Albert Einstein is purported to have said, “In the midst of every crisis, lies great opportunity.”
While Einstein’s brilliant intellect is uncontested, three major oil supply interruptions over the past five decades have failed to produce sustainable U.S. energy policies. Instead, during high price episodes, we hear a lot of rhetoric and even some policymaking. But as prices retreat, so does the political will.
This is particularly problematic for energy policy because energy infrastructure is outdated, and investors need long-term confidence in market pricing to support large-scale capital deployment, hence the need for enduring policies that will be preserved notwithstanding election cycles.
For decades, energy analysts have recognized the vulnerability of global oil markets to a closure of the straits. Beginning with the Nixon administration in 1973, there has been a raft of federal initiatives designed to mitigate the impact of constraints on global oil supply upon the U.S. economy and national security. While these have failed, some three decades later, the shale revolution enabled by the free market, U.S. entrepreneurship, and technology prowess has finally made the United States effectively independent of oil imports.
However, despite all the technological advances and billions of dollars in investment, U.S. crude and associated gasoline and diesel fuel prices remain inextricably linked to the world oil price.
STRAIT OF HORMUZ TRAFFIC HAS GROUND TO A HALT. HERE’S WHY IT’S VITAL TO GET IT BACK UP AND RUNNING
U.S. strides toward energy security have been made notwithstanding the efforts of environmental activists, who have long dismissed energy security as a priority compared with issues such as climate change. Now, we see activists embracing energy security to secure more clean energy subsidies while conveniently ignoring their own responsibility for consumer exposure to high energy prices. This includes their continued efforts to thwart the construction of new energy infrastructure, arguing that clean energy would solve all our energy issues, as well as climate change. In economic terms, they now argue that the negative externalities associated with geopolitical risk should be “monetized” and used to pay for more subsidies.
Today, we face the reality that the straits have closed under the threat of Iranian attack, significantly impacting global access to Persian Gulf crude, oil products, natural gas, nitrogen, and other commodities. Not surprisingly, markets have responded with significant upside pressure on prices and increased price volatility. In preparation for the eventual end of the kinetic part of the conflict, it is important to undertake a thoughtful analysis of potential alternatives for U.S. energy policy.
I suggest the following:
First, let’s mitigate the polarization around energy policy toward the goal of building a centrist consensus by fashioning a policy that reflects a near- to mid-term focus on national and energy security while also recognizing the longer-term need for energy transition.
Second, fostering national and economic security requires enhancing the resiliency of energy infrastructure at home and abroad.
At home, we need to take steps to harden electric transmission and distribution systems against episodic severe weather events and terrorism as we plan for the accelerated commercialization of advanced technologies such as small modular reactors.
Abroad, it is critical that we ensure state or non-state actors, such as Iran and its proxies, no longer have the capability to threaten the straits. Irrespective of whether one agrees with the decision to commence the present military campaign, efforts must continue until this goal is achieved. Further, after the conflict subsides and assuming that the regime continues in some form, significant steps must be taken to harden the Persian Gulf’s existing oil and gas infrastructure, including constructing new pipelines to deliver crude and oil products to the Red Sea, hardening the resiliency of existing energy infrastructure, and enhancing regional defenses against missile, drone, and other attacks.
Third, we need to act decisively to address energy affordability at home, which includes mitigating the economic impact of high oil prices on Americans.
A thoughtful idea for how to do this comes from Jason Bordoff and Spencer Dale, who have proposed offsetting higher prices at the pump by reducing fuel taxes and linking the marginal tax rate on U.S. oil producers to the crude price. Specifically, producers pay more of a tax when prices are high and less when prices are low.
In addition, more needs to be done to reduce consumer electric costs, particularly by reversing state policies that have prohibited the construction of new natural gas pipelines and other natural gas infrastructure, including expediting permits and other governmental approvals. Such action should also reverse state efforts to prohibit new natural gas hook-ups and impose draconian clean energy mandates on energy consumers.
IRAN’S SHAKEDOWN IN THE STRAIT
I can vividly recall the gas lines triggered by the oil supply interruptions of the 1970s and how energized politicians and the public were to address the issue. But over time, the political will to implement structural changes in energy policy subsided as prices moderated. As a result, the underlying vulnerabilities were never addressed.
Today, both the Trump administration and key members of Congress appear to recognize the importance of energy security. Hopefully, they will heed Einstein’s advice.
Michael Schwartz is a former energy-sector executive and the Gerhard R. Andlinger Visiting Professor in Energy and the Environment at Princeton University.
