluate our resources, refocus our abilities in defining a new agenda for what is really a new world.
We've all heard it remarked often in the last 10 days that September 11 changed America. It did indeed. Yet there are still many implications of that change that have not been fully thought through, and since we are thinkers here, it's time that we do start thinking through some of those implications.
This morning, we're going to discuss three different areas where the need for rethinking is urgent and the kinds of change we make are crucial to the future of our nation and the cause of freedom worldwide. We've recruited three of the country's best thinkers in these areas.
First, we'll be hearing from Ken Adelman as he shares with us his views on how America can best defend itself in the new era. Then we'll hear from David Malpass, who will discuss the future of the American economy and the world economy. Our final speaker will be Denise Bode on what these new times mean for America's energy policy.
Let me first introduce Ken Adelman, the director of the U.S. Arms Control and Disarmament Agency during the Reagan Administration. Prior to that post, Ken served as deputy U.S. Representative to the United Nations during the early 1980s, where I had the honor of serving under him, and as an assistant to Secretary of Defense Donald Rumsfeld in 1976 and 1977. He is also a well-known author, a regular contributor to Washingtonian magazine, a co-host of Tech Central Station, and senior counselor at Adelman Public Relations Worldwide.
KENNETH ADELMAN: I am proud to say that in, I believe it was 1979 or 1980, I contributed to Policy Review an article saying that America had to defend itself: As the 1970s opened with the ABM Treaty renouncing any kind of ballistic missile defense, the 1970s would close--I predicted--by questioning the ABM Treaty and moving toward ballistic missile defense.
Little did I know we'd be debating this almost 25 years later, on some of the same grounds that we debated it then.
It was a pleasure in the 1980s working with Ed Feulner, when I was at the U.N. as ambassador and Ed was a public member. He worked awfully well when we were waging the battles there. Today's battles are of a different kind and different scope. It is a total transformation in America, and I thought the President did an outstanding job last night at explaining the situation to us.
It is quite clear now that this will test the seriousness of America as a country, and our way of life, in a way that really has not been tested since World War II. Our response to September 11 has to serve as a lesson that no one can attack America with impunity. So how we handle this situation is going to be absolutely critical for our lives and the lives of our children and grandchildren. It's an amazing moment also, as you could see visually last night; here was a President that barely won an election a short time ago and now has overwhelming support for actions that he wants to take.
The Will to Do Great Things
The Heritage Foundation, Ed and myself, everybody in the cause over the years said if only people really had the political will, the government could do wonderful things. We needed to rouse public opinion. We needed to interest people in our foreign affairs. We had to educate them through public outreach on defense.
I daresay right now, all of that has been unfortunately accomplished beyond anybody's wildest dreams. The problem for the foreseeable future is not going to be public support. The problem is not even going to be congressional support. These are both overwhelming, and I thank God for them both. But what we really need to do, and I'm convinced we will do, is to have the kind of executive leadership that we really need at this moment.
What does that executive leadership consist of? It consists of a campaign against (1) the international terrorist network, (2) weapons of mass destruction, and (3) countries that harbor either of these.
Countries involved in the first are overwhelmingly involved in the second. If you took a list of the countries harboring, hosting, or funding the international terrorist network and the countries involved in developing, buying, researching weapons of mass destruction, there is enormous overlap. Moreover, weapons of mass destruction are the ultimate terrorist weapon. We'd better stop the problem right now, before it grows.
A Long, Broad Campaign
Now, with these goals, what does that mean? It means that this is going to be a global effort, an effort beyond Afghanistan, into such countries as Sudan; obviously, Iraq; other countries; and other countries that, while the government may be friendly to us, still host and train terrorist organizations.
It's going to be, as everybody says, a long campaign and a campaign that is far broader, far more extensive than going after the perpetrators of the crime on September 11.
We have to go not primarily for retribution, as much as that is needed, but for prevention in the future against all these attacks. We have to make the price enormously high for anybody hosting or perpetuating or training or funding terrorist organizations.
This has to be a massive campaign and a shocking, startling revelation to the world that America cannot be attacked with impunity.
Organizing to Meet the Unconventional Threat
Secretary of Defense Don Rumsfeld, for whom I've had the privilege to work three times in my life, has been talking for the last nine months, in a way that seemed stifled just 10 days ago, about transforming the military. He advocated programs that can protect our satellites, our intelligence network, our country with ballistic missile defense. Get away from legacy programs that were wonderful and gave us the victory in the Cold War, and in my very conservative mind were worth every single dime we paid for them because the Soviet Union was such a threat, but get rid of some of those legacy systems so we can concentrate on the unconventional threat.
Ten days ago, he was stymied in this--stymied in the Pentagon, stymied on Capitol Hill, stymied among defense contractors. The whole system was blocked.
The whole system now is wide open. I would urge him to submit soon a package to Congress implementing what he's discussed over the past nine months, and to see it through.
Why now? Because it's a moment of opportunity that's not only rare, but almost unheard of in Washington. And because we have to get the military in line to take care of these kinds of threats in the future and protect our assets.
Let me end by saying that all of this does seem awesome, and it is awesome. I wake up every morning and just can't believe that it happened, and I know a lot of people share that. But here we are nine days after the event. We just can't imagine it happened, and I guess we have to have a little time for reality to sink in and realize that.
An Historic Opportunity for America
What I feel across America is such an outpouring of emotion and support that we can, for really a rare time in our country, wage a sustained fight against international terrorism and those countries that harbor it, and those countries that are building weapons of mass destruction, in such a way as it can really make our future generations far safer than we could even 10 days ago.
That opportunity is the historic opportunity of the Bush Administration that was involved in lots of issues. Many of them are totally forgettable now, and seemingly relatively minor before. That is the historical mission of this Administration, and by God, the Congress and the American people are behind it.
I think with that, and with the wisdom we have in the executive branch, we're going to succeed and make the future far safer than it would have been before.
DR. FEULNER: Our next panelist, David Malpass, is going to speak about the current state of the economy and steps that can be taken to improve it. He's the chief international economist at Bear, Stearns and Company. Any of you who have the opportunity to see his routine e-mails on the world economy know that he not only calls it the way he sees it, but often sees it before most other people do.
He joined the firm in 1993 and now is senior managing director. He writes economic and financial studies and discusses financial market conditions with institutional investors. His articles often appear in The Wall Street Journal . Prior to his work at Bear, Stearns, he held senior posts in the government, including six years with Secretary James Baker at the Treasury and State Departments. He's worked on a host of international economic and trade issues for the Treasury and State Departments, as well as in the U.S. Senate.
DAVID MALPASS: I want to talk about how we could stop the global recession, to give you a sense of what's going on in the economy and what could be done about it.
To give you a backdrop, I think we were already in a global recession before September 11, and it was actually deepening pretty rapidly. One way to measure that is to look at what equities were doing before September 11. The S&P 500, which is a broad index of equity performance, had fallen 17.3 percent already by September 11, and it was down 8 percent in just the two-week period leading up to September 7. So, completely separate from the tragedy, equities had been falling.
I don't mean by that to diminish the level of the human catastrophe and the tragedy itself, but if we're to move forward on fixing the economy, we have to decide how much of the problem is the tragedy itself and how much of the problem was there before the tragedy. Before September 11, not only was the U.S. in decline in terms of its equities and its economy, but outside the U.S., it was even worse. If we look at equity performance in other markets, in Europe and in Asia, they were down 20 to 30 percent before September 11.
So let's agree that the tragedy occurred, and it's going to be very costly; but there were problems before that, and maybe we can work on those problems. We can't undo the damage from the attack itself, but at least we can work on the previous problems.
Major Change in Monetary Policy
We had a world that was in a deflationary recession. The roots stem back to the "irrational exuberance" speech in 1996, when Alan Greenspan changed monetary policy substantially. Up until then, the monetary policy focus had been to have low inflation. Greenspan then added another facet to it, which was not only do we want low inflation, but we don't want markets to be irrationally exuberant. That was a major change in monetary policy.
One of the side effects of that was that the dollar began strengthening rapidly. Over the next four years, the dollar revalued by 30 percent. As it did that, prices of things had to start going down, and they did that progressively around the world over the next four years, with particular impact in the Asia crisis, and then again in 2001.
If a country devalues its currency, then the price of everything goes up. The same thing also happens in reverse. If a country raises the value of its currency, then the price of everything in that country goes down. And if there were debts outstanding prior to that revaluation of the currency, then those debts are under water. So if you had borrowed $10,000 in 1996 and then the value of the dollar suddenly went up, you're left trying to pay back the $10,000 with things that simply aren't worth as much. That was the trap that Thailand fell into, and Indonesia, Malaysia, and other countries, in the late 1990s.
So as we think about how to begin the recovery, we have to attribute some part of the downturn to the global economy. It had fallen into a recession that I think was going to be a deep one. There are some in the U.S. government who say that we are almost on the brink of a recovery, but the data simply do not show that and did not show that. We were falling faster, and the equity markets were showing the clear picture.
The August data on industrial production from the U.S. were way down. Germany just this morning reported its IFO Business Confidence Index for August; that was way down. You had housing starts that came out last week for August that were way down. And the University of Michigan Business Confidence Sentiment Indicator, which came out last week with data from August, was way down.
So the equity markets since September 11 would have been down sharply anyway. I think it's a better way for the U.S. to think about it: not that that tragedy, or the terrorists, could cause $2 trillion in losses in U.S. equities, but that we control our own destiny and we can re-create that value.
Interest Levels and Monetary Policy
Specifically, what are the problems? The Fed was too tight in 1997, 1998, 1999, 2000, and into 2001. How do we know that? Because prices kept falling. So one of the key things to think about in getting us back to a growth path is to make a clear differentiation in your mind between the level of interest rates and the tightness of monetary policy. We're too often taught in school that interest rate levels are monetary policy: that if the Fed lowers interest rates, that's a loosening of monetary policy. That's not really true at all, and I'll give you a simple example.
If I tell you Country X, a developing country, has an interest rate of 10 percent, do you think that's a tight monetary policy? Ten percent is a pretty high interest rate, but you know intuitively to say, `Wait a minute, I need to know what the inflation rate is." If the inflation rate is 12 percent, then a 10 percent interest rate is not a tight monetary policy. It's actually a loose, inflationary monetary policy.
Then suppose I tell you that that government has raised the interest rate from 10 to 11 percent. Is that a tightening of monetary policy? Maybe inflationary expectations went up from 12 to 14 percent, so if they just raised the interest rate from 10 to 11 percent, that wasn't tightening of monetary policy.
Around the world, central banks are using the interest rate as a proxy for the tightness of monetary policy, and that simply wasn't working at all in managing monetary policy. So we see Brazil having raised interest rates, beginning in June a year ago, as oil prices went up. They thought, "We better tighten monetary policy because of the inflationary effects." Remember that the European Central Bank was doing the same.
They began raising interest rates. The effect of that was to slow the economy and reduce the demand for reals and for euros. So even though the governments were raising interest rates, the monetary policy became looser and looser, and the currencies became weaker and weaker, because the demand for money was going down faster than the supply.
This may sound like theory, but it's very practical for what the Fed is doing today. Last week there was a crisis, and the Fed injected liquidity into markets. You saw $80 billion injected into the markets.
But what the Fed did was use one-day repos in order to inject that liquidity. That meant they put a lot of money out with the promise that they would get it back in less then 24 hours, so it wasn't really very much of a grant of liquidity. Meanwhile, the bond market over the last week has been selling off hard.
We've actually had a continuation of a very tight monetary policy. The Fed funds rate is 3 percent now. It's been cut eight times this year. But the demand for money has been going up very rapidly. The Fed's actually allowed a tightening of monetary policy during the year. They've cut eight times, but it never got ahead of the curve. So we ended up in August with monetary policy tighter than it was in January. That's relative to real interest. That's relative to the inflation expectation.
What Can Be Done?
The Fed could change monetary policy in a way that makes a whole lot of sense. Right now, they're expanding their balance sheet. They're injecting liquidity very, very short-term: one-day money. That's pretty stingy, and it doesn't show any confidence in the inflation outlook. They've actually shortened their duration. If you think of what the Fed owns, it owns some Treasury notes and some yen--not very much--and some gold, and what they've been injecting over the last week is just one-day money.
The average maturity of their portfolio actually shortened. That's a sign that they don't have any confidence in the inflation outlook. If they were confident, they'd be buying, just like you and I would, longer-term instruments.
The yield curve--the interest rates from the short end to the long end--has steepened dramatically over the last two weeks in a sign that there's both deflation risk, because prices are falling and the Fed's been too tight, but then inflation risk, because the Fed's not willing to buy U.S. Treasuries out at the longer end.
What I'm proposing is actually unusual. Central banks don't usually like to go out on the yield curve. But we're at war. We have a very unusual situation. The equity markets again this morning are crashing hard. So it's time for a little different way of thinking about things.
Specifically, what we could be doing is changing monetary policy so that it was stimulative rather than contractionary, the way it's been. An easy and logical way to do that is for the Fed to invest longer-term in its own portfolio. That would bring down the yields on bonds for the country, which have been shooting up. Yields have gone up a lot. Corporate bond yields have gone up by almost 2 percent since the crisis; in junk bonds or high-yield instruments, even more than that.
So there's this huge squeeze on the private sector right now that the Fed's not really addressing at all by injecting this overnight money. Nobody really needs overnight money. People need three-year money and five-year money.
Government Spending As Recipe for Recession
I wanted to go through that and have a concrete proposal, a change so that the Fed is going to give us stable prices and an end to the deflation. It's the same prescription that I've recommended for Japan over these 10 years. Japan, year after year, tries to use fiscal stimulus. You're hearing now that the U.S. is going to save itself by spending a lot of money. Well, Japan's been there, done that. It simply doesn't expand the economy to have the government spend more money for things that aren't totally necessary.
I'm in favor of government fiscal stimulus for the war effort, but I think we shouldn't look at that as an economic positive. We should look at that as reality. We have to have a better defense establishment and so on, but if we're spending money on the idea that somehow that helps the economy get growing, we have this glaring example of Japan that has spent itself into endless recession over the last 10 years.
Monetary policy is critically important; fiscal policy, less so. We should be lowering the capital gains tax because it's the right thing to do, not because we think that it will cause a fiscal deficit. If it's the right thing to do, it's going to raise the growth rate, and it's not going to provide any "fiscal stimulus" in the sense of fiscal deficit; it's going to reduce the fiscal deficit. We should be doing it because it's the right thing to do, not because somehow it causes Keynesian stimulus.
The Problem of Oil
One other area is oil. We should recognize that the OPEC cartel set itself up and tightened its grip in 1998 and 1999, with the U.S. seeming to give its blessing to that through Mexico and Venezuela participating actively in the quota cuts. I think it was very poor U.S. policy to let this happen. The Bush Administration hasn't, that I've seen, changed it very much.
So one of the things that we have to focus on is that the global recession that we are already in had one important cause from oil itself. You can't really expect the world to have kept growing in 2000 and 2001 when there was this huge shift from the idea that the world could get cheap OPEC oil to the idea that it was going to have to find expensive oil somewhere else.
That wealth loss for the world was massive. It's still ongoing. Oil prices last night, when I looked out to August of 2002, a full year from now, were expected to be $25 a barrel, which means in my mind a permanent global recession. You can't run a world economy when you're paying $25 a barrel for oil.
DR. FEULNER: Denise Bode is going to be discussing America's emerging need for a revised energy policy. She currently serves as chairman of the Oklahoma Corporation Commission and is recognized as an expert on national energy policy. She has lectured here at Heritage, as well as testified before Congress, on the topic of energy policy on a number of occasions.
Before joining the Commission, she served for seven years as president of the Independent Petroleum Association of America. Prior to that, she was a founding partner of a Washington, D.C., law firm.
DENISE BODE: There's much that we need to be doing now concerning energy policy. Above all, we must act. Economic, foreign policy, and national security imperatives require that America provide for our energy needs.
While those imperatives were crystal-clear before September 11, at least much of President Bush's energy plan seemed to be dying a slow death as California's rolling blackouts faded in our memories and gas prices eased. In energy policy also, America needs to muster the resolve to see the job done.
Here is our situation. The attack on American soil has caused many Americans to no longer feel safe; but for those of us from Oklahoma, we already have come face to face with that loss of innocence from the acts of domestic terrorism. We thought we had seen the worst.
This week, as chairman of the commission that regulates energy, utilities, transportation, and water in Oklahoma, I found myself addressing defensive needs regarding these facilities that we regulate for the first time, launching inquiries to see what state plans need to be developed, or are already in place, to utilize law enforcement and the National Guard to assist the private sector in protecting those essential assets. This is clearly a new focus for state policymakers.
And as both a regulator and someone who has had a long association with the domestic energy industry, a decades-long concern became even more pressing: our crumbling energy infrastructure. From conservation to pipelines, from oil rigs to electric transmission lines, America has very serious problems that can no longer be ignored.
Oil and National Security
The reality of our oil supplies will be tested. A long, sustained American war on terrorism and the nations that harbor terrorists is very likely to further strain our relations with the Middle Eastern OPEC nations that provide much of our oil imports, underscoring the need to get our domestic house in order quickly.
With President Bush declaring war on terrorism and those nations that harbor terrorists, the likelihood increases that those oil-producing nations with terrorist links that we have been forced to swallow hard and continue our oil trade with, as the Atlanta Constitution put it in a recent editorial, may be drawn into the conflict. They may cut us off.
The last Arab oil embargo in 1973-1974 hit our economy hard. At that time, we were 40 percent dependent on foreign oil. Today, that number is almost 60 percent. Much of that comes from OPEC member nations hostile to the U.S. In the past year, the U.S. State Department has put five of the 11 OPEC nations on the list of those countries traveling Americans should avoid.
The previous Administration conducted two national security investigations of the impact of oil imports, both of which concluded that such imports pose a national security threat. Despite bipartisan congressional support, little action was taken to meet that threat. Instead, the accepted ritual of American energy policy became that in times of crisis, or just high prices, American Cabinet officials go to OPEC to plead for increased oil production.
That policy may be less effective with a real war on states that harbor and finance terrorists. Unlike Desert Storm, where we went to war to protect our growing foreign oil habit, we may be taking actions that would actually limit those supplies. All this at a time when America is as yet unprepared to meet the demands of a peacetime economy, much less the needs of an America on a war footing.
And make no mistake about it: Military action means an even greater demand for energy. Milton Copulos, president of the National Defense Council Foundation, estimates that it now takes eight times as much oil to meet the needs of each soldier as it did in World War II. To put this in perspective, during Desert Storm, 450,000 barrels a day of oil was consumed by Allied forces. The total U.S. daily consumption in peacetime is approximately 17 million barrels a day. That is a huge use of our resource.
Rebuilding America's Energy Infrastructure
Let's talk a little about rebuilding the domestic energy infrastructure. The rub is that it isn't only oil that's at issue here. America's domestic energy infrastructure is a fine balance involving raw supply, manufacturing products from that raw supply, getting the products to market, and demand for those products.
What we have now is an infrastructure that is like Humpty-Dumpty: teetering on the wall, barely able to make all the necessary areas stay in proper proportion. It is precariously close to falling, and the result will be identical to the nursery rhyme: All the king's horses and all the king's men couldn't put Humpty-Dumpty together again.
Superpower America could find herself without the resources to supply our needs. Even before last week's attack, we were facing energy shortages in energy-rich America. Our domestic infrastructure has lost hundreds of thousands of jobs and well over 1 million barrels a day of oil production.
At the same time, our ability to turn that crude into something that can be used has been greatly reduced over recent years. The infrastructure is so strained that a fire at a refinery in Illinois a few weeks ago caused gasoline prices in America's heartland to skyrocket, and BP Amoco began shipping in gasoline from Europe to restore some sort of normal supply.
The Urgent Need to Increase Refinery Capacity
We have not built a refinery in a quarter of a century, while we've closed 50 out of 200 existing refineries. And given the regulatory and social hurdles, there are probably no plans right now, without change, for any companies to replace them, and more will close. At the same time, forecasts state that we need an increase in refinery capacity and utilization of 1.7 million barrels a day to meet consumer needs in a peacetime economy, roughly the equivalent of nine new refineries.
Again, this does not take into account the extra burden that would be posed by a military action. The refineries that remain face a daunting task. Not only are there different kinds of crude, each requiring its own special processing; every barrel must be turned into product. Economists who have claimed we are not as oil-dependent as we once were have to be ignorant of the oil required for the clothes they wear or the computers they use. There are hundreds of different products to be made, from plastics to crayons, each requiring its own process.
Today, there are over 30 different kinds of gasoline that refineries are required to produce, the result of different mandates for boutique gasolines from every Tom, Dick, and Harry in government, from the cities all the way up to federal authorities. We must make it a priority to end this practice.
Reaching the Market
Finally, the product has to reach the market, and that requires, among other things, pipelines. Most of our nation's pipeline system is 50 years old, on average, and is carrying far more than its designers intended. It is being strained to the limit.
Ironically, a notable exception is the Alaskan pipeline, which is running at almost half its capacity because of the limits on drilling in ANWR [the Arctic National Wildlife Refuge]. And you cannot mention Alaska without pointing out that, while they are producing tremendous volumes of natural gas, it is being reinjected into the ground or shipped out as LNG [liquefied natural gas] because there is no gas pipeline to bring it to America. That must be a top regulatory priority.
There are some who point to natural gas as a logical alternative to our dependence on oil. The problem is that the two are closely linked. When OPEC nations dumped their oil on American markets a few years ago at fire sale prices, it forced many independent domestic producers out of business--the very people we depend on for our natural gas.
Over 90 percent of the natural gas we use is produced in America, but over 70 percent of that is produced by these independents, the small businessmen and businesswomen who depend on income from their wells, both oil and gas, for exploration and development. No income means not only no more oil wells, but no more gas wells. Cheap oil resulted in high natural gas prices for consumers last winter.
Another Urgent Need: More Drilling
While there has been an increased drilling level in America in the past year or so, with the higher prices you talked about, it's nowhere what's needed. Just to replace the existing natural gas reserves and meet the new demand that's projected, we need close to 2,000 rigs running. We have about 1,000.
While Intent to Drill forms filed with my agency have doubled since 1999, and are up 60 percent in Texas, there is a vast difference between planning to drill and actually producing oil and gas. Even if all goes well, it takes an average of three years to develop onshore projects.
Further, the cheap oil I've already mentioned decimated our infrastructure in terms of men and equipment. Rigs were sold for scrap. Experienced men and women gave up on the energy business, never to return. Simply put, we don't have the people or the equipment that we need yet.
Americans must also understand that whatever increased production we are seeing here at home is, for the most part, from old fields. We simply can't keep going to the same wells indefinitely. Once they are plugged, they are lost. We must open the Rockies and other areas to exploration and development in order to get the new supplies we need.
Also, we need to make it worthwhile to try. Cambridge Energy estimates that, at a minimum, it will take almost $1.5 trillion over the next 15 years to meet estimated demands. That requires investors, and that in turn requires incentives.
In what can only be described as irony, institutional environmentalists--those whose associations profit proportionately from every environmental scare they create--fight any move to tap rich oil fields lying off the shores of America's coast or under American land, completely ignoring the fact that, using today's technology, energy exploration and development is not an environmental threat. For example, in my state's Tall Grass Prairie Preserve, a national park, oil wells dot the landscape, and income from them helps maintain the ecologically sensitive environment.
Apocalyptic predictions of what the Alaska pipeline or drilling would do to the delicate tundra environment have never come true. Yet there is scorn for any proposal to rebuild and strengthen our energy infrastructure. The result? We import more oil and related products, using an ever-increasing number of huge supertankers--10,000 a year with imports at 60 percent, which history proves pose a far greater environmental threat than drilling on our land.
Another piece of this complex puzzle is electricity. The Department of Energy estimates that there will be a 43 percent increase in the demand for electricity over the next 19 years. To meet this nation's electrical needs, we need new transmission capacity and new power plants. Because it is environmentally friendly and has other benefits, right now 96 percent of the planned new plants will use natural gas. This is foolish. Keep in mind, I say this as a native of Oklahoma, the third largest natural gas-producing state in the nation.
Investors are told to build a well-diversified portfolio in order to weather whatever tough times come. We need to do the same when it comes to energy. Clean-burning natural gas should play a lead role, but diversity, such as oil, coal, alternative generation, and alternative fuels, is imperative. And let's not leave out greater conservation. Unfortunately, we've been steadily moving away from such diversification over the last 10 years.
What We Must Do
Is there any good news in all of this? Yes. We have a President and a Vice President that are the most knowledgeable in our history about energy and, even before this national disaster, recognized how important energy is for both a peacetime, high-tech economy and national security.
As President and Vice President, they understand the principle of federal governance, that people are policy. Therefore, they've made skillful appointments in key energy Cabinet posts, as well as regulatory agencies like the Federal Energy Regulatory Commission. I give thanks to God these people are there with this knowledge during this critical time, when it is needed the most. And I give thanks that they have that knowledge at the top.
One cautionary note, though, is that the resolve at the top needs to be translated down to the folks in the regional federal offices that we deal with in the states and who may impose new, unreasonable regulatory burdens on energy production because they haven't gotten the word.
One example is the Environmental Protection Agency in our producing region. This administration can also act through regulatory relief, though, to encourage the rebuilding of needed energy infrastructure while the Congress completes the complementary legislative package. The FERC has already started down that road.
The Bush team put together a plan that focuses on rebuilding our failing energy infrastructure. Much of that plan is included in legislation that has passed the House. Contrary to some of the media reports, it does provide the needed diversification by encouraging development of all forms of energy, including alternative energy sources. It also calls for conservation and provides more help to the working poor to help them through this rebuilding period.
The ball is now in the Senate's court, and they need to act quickly and boldly.
Improving the President's Energy Plan
Would I tweak the President's plan or the House bill? Sure. While the President's plan had incentives for exploration and production of oil and natural gas through federal lands, which the Senate must support, including ANWR, the final House package added necessary support for domestic production in mature provinces such as Illinois, Texas, Oklahoma, California, and Kansas.
Most of the wells in these areas are called marginally economic wells. They produce only a few barrels a day, or they are so expensive to produce that they're marginally economic. Yet they account for 40 percent of our domestic oil production.
In order to keep them operating and to get more, we need to provide a marginal well tax credit that will keep them in operation. We have done this in Oklahoma and in other producing states at the state level, and there is a study that came out Wednesday of this week, done by the Interstate Oil and Gas Compact Commission, that confirms that it has saved much domestic production just by acting at the state level. We need the support at the federal level as well.
The House-passed bill also allows for the deduction of legitimate expenses involved in energy exploration and production. In addition--and this is something new that I keep pushing because I think it's critically important in encouraging new technology--expand the existing Enhanced Oil Recovery Credit to allow for greater technology development and greater environmental comfort for those of us who live in these states.
The President's plan also points out the need to expand refinery capacity. Among other recommendations, it called for a study of boutique fuels. Surely it is time now to act, not study. I support legislation to stop the practice of endless boutique fuels being required of refineries, as well as other efforts specifically targeted to providing incentives for refinery expansion, not contraction.
Finally, the moratorium on offshore drilling should be lifted. Oklahoma has had hundreds of thousands of wells drilled and producing in an environmentally safe manner to provide this nation with energy security. We are doing the best that we can. Other states should do the same in providing for our country's needs.
The Price of Security. In April of this year, Oklahoma producers sold 185,000 barrels of oil a day. American dollars went to Americans. But in that same month, America gobbled up 862,000 barrels a day of oil from Iraq alone. American dollars went to those who support the kind of acts we saw on September 11.
As a result of our failure to do something about our crumbling domestic energy infrastructure, Americans are helping to fund acts of war against themselves. Can there be anything more tragic?
DR. FEULNER: I thank our three panelists for sharing their insights with us on three very broad, major policy areas that we'll be looking at over the course of the next months. The world has fundamentally changed as of September 11, but there are lots of areas where we can move ahead in terms of broad national agendas and hopefully move forward in terms of not only promoting America's national interests, but also preserving individual freedom and prosperity around the world.
Edwin J. Feulner, Ph.D., is President of The Heritage Foundation; Kenneth Adelman is former Director of the United States Arms Control and Disarmament Agency; David Malpass is Director, International Economics, for Bear, Stearns and Company, Inc.; Denise Bode is Chairman of the Oklahoma Corporation Commission.