Troubled Oil Across the Waters

Are there reasons to ask whether a long-run free trade policy for oil in Western Europe is being built upon a protectionist policy for the same commodity in the United States? Sam H. Schurr, director of RFF's energy and minerals program, suggests that there are. In a paper given during Christmas week at the New York Meeting of the American Association for the Advancement of Science, Schurr notes a subtle interdependence between these two apparently contradictory policies.

Both the United States and Western Europe, he notes, have become more dependent on oil as a raw material of energy, and for the same reasons: oil's price advantage; its unique qualities as a fuel for automobiles, planes, and other devices powered by internal combustion engines; and its superiority over coal in several other uses. Beyond that the situations and the two areas are quite different.

The United States, rich in both coal and oil resources, imports oil because foreign oil is cheaper. In recent years consumption of oil has been about 15 percent greater than domestic output, and doubtless would have climbed considerably higher if that relationship had not been maintained artificially by governmental policy restricting oil imports. Concern over national security is prominent among the reasons underlying this policy.

Western Europe has large coal deposits and practically no oil. Nevertheless, long-run policy of its governments apparently is based on an expectation that because of diversity in foreign sources of supply they can continue to expand imports of low-cost oil without impairing their security. It is true that some governments have discouraged the shift from indigenous coal to foreign oil as a means of moderating distress in coal mining regions, but these moves are all of a temporary nature. By 1958 imports of fuel from outside Western Europe had reached almost 30 percent of its total energy consumption.

The published statements indicate, Schurr writes, that “existing United States and European policies are flatly contradictory in their evaluation of the security problem. However, I believe that there is in fact a subtle interdependence between the two policies in the sense that some of the assumptions underlying the recently formulated European policy reflect conditions which might not exist except for the policies pursued by the United States in recent years ... The Europeans are not unaware of the fact that this country uses much of its oil capacity at only a fraction of its full potential. I believe that it is implicitly assumed that this extra capacity in the United States will continue to exist and can therefore be regarded as providing an ultimate security safeguard for Europe.

“If this is the case, it is important to recognize that the maintenance of such excess productive capacity depends on continued investment in domestic oil exploration and development. But would current levels of domestic investment be maintained if the United States were to drop its own import restrictions? Equally important, the assumptions in regard to the prices at which Europe could buy oil are based on a world market situation strongly influenced by the fact that the United States, by far the world's leading consumer of oil products, seriously restricts the entry of foreign oil.

“If indeed Western European energy policy is dependent on the present oil import policy of the United States this means that a free trade policy for Europe is, in part, sustained by a protectionist policy in the United States. The really disturbing point is that this interdependence is unintentional, and even unrecognized.

“The current import policy of the United States, a cornerstone in this structure, cannot be taken for granted. It is under constant attack from many quarters, especially since it involves higher energy costs to the American economy than would a policy of greater freedom in importation. Moreover, the oil import policy runs counter to the broad foreign trade policies according to which the United States attempts to conduct its economic relations with other countries.

“Even if the apparently contradictory energy import policies of the United States and Western Europe result in a consistent overall policy, the balance thus achieved cannot be viewed with equanimity. The policy balance will continue to be precarious and fraught with dangers for the Western world until both Western Europe and the United States develop their energy policies within a common framework, with agreement about the assumptions upon which policy is based, and a clear understanding of the consequences of change.”