Oily waters

Big oil isn't as powerful as it used to be, but when everyone is buying SUVs and gas prices are dropping, there's still little hope for alternative energy. Second of two parts.

By Damien Cave

Nov. 20, 2001 | Part 2 of two parts. Read Part 1

The Bush administration's close ties to the oil industry are undeniable. But they need to be viewed in a context in which big oil has progressively lost influence on foreign and domestic policy. The question to ask, with respect to Bush and oil, is not whether oil executives are in charge of crafting new governmental policy initiatives, but whether Bush's oil experience will undermine or help create reform -- policy shifts that will end U.S. dependence on foreign oil.

A case can be made that the oil industry has been progressively losing power since the 1960s, when countries in the Persian Gulf started nationalizing control of their oil resources. Many of the companies that thought they could control both the oil below ground and the governments above it became rent-paying guests instead.

"British Petroleum [in the 1950s] used to have lots of influence even in the producing countries," says Manoucher Takin, a former advisor in the OPEC secretariat and senior analyst for the Centre for Global Energy Studies in London. "They tried to topple governments, bring out revolutions."

"But that story is not there anymore," he says. "They've become more commercial concerns."

Chevron is a good example. Formerly Standard of California (Socal), the company paid $175,000 in 1933 for rights to most of Saudi Arabia's largest reserves. But today Saudi Arabia owns and operates its oil fields and Chevron, like other oil companies, is essentially just a buyer of raw crude. Not even the tankers that transport the oil to Chevron refineries belong to the company.

"These oil companies simply provide services," explains Bill O'Grady, an energy futures analyst at AG Edwards. "They get contracts to drill or do consulting work and either get paid a flat sum or with a piece of the action. For the most part, they're just subcontractors, not owners and producers."

No American president has attempted to rein in the power that local governments have over the companies, O'Grady says. Oil companies were left to negotiate nationalization plans on their own. Military support has never been considered in defense of, say, oil rigs in Nigeria that are regularly attacked. Even now, as the Venezuelan government considers a plan to rewrite the law and take 30 percent of the oil profits of the national oil company and its partners -- nearly doubling the contracted rate of 16 percent -- the U.S. government sits idly by.

In most cases, the Gulf War being an obvious exception, presidents -- Republican and Democratic alike -- have eschewed the use of force for oil, choosing diversification at home instead. The oil shocks of the 1970s set the pattern. When production cuts of around 5 percent -- caused in 1973 by the Arab oil embargo and in 1979 by the overthrow of the shah in Iran -- caused prices to more than triple, public attention to energy suddenly turned inward.

President Carter responded to these shocks by creating the Department of Energy and pushing through legislation that scheduled higher fuel efficiency standards and provided tax breaks for producers and consumers of alternative fuels.

Even President Reagan, who dismantled many of Carter's alternative energy incentives in an attempt to streamline the tax code, was responsible for actions that angered the oil industry and weakened its influence. Sanctions against Libya and Iran -- an earlier version of the war on terrorism -- did some of the damage. In Iran, sanctions forced at least one company, Conoco, out of the country for good. Reagan also cost the oil industry billions of dollars domestically when he signed into law the bill creating the EPA "Superfund" -- which levied a tax on crude oil in order to fund a national pollution cleanup campaign.

President Bush (the first) went even further. He added Iraq to the list of sanctioned countries and signed several pieces of legislation that assisted conservation and alternative fuels. In 1990, for example, he signed legislation that funded research and development of alternative fuels with an increased gas tax. That same year, Bush created the reformulated gasoline program, which essentially decreased ground-level ozone by forcing oil companies to make cleaner gas. And his Energy Policy Act of 1992 (EPAct) offered a broad array of financial incentives for reducing oil dependence. Along with slightly expanded tax breaks for domestic oil and gas producers, EPAct also offered substantial rewards for producers of nonconventional energy sources. Consumers even won incentives: Anyone who bought a car that ran on biomass fuel earned a $2,000 tax deduction.

President Clinton, however, did not continue the trend. John Holdren and Dan Kammen, who both worked on Clintons Committee of Advisors on Science and Technology, say that over two terms, the president repeatedly ignored calls for energy efficiency incentives and a carbon emission tax. Although these provisions would, in Holdren's words, "reduce the vulnerability of our economy to price shocks in the world oil market, as well as decrease the constraints on our freedom of action in the Middle East," Clinton didn't see the need to pursue a long-term energy plan. With the domestic economy booming, he was content to ignore the problem.

Now that the economy is in free fall and the Middle East is an uproar, the question of oil is back at the forefront. None of the measures enacted by Carter, Reagan or Bush significantly changed the status quo; dependence on foreign oil has been rising for years and alternative fuels still supply only a fraction of the nation's energy needs. A terrorist attack against the Alaska pipeline, a coup in Saudi Arabia, another Arab oil embargo -- if any disruption to the oil supply occurs, the already weak U.S. and world economies could easily fall into a deep swoon. Will Bush, goaded on by these dangers and the renewed public interest in energy, fight to end the American oil addiction?

Next page: The Saudi connection and the Bush energy plan: not what you think