DRAIN ARABIA* FIRST
By Robert Cohen

Unless we drastically revise U.S. energy policy, we are headed for disaster. We are now depleting U.S. oil reserves -- of which we have about a 10-year supply -- by about 2% per year; that is, each year we are extracting some 20% more domestic petroleum reserves than we discover. Furthermore, because of our limited remaining domestic oil resources, we cannot significantly increase our annually diminishing oil "production" (more precisely, "extraction"). Thus a continuation of the present "Drain America First" practice is making us increasingly reliant on, and is about to make us completely dependent upon, oil imports. We cannot allow that to happen, since it would subject us to tremendous vulnerability to price gouging by our foreign suppliers. In other words, it would put us at the mercy of those suppliers, who will then be at liberty to extract extortionate rents considerably in excess of their costs of extraction. But how can we change this trend?

The answer will require an aggressive U.S. energy policy that will buy us time to simultaneously implement a broad group of fundamental changes in our energy equation which will lead to a drastic reduction in our oil consumption. While we are implementing those changes, we would temporarily be importing more oil (about 15% more per day than we would otherwise be importing), but at a current world oil price that is relatively modest compared to the discounted present value of the price it will attain later. The policy changes would include:

                (a) broad-based research on, and development of, all potentially viable energy-supply technologies for                  both  U.S. and export markets; and
                (b) comprehensive programs for research on, and application of, systems for improving energy efficiency and automotive fuel economy. [These programs would have highly beneficial consequences on our export potential and on energy use in the developing world.]

        Substituting a Drain Arabia First (for the purposes of this writeup, "Arabia" includes all oil-exporting nations) oil policy for our present Drain America First oil policy, so as to stop depleting U.S. oil reserves; i.e., to reach the point of sustainable extraction, where annual reserve additions match or exceed annual reserve depletions. [Such a policy would impose severance fees on oil extraction, which revenue would be used to provide exploration incentives for discovering additional domestic oil reserves.]

Unbelievable as it may seem, although U.S. oil reserves are only about one-tenth of Saudi Arabian reserves, prior to Kuwait we were nevertheless extracting U.S. oil at a rate about one-third greater than the Saudi extraction rate! Thus the continuation of present U.S. oil policy -- which allows our oil reserves to decline by extracting oil faster than we are discovering it -- would exacerbate our dependence on OPEC and undermine (literally) our energy security. Instead, we need an oil policy aimed at our utilizing foreign oil reserves without depleting domestic oil reserves, while at the same time protecting us against supply vulnerability. The above policy thus provides two corrective approaches: a) to intensify our petroleum-exploration activities so as to augment -- or at least stabilize -- U.S. oil reserves; and b) to treat the new oil discovered as a large additional strategic petroleum reserve, to be drawn from judiciously only during periods when imported oil is relatively unavailable. But how can such a policy be implemented?

 Federal economic incentives would be used to encourage environmentally acceptable exploration for petroleum, paid for by severance fees levied on the extraction of U.S. oil. In other words, there would be incentives for discovering oil (and creating an infrastructure for its extraction) and -- during normal times - strong disincentives for its removal. This would have the opposite effect of imposing import tariffs or quotas. With such a U.S. oil policy, the discovery of petroleum would seldom lead to its extraction -- except temporarily -- and then only under legislatively specified circumstances. Such circumstances -- times of war, severe embargos, or extreme economic pressure -- would be carefully proscribed by law and would allow for the temporary relaxation of severance fees.

The implications of this recommended U.S. oil policy for the U.S. oil industry need to be carefully examined to ensure that the parochial interests of that industry can be satisfied in consonance with the national interest. A balance would need to be struck to ensure ample convergence of those interests so as to maintain or enhance U.S. capabilities in the exploration, extraction, refining, and distribution areas.

 People in the oil industry are prone to react to the proposed policy by questioning whether it is technically or economically feasible to "shut in" potentially useful wells once new oil reserves have been discovered. Convincing evidence of technical feasibility was indeed provided by the Saudis during the Kuwait crisis. Within a few weeks, they increased their oil-extraction rate by some 2 million barrels per day, using idle capacity, to help provide for the global oil shortfall. During that period, ironically, the Saudi and U.S. oil-extraction rates became comparable, at about 7.4 million barrels per day. Insofar as ensuring the economic feasibility of maintaining some extraction capability idle, an enlightened federal policy would need to be carefully worked out.

 The foregoing policy approaches would enable the United States to husband its remaining oil resources with greatly enhanced energy security while simultaneously buying time to help bring about favorable global trends toward reducing foreign and domestic oil consumption. Those trends would result both from the increasing price of energy and the increasing availability of a diversity of exportable energy-supply and energy-conservation technologies that become ever more attractive economically when competing against that rising price.

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* For the purposes of this writeup, "Arabia" includes all oil-exporting nations

 Robert Cohen was on the staff of the Energy Engineering Board, National Academy of Sciences, from 1985 to 1990.