- The Washington Times - Wednesday, June 16, 2004

The famous phrase “we have nothing to fear but fear itself” might not apply to all the many reasons for rising gasoline costs, but fear is certainly a major factor in the market speculation driving prices to record levels.

Analysts who follow world energy markets attribute a growing portion of the recent escalations in the price of crude oil to a “fear premium” — a steep mark-up prompted by anxiety over potential terrorist threats to the petroleum industry. Experts estimate a “terror premium” of $5 to $10 per barrel of crude oil. Marketplace uneasiness — and prices increased further after attacks on oil workers in Saudi Arabia.

This “fear factor” over prospects of disruption in the world’s tight oil supplies emphasizes the critical importance of winning the war against terror. As we saw in the September 11, 2001, attacks, and other incidents, the economic well-being of the Free World is a prime terrorist target.

The terrorist threat also stresses the importance of America’s Strategic Petroleum Reserve and the wisdom of President George W. Bush’s decision to fill it to capacity and use it only in true emergencies — not as a political tool to manipulate prices.

Sen. John Kerry, Massachusetts Democrat, has proposed temporarily suspending the Strategic Petroleum Reserve fill until oil prices return to “normal levels.” Not only would suspending the Strategic Petroleum Reserve fill have little or no impact on gasoline prices, Mr. Kerry’s proposal would make America more vulnerable to terrorists.

The al Qaeda terrorists are determined to hurt our economy, and they have targeted oil as a way to do it: They have bombed oil tankers, sabotaged pipelines, and recently killed 22 oil workers Khobar, Saudi Arabia — all acts designed to disrupt the flow of oil to America. According to the May 31 article by DEBKA, an Israeli newswire service, counterterror sources report al Qaeda intends to “sabotage” oil prices and “frighten foreigners” out of the country. In this scenario, the Saudis would then fail to boost oil production.

Should the terrorists massively disrupt oil supplies, the Strategic Petroleum Reserve is all that stands between continued economic prosperity and severe economic crisis that would threaten our national security.

Filling the Reserve — along with increasing domestic oil supplies, increasing our oil refineries’ capacity, and promoting conservation and efficiency — are key components of the president’s National Energy Policy issued three years ago.

Citing America’s growing dependence on foreign oil, the National Energy Policy warned of price spikes if demand for oil outpaced production or if refinery capacity became inadequate — both of which have now happened. The National Energy Policy noted the oil refining industry has been running at close to 100 percent of its capacity, with no new refineries built to meet America’s increasing need for gasoline.

It also noted U.S. domestic oil production is declining, leading to ever-increasing dependence on imports.

When the Bush administration cautioned these and other conditions, if unaddressed, could cause surging gasoline prices, political opponents called it scare-mongering. But those factors — in addition to the terrorist threat — are the major reason prices are so high today.

Unless we expand our refining capacity, the gasoline supply is likely to remain tight. Throughout the 1990s, the refining industry suffered from poor profitability and low returns on investment, which discouraged the building of new refineries and contributed to closure of 50 U.S. refineries. No new U.S. refineries have been built for nearly three decades.

To compensate for the lack of refining infrastructure, the United States has relied more on imported gasoline. But imports are not meeting rising demand, either, because most foreign refineries are not equipped to produce the specific gasoline formulations required by U.S. environmental regulations. So inventories of gasoline have declined, in the face of rapid demand growth, adding to the problem.

To improve the investment climate for additional refining capacity, the administration has been working to reform “new source review” environmental requirements and the lengthy and complex permitting processes that hinder new construction. These changes would make refineries less difficult to permit and build, and they would provide more regulatory certainty for investors in expensive refinery projects.

Another way to significantly ease our tight gasoline markets is to increase U.S. oil production. This effort also has met fierce political opposition from Mr. Kerry and congressional Democrats. America has vast reserves of untapped oil in Alaska, particularly in a remote section of the Arctic National Wildlife Refuge. Geologists and energy experts have studied the ANWR region more than 30 years, and a small section of this oil-rich area could be developed in a way that ensures protection of the environment.

Congress debated whether to open ANWR to exploration in 1988 and 1989, when the U.S. oil imports first exceeded 50 percent of our consumption. Today we import more than 55 percent of our oil, and the percentage is steadily rising. The ANWR proposal was considered again in 1995 but was vetoed by President Clinton.

Had the plan gone forward then, about 1 million barrels of additional domestic oil would be flowing through the Alaska pipeline today — equal to 12 percent of our daily imports. But many in Congress still oppose developing ANWR’s oil resources.

All Alaskan oil now goes to markets in the Far West — California, Washington, Oregon, Arizona and Nevada. Ironically, lawmakers from these states have been among the chief opponents of ANWR oil production, and these states have some of the tightest U.S. gasoline markets and highest prices.

The Bush administration has carried out many initiatives called for in the National Energy Policy. But many other recommendations require changing current laws or enacting new ones, which Congress can do. Unfortunately, comprehensive energy legislation, including a number of measures that could moderate some of the gasoline market volatility, has been stalled by Democratic senators.

Enacting President Bush’s long-overdue energy legislation — and pressing forward in the war on terror — are both necessary to help ensure stable, reliable and affordable energy supplies to fuel our economic growth and protect our national security.

Cesar V. Conda, former assistant for domestic policy under Vice President Dick Cheney, is a board director of Empower America (www.empoweramerica.org).

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