03-18-2000

ENERGY: Richardson's Difficult Courtship

On March 27, when the ministers of the Organization of Petroleum Exporting
Countries meet in Vienna to decide how much oil they'll sell during the
next year, U.S. Energy Secretary Bill Richardson could emerge as a U.S.
hero-or a rejected suitor. For the past several months, Richardson has
been courting the oil-rich OPEC nations in hopes of convincing them to
significantly increase production and bring down soaring world oil
prices.


The measure of Richardson's success-and the impact that oil prices will
have on the U.S. economy-will depend on how much more oil the OPEC
countries are willing to pump and how quickly they can get it to market.
Energy Department officials say the world is currently using 2 million
more barrels of oil a day than are being produced. As a result, oil
reserves have been seriously depleted and prices have tripled, from $10
per barrel early last year to today's prices of $30 to $34 per
barrel.


From the White House's perspective, OPEC can't get the oil to market fast
enough. High oil prices have triggered significant economic and political
headaches for the Clinton Administration. In late January, the United
States-the world's largest consumer of petroleum products-felt the pain
from decreased oil supplies when home heating oil prices doubled in New
England.


Since then, gasoline prices have crept steadily higher, and the Energy
Department's Energy Information Administration is predicting a rise to
$1.75 per gallon this summer, just in time for the travel season and the
escalating 2000 presidential campaign. Prices are already higher in some
areas because of state and local taxes, environmental requirements, and
local refinery problems.


Even the $1.75 figure may be optimistic, according to many economists.
"DOE's economic models tend to underestimate the peak prices,"
said oil economist Phil Verleger. "Because of the lack of
inventories, I could see us getting to $2.00 to $2.50 per
gallon."


Not surprisingly, oil issues are beginning to take center stage in the
presidential campaign. Republican candidate George W. Bush-who spent some
time on the oil fields of Texas-is using the high gasoline prices as a way
to attack Democratic challenger Al Gore. Bush has criticized the
Clinton-Gore Administration for wasting the political advantage that the
United States gained over the Middle East countries during the Persian
Gulf War-which was waged by Bush's father.


Bush's staffers also say he's considering backing a congressional proposal
to roll back the 4.3-cent-per-gallon federal gasoline tax approved by
Congress in 1993 with the help of Gore's tie-breaking Senate vote. Current
gasoline prices include an 18.4-cent-per-gallon federal tax; diesel fuel
is taxed at a rate of 24.4 cents per gallon. Gore opposes the rollback,
arguing that it would do little to affect domestic oil prices and would
slash funding for the nation's highway repair fund. Ironically, some top
Republican leaders share Gore's position. Nonetheless, Gore's ties to the
tax have prompted Senate Majority Leader Trent Lott to describe the 1993
levy as "the Gore gas tax."


Congressional Republicans also see the oil issue as a vehicle for
political gain-an excuse to attack the White House and to push bills that
would do everything from creating new natural gas pipelines to opening
Alaska's Arctic National Wildlife Refuge to new oil and gas
exploration.


This year's oil crisis is the consequence of a March 1999 agreement by
OPEC oil ministers to decrease oil production and thereby increase world
oil prices, which had bottomed out in early 1999 at $8 to $10 per barrel.
The OPEC countries cut production by 4.3 million barrels per day, at the
same time that world oil consumption was continuing to rise. "Demand
has increased pretty strongly because of the economic growth in the United
States, other developed countries, and the Asian economy," said John
Felmy, the director of policy analysis and statistics at the American
Petroleum Institute. As a result, oil prices climbed to $34 per barrel in
early March.


Gasoline today isn't as expensive as it was during the 1980 Middle East
oil crisis. Adjusted for inflation, that pump price peaked at $2.66 per
gallon. But that bit of trivia was little comfort to New England
homeowners earlier this year, when heating oil prices doubled in one
month's time. At a February heating oil summit at Boston's Faneuil Hall,
Richardson admitted that the Administration was "caught napping"
by that price jump. "We got complacent," he said.


In the weeks since that winter price shock, Richardson has crisscrossed
the world, holding meetings with top officials in the oil-producing
countries of Kuwait, Norway, Mexico, and Saudi Arabia. Congressional
Republicans have denigrated his efforts as "tin-cup diplomacy,"
calling for the White House to take a harder line in dealing with the
foreign oil-producing countries. In early March, the Senate Foreign
Relations Committee passed a resolution warning OPEC leaders that they
will jeopardize their relationship with the United States if they fail to
increase oil production.


Meanwhile, House International Relations Committee Chairman Benjamin A.
Gilman, R-N.Y., is pushing legislation that would halt U.S. foreign aid
and arms sales to countries that fix the price of oil-meaning the OPEC
nations. At a March 15 hearing, Gilman said that U.S. assistance to other
countries should be "inextricably tied to the development of our own
nation."


In addition to Richardson's diplomatic forays, the Administration
increased federal funding to help low-income families and small businesses
pay their heating bills. It also waived federal environmental laws in some
states to allow the sale of more plentiful, but higher-polluting, fuel-oil
supplies. Some economists say the Administration may need to waive
gasoline pollution regulations this summer. That would allow any increase
in OPEC oil to flow to the consumer without the additional refining steps
needed to meet stricter new rules on sulfur content.


Richardson also met recently with U.S. oil producers, urging them to hike
their oil output. In fact, domestic oil production has increased slightly
as international oil prices have climbed. But so far, many oil companies,
burned by the $10-per-barrel oil prices in early 1999, have been reluctant
to return to the fields. "We went through such a devastating
recession in the oil industry last year that a lot of people just got out
of the business permanently," Felmy said.


But Congress wants the White House to go even further. Early this year,
Sen. Charles E. Schumer, D-N.Y., argued that the Administration should
ease home heating oil costs by tapping into the nation's Strategic
Petroleum Reserve. Now a bipartisan group of lawmakers is touting the
petroleum reserve as the best tool to suppress rising gasoline prices. But
that proposal is opposed by a handful of key Republicans, including Senate
Appropriations Committee Chairman Ted Stevens and Senate Energy and
Natural Resources Committee Chairman Frank Murkowski, both of Alaska, and
House Energy and Power Subcommittee Chairman Joe Barton of Texas. "I
do not believe we should get back in the business of setting oil prices,
even in a back-door fashion, by drawing down the Strategic Petroleum
Reserve," Barton said at a March 9 hearing.


The Administration has also found itself on the defensive on several other
congressional proposals. On March 8, when Murkowski and Stevens introduced
legislation to allow new oil and gas development in the Arctic National
Wildlife Refuge, Interior Secretary Bruce Babbitt fired back that the
Administration "will protect this last undeveloped fragment of
America's Arctic coastline."


Oil-patch lawmakers are also waging war against Clinton Administration
policies that have limited oil exploration on some federal lands in the
West and off the California and Florida coasts. "Their energy policy
is to make it as hard as possible to produce domestic oil," Sen. Kay
Bailey Hutchison, R-Texas, charged at a March 8 press briefing.
Republicans have also reminded reporters that on the campaign trail Gore
promised to further restrict offshore oil exploration.


Just how bad the economic and political pain will get for the Clinton
Administration depends on how high gasoline prices rise and how long they
remain in the upper brackets. In late February, truckers who filled the
streets of Washington, D.C., to protest high diesel prices made it clear
that they're already feeling the economic impact. Republicans warn that
continued higher transportation costs would raise the price of goods and
services and undercut Clinton's much-prized era of economic prosperity.
"This is what's going to bring our boom down, really take the air out
of it, if we don't get a handle on it," Stevens argued at a March
briefing.


But economists predict that OPEC will increase its oil production, more
for its own benefit than for the well-being of the United States.
"OPEC is trying to play a strategic game," said Paul Portney,
the president of Resources for the Future, a Washington environmental
think tank. "They want the price of oil to be as high as it can be
without providing a big incentive for the countries that have more
expensive oil. If prices stay at $30 a barrel, there is oil in the U.S.
that's profitable to pump. OPEC wants to keep that oil out of the
market."


For Richardson, the oil crisis, if unchecked, could have a particularly
painful side effect. The longtime Democratic politician, who took time off
from his diplomatic tour to attend Gore's Super Tuesday victory party, has
hinted that he'd like to be tapped as Gore's vice presidential running
mate at the August Democratic National Convention. That's not likely to
happen if oil prices soar this summer.


Margaret Kriz

National Journal