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Why We're At Opec's Mercy


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Why We're at OPEC's Mercy

The U.S., Europe, and Asia are panicking with oil at $37 a barrel. Maybe they should have panicked when oil hit a low of $10 a barrel. It is clear that there were sins of omission and commission made during the time of cheap energy that are now haunting the world economy. It's time to start rectifying them.

At the top of the list is energy efficiency. It's no accident that the loudest protests against higher oil prices are coming from drivers. Over the past 20 years, industry has made dramatic improvements in energy efficiency. The U.S., Japanese, and European economies use significantly less energy today than they did in the 1970s. But this is not true for transportation. Improvements in car and truck mileage basically stalled out a decade ago, especially in the U.S., where the love affair with sport-utility vehicles is now turning sour. SUVs, most of which are built on truck platforms, get much worse mileage than cars. This must end. SUVs must be identified for what they are--passenger carriers--and made much more energy-efficient. They should also be brought under tighter government mileage standards as quickly as possible.

It may be time to revisit the massive consolidation in the oil industry as well. Trustbusters turned a blind eye to mergers because it appeared rational in a world of $10-a-barrel oil. But the consolidation appears to be making the oil market more volatile, vulnerable to OPEC, and prone to upward spikes. Oil companies are moving to just-in-time inventory management to save capital while cutting back on refinery capacity to cut costs. That's good for shareholders. But it removes the buffer to swings in oil prices, sending each OPEC jerk of the chain quickly through the economy.

Even more important, oil companies are no longer responding to higher prices by boosting production. They are pocketing the profits instead of investing them. Energy is one of the most subsidized and protected industries in the U.S., showered with special tax breaks and favors from Washington that are not generally enjoyed by other sectors of the economy. It is not unreasonable to expect Big Oil to increase production in the face of $37-a-barrel oil and to maintain sufficient inventory to smooth out the ups and downs in the market. And it is not unreasonable to encourage more competition in the energy business in the hopes of achieving these goals.


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