Learning From the Oil Shock

But higher demand from developing countries and oil producers is offsetting the lower demand of wealthy countries. Consumption in these countries will rise 3 percent in 2008, or 1.2 million barrels a day, projects the International Energy Agency. Many of these countries subsidize fuel so that final customers are insulated from price increases. Gasoline is about 25 cents a gallon in Venezuela and about 60 cents in Saudi Arabia, Kuwait and Iran, notes Rubin. China also subsidizes fuel.

There's been a huge transfer of power to oil producers. Even at $100 a barrel, Saudi Arabia, Kuwait and the United Arab Emirates will earn almost $8 trillion in oil revenues between now and 2020, estimates the McKinsey Global Institute. More troubling are the political implications. "This has really strengthened the Iranians, Russians and Venezuelans to be more provocative in the world," says Larry Goldstein of the Energy Policy Research Foundation. Although governments control crude supplies, private companies have dominated distribution. Anyone can buy oil at a price. Now oil could become a political commodity, used by governments to cement their alliances: offered to friends at a discount; withheld from rivals.

What to do? How can we retrieve some of our lost power? The first thing is to get out of denial. Stop blaming oil companies, "speculators" and other scapegoats for a situation not of their making. Next, we need to expand oil and natural-gas drilling in the United States, including Alaska. No, we can't "drill our way" out of this problem. But we can augment oil supplies and lessen price strains on global markets. It might take 10 years or more, because new projects are huge undertakings. But delay will only aggravate our future problems, just as past errors aggravate present problems.

Finally, we need to let high prices work. Aside from encouraging fuel-efficient vehicles and disciplining driving habits, they may also stimulate development of new biofuels from wood chips, food waste and switch grass. Production costs of these fuels may be in the range of $1 a gallon, says David Cole of the Center for Automotive Research. If true, that's well below today's wholesale gasoline prices. To assure new producers that they wouldn't be wiped out if oil prices plunged, we should set a floor price for oil of $50 to $80 a barrel, about 40 percent to 60 percent of today's levels, says Cole. It's a worthy idea and can be done with a standby tariff. It would activate only if prices hit the threshold. We know that oil prices are unpredictable, and should a price collapse occur, Americans wouldn't be deluded into thinking we've returned permanently to cheap energy. We've made that mistake before.

© 2008