Politics & Policy

Want to Solve the Fiscal Crisis?

(OCS Alternative Energy and Alternate Use Programmatic EIS Information Center, 2007)
Expensive oil weighs down the economy.

As Washington looks for a deal to avoid the pending fiscal cliff, it is important for policymakers to solve the root problems of our nation’s economic troubles. Oil dependence is one such root problem.

Driven by higher oil prices, U.S. consumers will spend about $600 billion more on petroleum fuels in 2012 than they did in 2002. The average U.S. household now spends about $2,700 per year on gasoline, more than double the $1,200 it paid in 2002. Unsurprisingly, economic growth suffers when consumers are forced to spend more on oil products. When gasoline prices averaged about $3 per gallon in 2010, household spending and overall growth were trending positive. The following year, rapid growth in global demand for oil, combined with the Arab Spring, sent gas prices soaring by almost $0.90 per gallon in the first half of 2011. Our fragile economic recovery was stymied. GDP growth plunged to nearly zero.

As expensive oil weighs down the economy, it also worsens the nation’s fiscal crisis. Slower economic growth means less revenue in federal and state taxes. This fiscal impact can also be seen in entitlement programs. Earlier this year, the board of trustees of the U.S. Social Security Administration reported that the system will no longer be able to pay full benefits beginning in 2033 — three years earlier than last year’s projection. One of the reasons for this even bleaker fiscal picture is higher-than-expected oil prices, which are now being predicted to result in shortfalls in Social Security revenue that are greater than previously anticipated.

Some see impending relief in the form of America’s domestic oil boom, which they presume will yield cheaper oil. However, even if the U.S. surpasses Saudi Arabia in oil production by 2020, as the International Energy Agency recently predicted, the realities of the global oil market ensure that prices will remain high over the long term. The price of oil is set by a global market and therefore is impacted by worldwide supply and demand. Rising consumption in China, for example, will result in higher prices in the U.S.

Further, geopolitical crises — such as military action breaking out in the Middle East — causing a shortage could send prices soaring. Even if all is calm in the world, national oil companies (which are controlled by foreign governments) and OPEC (Organization of Petroleum Exporting Countries) are always capable of slowing production and causing a price spike. So, while producing more oil at home will create jobs and reduce our trade deficit, don’t expect it to result in consistently lower prices at the pump.

However, we are not powerless against oil dependence. There are important opportunities to improve our nation’s economic and fiscal outlooks.

Although the boom in U.S. domestic oil and natural gas won’t result in lower oil prices, we can make our economy stronger by maximizing production, which will create jobs and lower the trade deficit. In addition, there is a simple way to avoid spending more money on oil when oil prices skyrocket: Use it more efficiently. Currently, the transportation sector relies on oil for about 93 percent of its total liquid fuel consumption. The development and adoption of new technologies can allow us to meet our energy needs while increasingly reducing our consumption of oil. Diversifying the fuel base of the transportation sector is one way of achieving that goal.

We are proud to co-chair the Energy Security Leadership Council, a non-partisan group of business executives and retired military leaders who are committed to leading our nation toward a solution to the national-security, economic, and fiscal threats posed by America’s economic captivity to oil.

A concerted national effort is needed to address this multipronged threat. On the production side, we believe the federal government should expand access to the Outer Continental Shelf while providing the highest levels of environmental protection and giving greater input to coastal states about which areas should be considered for leasing. We also believe that coastal states should be granted revenue sharing as an incentive. On the consumption side, research and development of alternative-fuel vehicles (AFVs), natural gas, and biofuels should be expanded to heighten fuel diversity. A critical component of this will be the development of technology-neutral deployment communities, which will serve as concentrated “test beds” for the comingling of the vehicle technologies and infrastructure assets needed to support widespread adoption of AFVs. Further, eliminating bureaucratic red tape and frivolous lawsuits will help invigorate development and technological advancements in all energy production.

To be sure, oil dependence is a national challenge that will not be met overnight. Nonetheless, this profound threat demands that elected leaders deploy a specific plan to protect our nation. Whatever one’s view on specific policy recommendations, our nation’s economic and fiscal health requires that we take a second look.

— Frederick W. Smith is chairman, president, and CEO of FedEx Corporation. General P. X. Kelley, U.S. Marine Corps (ret.) was the 28th commandant of the U.S. Marine Corps. Both serve as the co-chairmen of the Energy Security Leadership Council.


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