Oil Spill May Be Catalyst for a Cohesive Energy Policy--at Last

Ravaged wildlife and fouled shorelines aside, the Alaska oil spill on March 24 caused only a brief interruption in the global flow of oil. But its impact on the energy debate has been likened to that of the faulty O-ring aboard the space shuttle Challenger.

Like the review of the nation’s attitudes toward space that followed the Challenger disaster, the oil spill is hastening change on the energy landscape. It also unmasked some fresh conflicts in the nation’s spasmodic search for an energy policy.

It has killed, for now, any prospect that the oil industry will be allowed to drill for oil in the Alaska National Wildlife Refuge, drilling proponents concede. If Congress should eventually grant permission, it will likely extract a high legislative price.

The spill is also credited with influencing Bush Administration decisions to tighten auto fuel economy standards and postpone an Alaskan oil lease sale. It has also unleashed a torrent of anti-oil measures at the state and federal level, ranging from the repeal of industry tax breaks to new obstacles facing lease sales in Alaska’s Bristol Bay and offshore from California, Oregon, Washington, North Carolina, Florida and elsewhere.

New Pressures Created

At the same time, the unprecedented surge in gasoline prices that followed the massive spill focused new attention on an increasingly tenuous balance--especially on the West Coast--between the nation’s voracious appetite for gasoline and its capacity to produce it.

Seized upon by industry advocates as evidence that we need to find more oil and build more refineries, this tightening market is cited by critics as yet another argument to toughen energy conservation measures and come up with other, cleaner ways to power automobiles.

The tight supply situation has also created new pressure to relax the terms under which the President can tap the U.S. Strategic Petroleum Reserve. It has also fostered congressional support for setting up regional oil reserves in California and elsewhere.

Some politicians think that all these worrisome signals might be enough to finally ram through a policy aimed at the long-term weaning of the nation from oil and that President Bush is more receptive to such steps than his predecessor was.

In contrast to Ronald Reagan’s first energy secretary--a dentist whose initial pledge was to abolish the Energy Department as unnecessary--Bush appointee James D. Watkins bemoans the dearth of ready alternatives to oil and natural gas as an “umbilical link to unstable oil producers in the world that threatens our energy security.”

Watkins, a nuclear expert, has ordered an ambitious review of the nation’s hodgepodge of energy programs and promised to come up with an “integrated national energy strategy.” This sounds familiar, but those who feel that the nation’s long-term energy needs have been ignored in recent years say Watkins is saying the right things.

Subsidies for Alternatives Cut

Yet it remains far from clear that a sentiment to conserve more energy and encourage the development of clean and abundant alternatives to oil can ultimately overcome the continued free-market economic advantages of petroleum.

The oil price decline that began in 1981 and became a nose dive in 1986 was accompanied by big government cutbacks in subsidies of solar and other alternative forms of energy which often failed in the free market and offered only limited potential.

The surging demand for the newly cheap oil, combined with falling U.S. production, has sharply driven up oil imports for three straight years--most of which has come from members of the Organization of Petroleum Exporting Countries. A spate of recent accidents in the North Sea and elsewhere in recent months has suddenly tightened markets, giving OPEC a modicum of leverage for the first time in several years.

Already, some Arab oil ministers--who just a few months ago were scrambling to block another price collapse--find themselves urging a strategic boost in production to prevent prices from climbing so high as to foster a repeat of the 1979-80 backlash that slashed oil use around the world. Crude oil prices remain 40% below their 1981 peak.

History suggests that such relatively low prices create too much inertia for any new governmental action on energy. But U.S. Rep. George Miller (D-Martinez) says the Alaska spill--on top of last year’s drought-driven warnings of global warming due to fossil fuels, new militancy over California smog and other events--has radically changed the picture

“A year ago, I said that with $1-a-gallon gasoline we were never going to redirect energy policy,” says Miller, chairman of a House interior subcommittee that is playing a lead role in responses to the tanker spill.

“I may have been wrong. We may now be in a situation where people are willing for the government to get ahead of the market. . . . Too many things are dovetailing here. There’s essentially no good news on the energy front. I just believe the politics are changing.”

Wildlife Refuge a Key Issue

The wildlife refuge in northeast Alaska is considered the most promising place in the nation for finding big new deposits of oil to replace Alaska’s Prudhoe Bay field, whose production has begun to decline. The Bush Administration continues to urge development there.

But since the spill, sponsors of exploration and development in the wildlife refuge--which could ultimately prolong Alaska’s tanker traffic by 30 years--have put their legislative efforts on the shelf for this year and possibly next. And opponents are liable to hold it hostage.

“We have a strong sense that at one point or another, the (wildlife refuge) issue is going to return, but the price has been enhanced by this incident,” says an aide to a key lawmaker. “In return for it, we’re going to get some kind of serious conservation mandate, something that hits hard at the oil industry (and the) auto industry. In the long run, the spill has got to be a tremendous boost to these efforts, because the alternative to energy conservation is more tankers from abroad.”

In addition to a myriad of post-spill legislative initiatives that triggered five congressional hearings last week alone, the state of Alaska--economically married to oil since the 1970s--has suddenly moved against the industry.

The state legislature went on record in opposition to oil drilling in Bristol Bay, a largely symbolic act that industry critics had repeatedly been unable to push through until now. More concretely, the state this month enacted a law revoking a form of tax relief that the oil industry had enjoyed in Alaska for nearly a decade.

The fiscal action in Alaska heightened industry fears that this revived anti-oil sentiment will make itself felt on other tax fronts at the national level. President Bush has supported greater tax incentives to explore for oil and slow the nation’s rapid decline in oil production.

“Alaska’s new tax will not devastate the affected firms’ earnings, yet the tax shift is an ominous development,” says Bernard J. Picchi, oil analyst at Salomon Bros. in New York. Citing fresh polls showing Americans’ distrust of the oil industry, Picchi says: “We can only hope that this attitude does not lead to a national version of Alaska’s fiscal revenge against the big oil companies.”

Says Daniel A. Dreyfus, former longtime staff chief of the Senate Energy Committee and now a vice president at the Gas Research Institute: “It will be a curse on the oil business and everything they try to do. It could go well beyond the wildlife refuge and go to such things as the oil depletion allowance.”

Meanwhile, the instant runup in West Coast gasoline prices after the spill--the quickest rise ever recorded by market analysts at the Lundberg Letter in Los Angeles--showed graphically the conflict between energy and the environment.

Post-mortems after the spill found that, for several reasons, gasoline prices were primed to go up at the time the Exxon Valdez ran aground. Fear that the spill would cause shortages gave oil refiners an opening to reap record profits at the expense of motorists, despite the fact that no actual shortage of oil resulted from the spill.

One reason for the price runup is a steady tightening of U.S. supplies of gasoline, a phenomenon that had been obscured by the fact that the world is awash in crude oil. These tight supplies have resulted, in part, from the crude glut itself. As the glut hit in late 1985 and prices tumbled, U.S. motorists--encouraged by the relaxation of fuel economy standards and of speed limits--responded by using sharply higher levels of gasoline.

This followed the shutdown of dozens of unneeded refineries across the country in the early 1980s, which cut the nation’s refining capacity by some 15%. Then, as demand began to rise, clean-air regulations and industry uncertainty over future oil prices served to block any investments in new refinery capacity. For many months, the nation’s refineries have been operating at near capacity.

Severe Problem in California

“There is a fundamental underlying upward pressure on prices because we are near the limit of our gasoline-making capacity in this country,” says a veteran Energy Department analyst.

Industry officials say the problem is most severe in California. Gasoline demand here is rising fastest, resistance to refinery expansion is greatest, and the cost of making gasoline is highest because of the heavy types of crude oil used here and the environmental restrictions on refineries.

A recent report by the government-funded East-West Center in Honolulu warned that with the scheduled decline in production of oil from Alaska--source of about 40% of the crude oil entering California refineries--the state’s motorists face tight supplies for several years. As a result, they will continue to pay more at the pumps than the rest of the country and will increasingly rely on imported gasoline.

That would further heighten the West Coast’s vulnerability to the mere threat of minor interruptions of supply, as occurred in the two weeks after the Alaska spill when tanker traffic was restricted and some 13 million barrels of crude oil were not shipped.

(The California gasoline outlook is particularly cloudy in light of the dramatic new clean-air plan enacted earlier this year by the South Coast Air Quality Management District. It would impose sweeping new restrictions on Southern California’s oil refineries in the 1990s--presumably cutting further the local gasoline supply--at the same time it mandated widespread use of other fuels for cars.)

The price impact of the Alaska spill has triggered legislation in Congress to lower the threshold at which the President could order an emergency drawdown of the U.S. Strategic Petroleum Reserve, the nation’s 560-million-barrel stockpile of crude stored in salt caverns in Texas and Louisiana.

Such a step could head off the “psychological shock effect” that was registered in California’s wholesale gasoline markets within hours of the tanker spill, says John Lichtblau, head of the Petroleum Industry Research Foundation.

Price spikes of up to 35 cents a gallon were reported at some Los Angeles area refineries within a week of the oil spill. Spot prices jumped 20 cents in a four-hour period. The national average price increase was 10 cents a gallon at the pump in the two weeks after the spill, the fastest such rise ever recorded.

Lichtblau also urged the establishment of regional reserves of gasoline and other finished products, an idea that has been explored in past years by state officials in California, Hawaii and New England but opposed by the Energy Department.

“If there had been two or three million barrels of (reserve) gasoline on the West Coast on March 24, ready for instant release, West Coast gasoline prices would hardly have risen by headline-making magnitudes as they did,” says Lichtblau. He says the Alaskan incident “could easily have developed into a . . . sub-crisis” had it continued for two more weeks.