What Is the ‘Energy Crisis’?

I

President Nixon’s energy policy, expounded in April and amended in each subsequent turn of economic policy, down to the imposition in June of Freeze Two, has failed so far to halt even the rhetoric of the “energy crisis.” The President’s energy message was received with judicious commendation by large and small US oil corporations. Nixon proposed the liberalization of oil imports, increased support for domestic production and refining, relaxation of controls on natural gas prices, reduced concern for environmental protection, and a new system of tax credits for oil and gas exploration. These suggestions inflated the already high price of oil stocks. The Wall Street Journal quoted the opinion of an oil analyst that “the [unpredictedly but ambiguously munificent] tax credit was the only surprise in the energy message.”

Nixon’s statement stayed close to the hopes and exhortations, even to the language, of the petroleum industry’s corporate advertising. His major projects followed most of the recommendations of the American Petroleum Institute, the National Petroleum Council, the American Gas Association, and the other institutes and associations that had described America’s energy crisis. The presidential message achieved a tone that mixed the calm and shrill, major and minor, multinational and nationalistic, Eastern and Texan voices of different energy interests: it was less sophisticated, less farsighted perhaps, than the reflections of the Mobil corporation, as advertised on the “Op-Ed” page of the New York Times, but less strident than the pronouncements of, say, the “New England Oil Men’s Association.”

Such a mixture of political-corporate business as usual was unexpected only because of the expense and momentous anticipation that attended Nixon’s energy “initiative.” Early descriptions of the forthcoming energy plan had promised the most global and photogenic policies. Soon after the 1972 election, Secretary of Commerce Peterson proclaimed that “the energy strategies and programs the President presents next year will be fully equal to his initiatives to the Soviet Union and the People’s Republic of China.” The subsequent message was prepared with the help of some sixty government reports, a cabinet super-committee, an energy overlord, a White House energy coordinator trained by the US Navy, and, sporadically, Dr. Kissinger’s secretariat.

The Wall Street Journal, in January, noted that Kissinger’s staff had organized “paperwork” on the strategic aspects of energy policy, and planned to “float it around the State Department, Pentagon, CIA and other concerned agencies.” Energy policy was presented as a major endeavor for the period “after Vietnam.” As one “Kissinger staffer” revealed, “Suddenly we’ve realized we should worry about energy problems. We’ve been pondering which matters to stress over the next |four years, and this is certainly one.”

The rhetoric of political anticipation suggested questions which a US energy initiative could not hope to answer. The message was, as one government official put it, a “disappointment.” Policies of Kissingerian balance were never very appropriate to the complicated and essentially economic problems of supplying oil, coal, and gas. The eventual energy message in fact minimized issues of national defense. Commentators noted that it failed to mention the word “Arab”; Kissinger himself, with some instinct for bureaucratic self-preservation, seems to have extricated his group from prominent involvement in such unpromising and disputed problems.

Most of the conflict over energy policy had to do with domestic economic issues. Government energy strategy, from Nixon’s message down to recent Administration attempts to regulate persisting energy shortages, was divided over the merits of applauding “free” competition and intervening to control it—the same issue that has fractured economic policy, and particularly policy to control inflation. Delays in the presentation of the energy message were caused, reportedly, by such questions as whether oil imports should be allocated to companies by fee or, in a purer spirit of free enterprise, by auction. President Nixon’s chief energy counselor was John Ehrlichman, who presumably found particularly keen distractions in early 1973. Ehrlichman spared the time, however, to reveal in an interview published in the May, 1973, issue of Nation’s Business that his “role changed from the first to the second Nixon administration to the extent that he…now is able to give more time to going into major issues, like the energy problem, in depth.”

Other disputes concerned different business lobbyists, such as the producers, refiners, and marketers of oil, and industries such as the chemical business which are large energy users. Officials disagreed over policies for moderating the demand for energy, as distinct from expanding its supply: the presidential message eventually dismissed energy conservation with vague encouragement, summarized by Treasury Secretary Shultz in his explanation that in conservation policy “what we are trying to give is a sense of ongoing effort to address this problem.”

The tone of these arguments also suggested a general retreat from the substance of environmental concern. This retreat, demanded by business, was signaled in Nixon’s deprecation, earlier this year, of the “doomsday mentality,” and in the remark of an Atomic Energy Commission official that the environmental movement is “seeing an analogue to the over-taking of the civil rights movement by the extremists several years ago.” It was apparent also in fiscally conservative attacks on urban reorganization plans and on the northeast railroads, and in the continuing re-examination, sometimes reasonable and sometimes craven, of air quality and auto emission standards.

Such complexities made it almost impossible for government strategists to disentangle, for example, the time periods of the “energy crisis.” Yet a confusion of time periods goes to the heart of energy difficulties. US energy “crises,” as described in hundreds of corporate advertisements and official pronouncements, include: immediate problems of distributing gasoline, heating oil, and other fuels, on a month to month basis; questions of energy production and oil refinery capacity for the next three years; problems of world oil supplies for the next fifteen years, and of finding “alternative” fuels as a substitute for oil; and finally a long-range “crisis” of industrialization and natural resources. These problems are distinct, although the resolution of each has to do with prices and corporate decisions about prices.

Each problem raises different, grave problems of political evaluation. An immediate example of these problems is shown in the recent Administration proposal, now postponed for apparently political reasons, to reduce energy demand by raising gasoline taxes. Such a strategy, unless combined with selective tax increases, would discriminate against the poor, who might be forced to reduce recreational and vacation driving, since automobile commuting is compulsory for most US jobs. The development of alternative fuels, to take a longer term example, will raise even more difficult questions. Public policy should, in this case, weigh the power of US industries, such as the chemical or automobile or trucking businesses, which are dependent historically on cheap oil; the benefits to consumers of lavish oil use; and the cost of developing new coal or oil shale, particularly to people living in the Western states where such fuels would be mined. Yet these difficult evaluations have seemed, to the high officials of the Nixon Administration, as inconceivable as subtracting the moon from the stars, or oil shale from automotive mobility.

II

The immediate energy crisis of gasoline shortages, halted tractors, and emptied Colorado schools is now a subject for angry incredulity. Even President Nixon has suggested that present troubles do not constitute a “genuine” energy crisis. Armies of local, state, and federal officials address the question of whether energy shortages are “real”—finding no answers, while shortages, which are real in a most concrete sense, persist.

The question Is there an Energy Crisis? may not be answered satisfactorily, because it is, in a sense, the wrong question. What can be shown is that the institutions and corporations responsible for distributing energy have behaved in a way which is incompetent, or disingenuous, and usually both. Questions about the reality of the energy crisis confront issues of corporate and competitive privacy. Independent gasoline marketers have been the main victims of present gas shortages, often unable to obtain supplies after large producers have supplied their own gas stations. Yet even the independents cannot prove deception in the general allocation of supplies.

There are few relationships more protected than the association, in petroleum distribution, among companies, their local depositories, their routing managers, their tanker drivers—and few decisions more obscure, even to most corporate employees, than the evaluation, in petroleum investment planning, of future demand and prices, of construction technology, and of the profitability of refinery building. Yet the cumulative effect of corporate behavior can now be seen much more clearly in the history of present energy disruptions.

Corporate crisis advertising is constantly critical of “environmentalist” or “doomsday” constraints, yet it has played quite openly on public anxieties about long-term dangers to the environment. Energy publicity relies on such images as electric lights that fail, frame by frame, or of the US “dangerously dependent” on barbaric foreign sellers of natural resources: these images, as will be seen, have very little to do with the business practices that cause energy shortages.¹

Immediate fuel shortages are caused, evidently, by failures of distribution. When Denver ran out of heating oil, there was oil in Pennsylvania, and when Long Island filling stations rationed gasoline, gas flowed freely in New Jersey. Some initial presumption of corporate disingenuousness is indicated by the financial scale of operations: the American Petroleum Institute and the American Gas Association alone spent $12 million on three recent energy campaigns, and individual corporate advertisers dispensed comparable sums—enough money, at least, to airlift heating oil to every school in Denver. Meanwhile proficiency in distribution has been among the proudest boasts of US oil companies, since an apologist for the Standard Oil Trust proclaimed in 1900 that “petroleum today is the light of the world. It is carried wherever a wheel can roll or a camel’s hoof be planted….”²

A study of energy use in Scientific American comments that the shortage of liquid fuels now presents “no real technological problem…along the distribution chain,” and that “it is easier than keeping grocery shelves stocked.”³ Even supplying a satisfactory “mix” of petroleum products—heating oil in the winter, or industrial fuels, or gasoline in the summer “driving season”—is comparable to the challenge grocery stores face when they supply lemonade in July and turkeys in the fall. Further presumptive evidence for disingenuousness is shown, of course, in the by now notorious pattern of energy shortages, where rationed fuel distribution discriminates against and occasionally bankrupts independent and cut-price marketers, where along a single highway favored stations find supplies and independents lock their pumps.⁴

Public concern about the status of fuel distribution problems has forced the energy corporations to retreat to a more sophisticated rhetorical position. Corporate advertisements of the last few weeks have emphasized the “three year” problem of insufficient refinery capacity, and the technical difficulties of importing foreign oil. Yet these problems, as obscure and as private as imperfections in distribution, show the same pattern of deviousness and incompetence. Even the limitations of existing refinery capacity are surprisingly flexible. For several weeks during the recent “gas crisis,” US refineries produced less gasoline than during gas booms. A June advertisement by the Amoco corporation displays this ambiguity, in a crisis “progress report” qualified to the point of meaninglessness: “Primarily, the situation is this: demand has outstripped our country’s crude oil supply. (Even though Amoco refineries are running well ahead of last year. And at practical maximum with available crude.)”⁵

Another indication of the complexity of these questions was given in the press briefing which followed the presidential energy message. Deputy Secretary of the Treasury William Simon complained that “at present there are no new (US) refineries underway,” and that “this is in a period where all the refineries are operating at 100 percent of their effective capacities.” Later, Mr. Simon was asked to explain the new regulations allowing extra imports of crude oil.

Q. If the refiners are at 100 percent capacity, of what value and what will happen to the new crude oil that comes in here for refining?

Mr. Simon: There are refineries inland that are not operating at 100 percent.

Q. So your 100 percent was a very vague number?

Mr. Simon: No, it wasn’t vague. A great majority of them are functioning at 100 percent….

What these evasions indicate is that, predictably enough, refinery limitations are determined by economic and political costs, rather than by technological necessity.

The problem of refinery construction is similarly hedged with confusion. A major corporate explanation for the energy crisis is that only one new refinery has been built in the US in the last several years. A Mobil advertisement asks, “Why haven’t oil companies built more refineries here?” and answers (with the standard qualifications, here italicized), “Mainly environmental and financial constraints…[which] have effectively kept oil companies from obtaining satisfactory sites for new refineries.” Such constraints, of course, make refinery construction not impossible, but more expensive (and if oil prices increase dramatically fast, Mobil will presumably be prepared to build idyllically clean refineries). Even the emphasis on new refinery construction obscures the extent to which companies could, quietly if expensively, add new capacity to existing refineries if they wanted to (and as Atlantic Richfield has recently proposed).

What the “energy crisis” propaganda reveals is a corporate desire to increase prices, particularly at the level of retail and wholesale business, which has been less profitable to US oil companies than the production and first sale of crude oil. The timing of refinery construction can give some indication of the political component of the “crisis,” and of the inflationary promise of present government policy. In the three weeks after Nixon’s energy message, five major refinery construction projects were announced, with thirteen more expected, and the prospect of what Barron’s calls a “bonanza” of doubled revenues for construction contracting firms. These projects were waiting, evidently, for political support; it should not be supposed that Exxon, for example, planned a $400 million expansion in the space of three weeks.

More generally, refinery construction problems show the inefficiency and irrationality of “free” energy investment. Oil companies were incompetent in failing to predict and plan for the expansion of gasoline demand in the 1972-1973 national boom. They have been unwilling to build new refineries because they experienced excess capacity after a building splurge in the 1960s, which, in a classic example of business overshoot, stimulated attempts to create more demand: campaigns to “Discover America” by buying more gasoline, the selling of excess gasoline at discount prices to the same independent retailers whom major suppliers are now attempting to crush. These failures provide the background to energy shortages: neither incompetence nor disingenuousness is much in doubt.

The momentum of the present energy “crisis” comes down to a play to raise prices, a corporate demand for immediate price increases and for longer term government support. The play has succeeded so far, as shown in the recent contrite remark of a Cost of Living Council official that “if our regulations [against oil inflation] are causing a supply problem, we’ll change them. We don’t want to aggravate the situation.” Gasoline prices have been frozen, in Freeze Two, at a level sometimes nine cents a gallon higher than they were in January, 1973.

A Wall Street analyst, observing higher prices, sees 1973 as “one of the classic growth years for the [oil] internationals.”⁶ Oil companies, with already inflated earnings, note that “product prices [have] generally recovered considerably” this year, and are gratifyingly “firm.” Business Week, seeing “sharp” increases in refinery profits, quotes the opinion of a Phillips Petroleum executive, “There’s such upward pressure on prices right now that there’s a good opportunity coming in refining.” The price of crude oil is also expected to increase, notably faster than the general rate of inflation. A prominent oil tycoon, in an intimate moment when his company’s share price potential was in dispute, confided the industry’s hopes to the Wall Street Journal: “We think we can continue to find oil and gas for the foreseeable future. We see tremendous increases in crude prices over the next five years and this should contribute to rising income.”

Increases in the price of fuel are now accepted as inevitable, and even desirable. A Sierra Club representative, quoted in Business Week, recently told US senators that “we invite the leaders of the resource extraction industries to join with us in supporting the free enterprise system…to overcome the ‘energy crisis’ by recognizing the proper and essential role of price in allocating resources and balancing supply demand.” That such recommendations should seem either rational or equitable must be counted as a triumph for the energy industries’ scheme to receive new “incentives.” Corporate energy advertising (as in a eulogy by Mobil of the oil companies’ “good track record” in predicting likely disruptions of supply—“Oil companies knew the shortage was coming. We knew how it could be averted”) improved self-fulfilling prophecy to the point where corporations predicted what their own behavior would be if they did not receive adequate incentives to act in a specific way; and this confused but commercially effective prediction was, of course, not a prophecy but a threat.

III

The most conspicuous energy problem for the medium term of ten to twenty years—the problem which provides the energy crisis with much of its geopolitical allure—has to do with the supply of oil. As the American Petroleum Institute puts it, “A nation that runs on oil can’t afford to run short,” and as other energy advertisements continue, “Every man, woman and child in the USA” runs on a little over three gallons of oil every day. Traditional sources of cheap and convenient oil now present increasing problems, and the fields of Texas and Oklahoma, California, Louisiana, and Venezuela can no longer supply US demand. These changes seem to threaten financial and military vulnerability—Senator Hubert Humphrey pronounces that “the sheiks of Arabia [may] control the dollar,” government officials see “serfdom” for the US, the New York Times fears, editorially, the “Gnomes of Araby” and their “stockpile of rootless dollars.”

The military situation appears even more vividly menacing. More than a third of the world merchant fleet carries petroleum, and the need to protect oil tankers supports world production of naval destroyers: Admiral Elmo Zumwalt of the United States Navy finds an exciting challenge in preserving the “flow” of world oil, since, “to the citizen of a less technologically oriented society there is nothing quite like a shipshape destroyer making a call.”

In the rhetoric of the energy crisis, such vistas will develop imperceptibly from present disruptions of supply. Yet the constraints which influence the world petroleum market are different from those shaping US oil refining and distribution—although both “crises,” like all problems of energy supply and demand, have to do with prices, and costs, and business interests. The immediate situation of US oil supplies is hardly terrifying: in 1972 the US, which is still the world’s leading oil producer, supplied more than 70 percent of its own oil, while of the oil it imported, more than 70 percent came from Canada and Latin America.

In 1973, according to predictions in a “fact sheet” that accompanied the President’s energy message, less than 14 percent of oil used in the US will be imported from the entire “Eastern Hemisphere,” including countries outside the Middle East. The fact sheet was more concerned about expected future imports, and about expected dependence, in the 1980s, on the Organization of Petroleum Exporting Countries, or OPEC, a “cartel” which controls three quarters of “the free world’s oil reserves”: OPEC, which was formed in 1960, now comprises Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, Indonesia, Abu Dhabi, Algeria, and Nigeria.

Future dependencies will be determined, as the fact sheet points out, by the continuation or interruption of present trends in oil consumption and production. But the shape of future supply and demand is already evident, in the sense that the momentum of world oil production has shifted from the US to underdeveloped countries of Africa, Asia, and the Middle East. A general pattern seems clear, despite the confusion which surrounds the science of oil predictions. Of all oil produced in the first hundred years of the large-scale world oil industry, from 1870 to 1970, 40 percent was produced in the US; of oil produced between 1970 and the end of largescale production (possibly around 2020), less than 10 percent is expected to be drilled for in the US. The US will meanwhile, at least for the immediate future, continue to consume 30 percent of all oil produced in the world. The US Geological Survey, noting that oil reserves are estimated on the basis of assumptions about prices, about economic and technical feasibility, proclaims that “oil must be sought first of all in our minds”; yet it concedes also that “it is extremely difficult to envision circumstances which would make the United States ever again economically self-sufficient in oil and gas.”⁷

The problems of oil importing are in no way peculiar to the US, and energy troubles are in fact notably more menacing in almost all foreign countries. Officials of the European Common Market have said (with what the Wall Street Journal describes as “a characteristic European style of rhetoric”) that “he who is in possession of energy products is in possession of power. And this literally as well as figuratively…”; that “quite literally” the lights might soon go out all over Europe. Japan, which supplies 75 percent of its energy needs with oil, imports about 99.7 percent of the oil it uses, each day producing 15,000 barrels of oil and consuming 5,000,000. The US uses oil for only 46 percent of its energy needs, and its oil-based pattern of economic growth, which US corporations have exported around the world, was made possible historically by munificent American oil fields from Pennsylvania to California.

For other countries the entire development of an oil-dependent society has required access to cheap and convenient foreign supplies (as in Britain, which with lavish coal resources depends on oil for almost half of its energy, compared to less than a quarter in 1960, or South Korea, also supplied with indigenous coal, which uses oil for nearly half of its energy needs, compared to less than 10 percent in the early 1960s). More generally, oil consumption required a world trade in natural fuel resources comparable to that obtaining for the last eighty years in metals, minerals, and agricultural production, where poor countries supply richer countries with raw materials, at a price which reflects the subordinate political status of the producing nations.

Buying resources from the rest of the world has been less important in the richly endowed US than in other industrialized countries. Yet US preoccupation with such commerce and its economic costs is now increasing—because of energy needs, because of continuing US demand for strategic but imported minerals, because the commodities to be traded now include such “goods” as clean air and water. US companies build “dirty” refineries in the Caribbean, and Southern California utilities import “clean” low-sulphur oil from Indonesia, while Japan uses coal stripped in US mines, and plans refineries, steel plants, and other polluting factories for coastal areas of South Korea and Taiwan. World crude oil trade is part of this global commerce, and like other public or private commercial endeavors, it is influenced by economic decisions. For the US, as for Europe or Japan, petroleum importing is a matter not only of military vulnerability, but also of costs and prices, of the shape of the domestic economy.

Rich countries face three major threats in importing oil. First, their supplies could be cut off or cut back; second, they could come under diplomatic attack when, for instance, Arab OPEC nations attempt to weaken US and European alliances with Israel; third, their economic and financial institutions could be disrupted as exporting nations acquire huge sums of money. The third threat is seen, at least by world business, as the most alarming; yet each menace is affected by the price of oil, and by the perceived economic and social costs of supplying fuels from alternative sources.

In the case of the first two “political” threats, a strategic objective of oil consuming countries (acting jointly or in mutual hostility) is to exploit differences between more or less amenable oil exporting countries—and the capacity to exploit such divisions may depend on economic and price discrimination, on the willingness to forego cheap oil. (Political intervention to support or set up favorable regimes is also of course to be expected.) The entire oil policy debate has to do with the fact that OPEC, and specifically Middle East oil, was sold in the past at bargain prices. Middle East oil, from Iran, Saudi Arabia, and other countries around the Persian Gulf, has been and remains extremely cheap to develop and produce. It cost, recently, 10 cents a barrel to produce, compared to 82 cents a barrel for Indonesian oil, and $1.31 a barrel for US oil.⁸ (A barrel contains forty-two gallons, so the production cost for a gallon of Middle East oil is one fifth of a cent.)

Middle East oil was also, in the 1950s and part of the 1960s, available at low royalties, barely higher than the royalties and taxes on US crude oil, and much lower than the taxes imposed in the US and Europe on oil consumption. When OPEC was formed, in 1960, producing countries shared oil revenues equally with oil companies. In 1948, according to OPEC statistics, this ratio had favored oil companies by 82 to 18; in 1970, the ratio favored producing countries by 70 to 30. OPEC taxes now account for approximately $1.50 of the $2.00 that a barrel of oil costs in the Middle East, an increase of almost 50 cents a barrel in the last three years of price negotiations.

This past cheapness is a major reason for the pre-eminence of Middle East oil in world reserves—accounting for 65 percent of reserves in noncommunist countries, and 55 percent of all world reserves.⁹ Middle East oil was convenient—economically, geologically, and to British and American oil companies, politically. Yet the observation of the US Geological Survey, that oil must be sought in the mind, applies to world oil exploration as well as to the US, at least for the next twenty years of oil production, during which physical limits to world production will not yet be of decisive importance.

Oil is being found, and reserves proved, in parts of the world less lavish geologically than Saudi Arabia. Exploration has followed political perceptions. Consuming countries and their oil corporations commit huge amounts of money to oil exploration in producing regions which, although not cheap and convenient, seem politically “stable.” The most enthusiastic of all recent exploration, outside such “industrialized” areas as the North Sea and northern Canada, has been in the potentially amenable and non-Arab OPEC regions of Nigeria, and Indonesia, whose recent bonanza is seen on Wall Street as “extraordinarily fine.” This desire for stability also explains much about the US and Japanese energy expansion into the Soviet Union. As one “American banker” in Hongkong told the Far East Economic Review: “To be frank, the Russians have a triple-A credit rating—which is something very few people have in this area, and you don’t have problems like corruption in Siberia.”

Oil importing countries make themselves more vulnerable to logistical and diplomatic attack to the extent that they are reluctant to accumulate expensive stockpiles of oil and to undertake the economically, socially, and politically much more costly task of developing contingency energy supplies. An OPEC shutdown could only be effective between the short term of perhaps three months, when stockpiles could meet a (reduced) demand for oil, and the time, six to twelve or more months later, when technological ingenuity or military intervention would replace fuel supplies. It could be effective only between the near future, when dependence on “Eastern” oil is still limited at least in the US, and the more remote period when energy importing countries develop permanent substitute fuels. A slowdown or cutback in OPEC supplies is more likely and more menacing than a total shutdown. OPEC countries and particularly the richer ones are justifiably concerned to limit depletion of the oil that is their major national resource. Yet even in the case of a slowdown, the vulnerability of consuming countries would largely depend on economic decisions about the cost of alternative energy resources.

The second, diplomatic, menace is mitigated, evidently, by similar preparations and price adjustments. Japan and the US display sharply different diplomatic attitudes in the Middle East. Until the last few months, they have depended on this region, respectively, for more than 80 percent and less than 5 percent of all their crude oil. Diplomatic threats, including the threat to the US posed by hostility to Israel, cannot reasonably be isolated from economic issues; these include the cost of investment in the fuel-producing regions, the involvement of US or European corporations in OPEC countries, the stability of domestic oil-intensive industries, even the balance of payments constraint, which encourages the US, for example, to export the products of its competitive arms industry to ever more countries in Africa and the Middle East.

The third menace to oil supply, a threatened disruption of financial and economic institutions, is described by Wall Street Journal editorial writers, speaking for the financial world, as the “most serious aspect of the energy ‘crisis.’ ” This menace derives from the fact that advanced oil importing countries pay large sums for the oil they buy—the US alone will probably spend some $15 billion a year in the 1980s. This expenditure would have serious consequences for the US balance of payments, and for the whole complex of economic policy trade-offs. Joseph Alsop has raised the prospect, in this context, of US dollars coming “to resemble confederate greenbacks.” The economic measures needed to prevent payments deficits might involve an expansion of the arms industry and its exports, or a further increase in America’s other major export trade, in agricultural products, which has been repudiated by Nixon’s latest economic policy in the interests of price stability and domestic consumer choice.

More generally, if the money received by oil exporting countries is kept in short-term, liquid investments it will seem to threaten the stability of international financial arrangements, to the extent that states owning such investments will be able and willing to move funds rapidly from one currency or country to another. If the money is invested in long-term projects, advanced countries might lose control of certain domestic industries. Oil exporters may soon take over some refining and marketing operations that the oil corporations now control, or demand that petro-chemical plants and, as Saudi Arabia has suggested, aluminum factories be built in producing countries. Business interests anticipate such investments with mixed fear and relief, as bringing, on the one hand, the terrors of a foreign take-over of Texaco or comparable corporate land-marks, yet on the other, a salutary involvement of oil producing countries in preserving international business stability, as Kuwaiti-owned gas stations become vulnerable, perhaps, to US government expropriation.¹⁰

Even the most political of oil problems have to do with the actual price of barrels of oil. The constant menace is that oil exporting countries will, in the words of Professor Adelman of MIT, the American oil “optimist” and scourge of OPEC, “overcharge” consuming countries, will like “a hungry tiger” demand ever more “red meat” by imposing higher taxes. This fear is further complicated by the activities of international oil companies. Business Week, quoting the opinion of Gulf Oil’s “director of economics” that “We have an interest in getting the crude out of the Middle East as fast as we can while there’s still a profit in it,” notes that the new Nixon energy policy in this situation gives “the best of both worlds to the big international oil companies.” Meanwhile oil corporations, simultaneously producers and marketers of petroleum, can be expected to use the excuse of a crude oil crisis, and of notoriously tigerlike OPEC demands, to increase domestic oil product prices by as much as and probably more than the extent of cost increases—a technique used most effectively in Europe by US and foreign-owned companies during the last three years of publicized OPEC negotiations.

It is certain that crude oil prices will continue to rise: OPEC producers hope and intend that their tax component of crude prices will increase until the total cost of “cheap” OPEC oil is as high as the cost of alternative fuels available to oil importing companies. (New domestic fuels, such as oil made from shale rock, or by coal liquefaction, will become “competitive,” according to the National Petroleum Council, when the price of crude oil rises to more than $5 a barrel, from its present price of between $3 and $4 a barrel.) Yet this process of substitution, which Nixon’s energy policies have attempted, halfheartedly, to encourage, will involve domestic conflicts that, for Europe and Japan as for the US, go beyond even the troubles of inflation and economic policy.

Increases in the price of natural or synthetic oil will damage permanently some of the largest US industries, not only truck and auto transportation, but the manufacture of synthetic fibers, and the production of electricity in oil-powered plants. Meanwhile producing alternative fuels would also expose the true national costs of energy use, as Long Island or Osaka is compelled to process its own fuel; or as in a denial of fairness, Colorado’s shale mountains are devastated for the convenience of California, Welsh coal towns for southern England or for western France. If these social costs, or the expense of avoiding them, are accounted for, alternative fuels become yet more expensive than the Petroleum Council expects—and yet more inconvenient relative to foreign oil.

To see the economic basis of oil supply problems is not to deny the catastrophic potential of the conflict over oil. A momentously geopolitical language, predictions of material vulnerability, diplomatic and naval activity around such perennially disputed locations as the Straits of Malacca and the western Indian Ocean, all recall strategic fears described in the late 1930s. Japanese planners are justifiably concerned, for example, about tanker routes, about the Indonesian oil industry, which flourished in the late 1930s, about comparisons between the US oil embargo in 1941 and recent US-Soviet energy deals, about the control of world mineral commerce by foreign, and particularly US, companies.

Now, as in the years before the Second World War, the worst dangers derive from conflict among advanced or oil importing countries—and sometimes from the perception more than from the reality of vulnerability. Former Commerce Secretary Peterson has warned of a “wild and cannibalistic scramble” among industrialized countries, for energy and external earnings. In such a situation, perceptions of a global energy crisis, reaching from today in US service stations to 1990 in Madagascar, seem particularly ominous, a self-fulfilling vision of technological and natural inevitability.

The rivalry of advanced countries, whether expressed in direct military confrontation or through special relationships to oil exporting countries, is a major but not of course the only danger of petroleum conflict. Senator Fulbright is almost alone in the US in warning publicly that “our present policy makers and policy influencers may come to the conclusion that military action is required to secure the oil resources of the Middle East, to secure our exposed jugular.” Yet any military aggression by oil-producing countries would be made possible by US and European arms exports. The US is now planning to supply arms and advisers worth an expected $4.1 billion to Saudi Arabia, Kuwait, and Iran, while such a minor merchant as Britain enjoys a $625 million contract to improve the air force of Saudi Arabia.

One US commentator has described these endeavors as “a second essential pipeline to match the oil pipeline to the US—a pipeline of continuing military equipment, spare parts, and training” (Michael Berlin, in The New York Post, June 1, 1973). The prospect of such a military “presence,” given the evidence of earlier presences, must inspire only the deepest fear and pessimism. For US policy makers this presence supports both open and covert economic needs. It protects diplomatically supplies of oil which are still cheap compared to any domestic substitutes; but it also encourages the export trade in war materials which will become so valuable to the troubled US balance of payments.

Even where geopolitical conditions most recall the menace of 1940, oil commerce still has to do with economic relations. The Second World War itself, while hardly a model for peaceful or long-term industrial adjustments, can provide examples of economic ingenuity in the use of fuels and minerals. Shortages of raw materials damaged the military effort of Nazi Germany only after several years of war. German engineers preserved resources by scrap recycling, conserving alloys, and devising substitutions. They used a Farben method for making oil out of coal, and invented the Lurgi process for coal gasification which now appears as an essential technique in America’s struggle against the energy “crisis” of the 1970s and 1980s.

Whatever direction energy policy takes in the long run, it will face the question of how technological substitutions can be induced, in a situation less urgent than that which the Lurgi company confronted. But policy makers also need to evaluate the economic benefits involved in energy use. They will be forced to discriminate, either consciously or by default, between different industries which consume or waste energy. They will decide how much of the inconvenience of energy conservation should be borne by business and how much by consumers, how much by the rich and how much by the poor. Such questions have been buried in the capitulations and market ideology of recent domestic policy. Yet even if they are not raised they will be answered, in some more or less purposeful fashion.

These difficulties, and the general problem of “equating” distinct costs and benefits, can be seen in the development of alternative fuels, in energy conservation, and in the evaluation of energy use, all of which will be considered in a second article. Some small comfort may be found, perhaps, in long-range industrial trends away from intensive energy use and toward the increased sale of computer processes, or services, or tele-communications. Such trends will at least cast doubt on the view, implicit in present concern to secure energy supplies, by ever more disruptive means, that there is some equivalence between increased energy use and industrial growth, or even between energy use and progress.

(This is the first of two articles.)