Hoover Daily Report

Making the Most of the U.S. Energy Boom

via Wall Street Journal
Monday, November 4, 2013
Image credit: 
everything possible, Shutterstock

In November 1973, members of the Organization of the Petroleum Exporting Countries implemented an oil embargo against the United States that imperiled the nation's prosperity and international influence. Forty years later, de-linking America's economy and security from high and volatile global oil prices is even more essential to protecting our domestic and international interests. And the U.S. now has the means to achieve true energy security.


The 1973 embargo, which effectively began Nov. 5 with the announcement of a 25% cut in production, occurred at defining moments of our lives. One of us was secretary of the Treasury, and the rise of OPEC and its "oil weapon" profoundly shifted the geopolitical paradigm and drove the U.S. into a severe recession. The other had just turned an idea to improve the airfreight industry into a new company—today's FedEx Corporation—that was nearly destroyed in its infancy by the spike in fuel prices.


Although America endured and ultimately recovered from the events of 1973, the embargo marked only the beginning of OPEC's manipulation of the global oil market. By tailoring oil production and investment strategies to keep markets tight and fearful, OPEC members have actively worked in the past decade to engineer expensive oil. As a consequence, prices have reached levels that would have seemed impossible even at the height of the oil crises of the 1970s. OPEC annual export revenue has exceeded $1 trillion in each of the last two years, which ranks among the greatest wealth transfers in human history.


While OPEC members are surely hoping to prolong this dynamic, America's energy revolution—which is taking place on both the supply and demand sides—has the potential to disrupt the status quo to the nation's considerable economic and foreign-policy advantage.


On the supply side, the domestic energy boom has reestablished the U.S. as a production powerhouse. In fact, the increase in U.S. crude oil production during the past five years equates to adding another Kuwait to the global oil system. According to the International Energy Agency, the U.S. will surpass Russia in total liquid fuels production (including biofuels) and become the second largest global producer by the end of the year. The U.S. even could surpass Saudi Arabia to become the leading global producer within the next decade.


At the same time, the rise of oil-displacement technologies is creating an unprecedented opportunity to reduce U.S. oil consumption in the transportation sector. Electricity and natural gas are both cheap and domestically abundant. There are now nearly 20 plug-in electric passenger vehicle models—from nearly every major auto maker—available to U.S. consumers. Hundreds of commercial and municipal fleet operators around the country have integrated natural-gas trucks and buses into their fleets, and dozens of models are available in nearly all fleet applications, from transit to refuse hauling. The nation's fleet of internal-combustion-engine vehicles has made great strides in improved fuel efficiency, and further improvements will be achieved over the next decade.


These changes create the possibility of dramatic improvements to the security of America's oil supply with significant benefits for economic growth and national security. Yet our ability to capture such advantages is not a foregone conclusion.


Fully maximizing the opportunities presented by the American energy revolution will require a concerted national effort that prioritizes investment in the development of advanced energy technologies—such as low-cost advanced batteries for electric vehicles and more-efficient home refueling units for natural gas vehicles—along with continued growth in domestic energy production. The volatility of oil prices, the presence of anticompetitive forces like OPEC, and the political and fiscal risks to significant and sustained energy-related research and development create an acute need for strong leadership from Washington if we are to capitalize on this moment.


Yet important philosophical differences now divide the major political parties on energy and environmental policies. Pretending such differences do not exist, or dismissing them as petty politics, defies reality and prevents progress on the pressing challenge of oil security.


To move forward, we suggest establishing oil displacement as a national goal. Such a target would advance the goals of robust economic growth, improved environmental protection and effective foreign policy. Best of all, a national consensus on reducing oil dependence should be possible without the resolution of the energy and environmental issues that will continue to be debated for some time.


OPEC's intervention in the global oil market creates price distortions that have cost the American economy trillions of dollars and stymied the very innovation required to develop competing technologies. OPEC operates as a cartel of governments, and the U.S. should not accept this condition as permanent. An American government policy response to counter OPEC's market manipulation would be in support of the free market. Preserving the current system only perpetuates a tax on American consumers imposed by foreign powers.


Meanwhile, replacing oil in the transportation sector by unleashing competition now shackled by OPEC's price manipulation would reduce pollution significantly. Petroleum fuels also account for a larger share of America's energy-related carbon-dioxide emission than any other fuel. For these reasons, the wide-scale adoption of alternative-fuel vehicles powered by natural gas, electricity and other fuels—or a flexible fuel combination—would represent a major environmental achievement.


Finally, as the U.S. confronts an increasingly complex foreign-policy landscape, meaningfully reducing oil dependence would allow the nation to set priorities with far less regard for the consequences of global supply interruptions. For realists and idealists alike, such independence holds tremendous value as the country contends with a fragmenting Middle East, an unstable North Africa, and a contentious Russia, among other challenges.


Since 1973, OPEC's "oil weapon" has dangled ominously over the U.S. While America remains dangerously exposed to changes in the price and supply of oil, our nation has never been better positioned to diminish the clout of cartel participants in the global oil market. We urge the nation's leaders to embrace both the supply revolution now well under way and the emerging demand revolution in oil-displacement technology that, together, promise a more secure and prosperous future.


Mr. Shultz served as Secretary of State, Treasury and Labor, and as director of the Office of Management and Budget, between 1969-89. Mr. Smith is the founder, chairman, president and CEO of FedEx Corporation.