Power Struggle

By Daniel Kadlec

Jim Schupp is looking on the bright side. With gas at the pump now topping $2 a gal. in his neighborhood and seemingly headed higher, he figures it's payback for all those insufferable, phony-rich, new-economy yuppies in their view-blocking, death-dealing, friend-of-OPEC SUVs. "Gas will probably go to $3, and I applaud it," says the retired computer-company executive as he fills the tank of his light pickup truck at a station in Los Angeles. "I'd like to see all gas guzzlers off the road."

Well, that's one view of a pressing energy crisis suddenly much larger than the state of California. Pedal-to-the-metal increases--not just in gasoline but in heating oil, natural gas and electricity--are a state of mind across the land, and most folks aren't appeased by Schupp's silver-lining view. Gasoline at the self-serve pump, for example, sells at a national average of more than $1.70 a gal.--up 5% in the past two weeks. That's an all-time high, although when adjusted for inflation the price is still lower than 1981's by about $1. But it follows a winter in which many homeowners saw heating costs soar more than 50%.

The creeping fear of unaffordable power has President George W. Bush looking for a backup policy generator as he prepares to unveil an energy program this week that is very fossil-fuel friendly--and simpatico with his and Vice President Dick Cheney's long ties to Big Oil. Bush says his policy, which stresses greater production over conservation, is a long-term solution.

Cheney, the former oil-service-company executive who is driving Bush's energy bus, has bluntly warned that there will be no magic bullet to deal with high gasoline prices or electricity shortages. And late last week, the President scoffed at the idea of intervening in the marketplace. "There's no such thing as immediate supply," he said.

But by Friday the White House had gone into reverse, even suggesting that the federal gas tax, which Bush vowed to protect, might be rolled back temporarily. The President then used the occasion to sell his tax cut. "If the Congress is interested in helping consumers pay for higher gas prices, they should pass the tax cut as quickly as possible," he said.

Essentially that would transfer money from the government to oil companies, via consumers--not exactly a populist move. Bush could suffer if he fails to relate to the immediate needs of people like Walter Melendez, who pulls over to top off his tank whenever he sees his gas gauge drop below three-quarters of a tank. "I'm afraid it's going to be $4 next time," says Melendez, a computer technician in L.A., where radio waves are full of energy talk.

The pain at the pump has put Big Oil in the profiteering spotlight again, albeit with an Internet twist. At least one widely distributed chain e-mail encourages readers to boycott stations operated by ExxonMobil, the largest gasoline retailer in the U.S. Exxon's profits roared 44% higher in the first quarter, to $5 billion, on fattened profit margins. The 27 largest energy firms in the U.S. earned $14.1 billion in the fourth quarter of 2000--more than double their profits in the same period a year earlier, reports the Energy Information Agency. Of course, there were no complaints while Exxon's profits were falling 33% between 1997 and 1999. But markets are more rational than people.

Consumers' energy quandaries aren't just at the pumps, as Californians know well. Last week the West Coast was hit again with sporadic power blackouts, further testimony to a botched deregulation effort that failed to encourage adding capacity in that state. Sizzling temperatures last Monday saw rolling blackouts for 103,000 customers. On Tuesday blackouts affected 300,000 more. Movie theaters went dark. Restaurants closed. Traffic lights went kaput. State officials predict 34 more such days before the fall. And in a frightening report, consultants at McKinsey & Co. say there could be a blackout somewhere in California on every single weekday over the summer.

That's just California, right? If only. Most now agree that the Northeast too is vulnerable as folks flick on the AC. Some believe problems lurk even in the less densely populated Southwest and Midwest. Thus, a week shy of Memorial Day, many officials wish summer were already over.

Of course, the whole scare may be a fake-out. For every expert with a panicky prediction, there's another with a view that things are under control. Eugene McGrath, chairman of Consolidated Edison in the New York City region, says his company has plenty of juice, and that electricity rates ought to be about the same as last summer--a good thing, given that rates spiked a year ago and stayed there. He's not predicting any power shortages in his area. Why, then, is New York racing to add several small plants by June 1?

As for gasoline, Bill Veno, director of the Global Oil Practice of Cambridge Energy Research Associates, says changing market conditions can't sustain gas at $2 a gal., never mind the $3 that alarmists are bandying about. "We believe gasoline prices may well have peaked, and could come down," he says, noting that refineries are running flat out and inventories have begun to build.

That rosier scenario would provide some temporary political relief for the White House; it won't change the President's approach. The Bush-Cheney plan is certain to focus on increasing energy production. After all, you won't find any tree huggers in the White House: just a proud Texan who sank a few wells in the oil patch and his deputy, Cheney, a Texas transplant who made millions as CEO of Halliburton. Those ties give critics plenty to latch onto as the President and the Veep stump for achieving greater capacity by opening a pristine Alaskan preserve for oil drilling and by putting a new power plant online every week for the next 20 years.

"I'm totally unimpressed with the Bush Administration's energy policy," says Gary Locke, Washington State's Democratic Governor. "We need to generate more energy, and we need to be self-sufficient, but we can't just rely on natural gas and oil exploration. We shouldn't try to dig, drill, burn and pollute our way to energy security."

Locke argues that it will take half a decade to get new energy to market. He is one of many Bush Administration critics who prefer a policy that says, "Conservation equals generation." Indeed, a report by leading scientists, three years in the making, finds that a government-led program of conservation could reduce demand anywhere from 20% to 47%. Bush's people play down the findings, arguing that they are just theoretical.

Cheney's proposal reflects the Administration's deep belief that the free market is best equipped to sort out short-term issues. "It's pretty astonishing," says a Democratic Senate staff member briefed on the general outlines of the report. "They have a fundamental belief that if you leave these energy markets alone, they'll right themselves."

That faith isn't shared by the loyal opposition. Democratic Senator Byron Dorgan of North Dakota, an Energy Committee member, says, "I don't think the marketplace is working in a manner that gives consumers the assurance that they're not being manipulated. If you wait for the market to right itself, we'll be waiting for a long while before prices fall back into some reasonable line."

Even Republican Congressmen, who face voter wrath more frequently than Senators, are getting antsy. "People are asking us, 'What are you guys going to do about these high energy prices?'" says Oklahoma Representative J.C. Watts Jr. "High gas prices didn't happen overnight, but explaining that to voters is tough." G.O.P. Congressmen don't want to return to angry town meetings in their districts with an energy plan that lacks concrete steps to deal with high gas prices and energy brownouts. "We've got members of Congress who are freaked out over this," says a senior House G.O.P. aide.

The Bushies complain that enviros and most Democrats haven't bothered to wait for the release of the new proposal before dismissing it as a sop to Big Oil. They incessantly lambaste the Clinton Administration for neglecting the nation's long-term energy needs. And they scoff at any critic who suggests that the White House is too close to the energy sector.

Yet the protests of the Administration, say critics, ring as hollow as an empty oil drum. It consulted heavily with energy-industry lobbyists but spent little time talking to environmentalists. The Administration's last-minute rush to portray its plan as "balanced" between promoting increased domestic production and encouraging conservation--a portrayal Bush reiterated in his radio address Saturday--may come across as a public relations gesture. Even some insiders concede that conservation measures were tacked on to the plan recently in response to what one calls "arsenic and CO2," referring to the beating Bush took for his stand on several environmental issues this spring.

Secretary of Energy Spencer Abraham acknowledges that the new policy won't do much now, but he insists that those short-term issues will be addressed "on a separate track." His department is investigating reports that gas-station owners have been told to expect $3-a-gal. prices this summer. Those rumors, Abraham suggests, might be evidence of price gouging. "Rumors become self-fulfilling prophecies," he says.

On drilling in Alaska, Abraham does not argue that the public and Congress are ready to support the idea. But, he asks, "do we think we should take 2,000 acres of a 19 million-acre refuge that can in fact be environmentally, sensitively produced and try to build more energy independence in the U.S.? I think it's a fair debate to have."

How did we get here?

A big part of the problem has been the cost of crude, from which gasoline is refined. OPEC has cut production twice since President Bush took office--the first time in January, the second in March--by a total of 2.5 million bbl. a day. That has pushed up prices to about $28 per bbl., the high end of OPEC's target zone.

Another big factor behind high gasoline prices is tight U.S. refining capacity. America has built no new refineries in the past 20 years. The reason is that, until recently, turning oil into gasoline and other refined products like heating oil was a low-profit business. There was too much capacity, not too little. According to the Energy Information Agency, the U.S. had 324 refineries in 1981, when the industry was deregulated. By last year, there were 158.

Ironically, cheap gasoline prices during the final years of the Clinton-era boom, which helped propel sales of fuel-gobbling SUVs, pushed refineries to the wall. To make matters worse, most distributors believed that OPEC would boost production. Betting that oil and gasoline would soon be cheaper, they neglected to build any significant reserves. Result: inventories of gasoline, home heating oil and other refined products have been at a low ebb for nearly two years, leaving prices vulnerable to the slightest market upset. Now consumers are dealing with it in a tough economic climate.

Soaring power costs threaten to extend the economic slowdown. Already, most of the Northwest's aluminum smelters are shut down. Jobs are being lost. Business owners in the East wonder if they will be next. And money that would have been spent buying goods and services is going into the gas tank. If George W. Bush wants some insight into short-term issues, he should consult Dad. George Bush Sr. didn't cause the brief recession in 1990-91, but he paid for it. Similarly, Bush Jr. didn't cause this current energy crisis. But he now owns it, lock, stock and oil barrel.

--Reported by James Carney, Douglas Waller and Adam Zagorin/Washington and Jeffrey Ressner and Sean Scully/Los Angeles

With reporting by James Carney, Douglas Waller and Adam Zagorin/Washington and Jeffrey Ressner and Sean Scully/Los Angeles