The New Geopolitics of Energy
THE dominant fact emerging from all discussions of the raw materials position of the United States is its increasing dependence on foreign sources of supply. Less than 50 years ago it produced within its own borders practically all of the basic materials required by its industries and, in addition, had some surpluses for export. The transition from a position of relative self-sufficiency in industrial materials to that of the world's greatest importing nation deserves to be regarded as a major event in modern economic history. It marks the transformation of the United States from an underdeveloped to a highly developed industrial economy. For the seemingly insatiable demands of our manufacturing industries we today use between 35 and 40 percent of the free world's output of basic materials. Our purchases from abroad each year put about $6 billion at the disposal of foreign countries, most of them in the category known as "underdeveloped." In many cases these exports to the United States furnish a substantial share of government revenues and of dollar exchange. This interdependence, while it raises difficult questions of policy, is fraught with great potential benefits both to us and to them.
The over-all objective of an American raw materials policy, according to the Paley Commission, should be "to insure an adequate and dependable flow of materials at the lowest cost consistent with national security and with the welfare of friendly nations." A concise statement of this sort must inevitably employ terms incapable of exact definition (e.g. adequate, dependable). It nevertheless is useful as a standard of reference in examining the legislative and administrative measures which have affected the supply of raw materials available to the United States since the war.
In times of national emergency American raw materials policies have attained considerable success. Measures adopted during World War II and in the Korean conflict provided the metals, oil and textile fibers needed to sustain defense production and make victory possible. This was accomplished, moreover, without imposing drastic restrictions on the use of fuels and raw materials for the production of consumer goods. The creation of a great new industry for the production of synthetic rubber during World War II, and its successful operation and technical advance under government ownership, were extraordinary achievements. A further indication of the success of the Government's rubber policy was the success with which plants were transferred after the war to private owners, who thereafter successfully operated them without tariff protection, subsidy or other form of government assistance. The development of uranium production with government subsidy, and with government monopoly of supply, was another major accomplishment. Government participation in nickel mining in Cuba resulted in valuable additions to the wartime supply of a critically important metal, even though the postwar history of the nickel venture was disappointing.
In the years 1947-1956 industrial production expanded by nearly 50 percent without encountering (except during the Korean conflict) serious shortages of raw materials. The unprecedented upswing in the national economy in this decade, however, may have been hampered rather than assisted by Congressional and executive activities in the field of raw materials. For optimum economic growth, the nation's industries should be able to obtain their supplies of raw materials at minimum real cost. This principle, however, was disregarded. Concealed subsidies to domestic producers of oil and metals in the form of depletion allowances reduced the federal revenue and, like all systems of preferential taxation, tended to divert labor and capital away from unsubsidized industries, thus raising their costs.
The protection against foreign competition which the tariff afforded to producers of raw materials was insignificant in most cases. Raw materials as a general rule entered free of duty, and on the dutiable items the rates were low. Only on wool and on a few metals were they high enough to raise prices in American markets appreciably. At the end of the decade, however, so-called voluntary restrictions on oil imports constituted a substantive violation of the minimum cost principle. By limiting the supplies of low-cost oil that might be obtained from Venezuela, Canada and the Middle East, the restrictions forced larger use of the more expensive domestic product.
Preferences accorded in government purchasing to commodities fabricated from domestic materials, in accordance with the Buy American Act, furnish a further example of uneconomic raw materials policies. In the stockpiling program, also, the misuse of purchases of strategic materials as a means of subsidizing domestic producers of lead and zinc and other materials added needlessly to the costs of the undertaking. The administrators of the program, moreover, failed to take account of technological progress and so accumulated unnecessarily large quantities of certain materials, notably wool and rubber, for which synthetic substitutes had been developed.
The coördination of policies in this field with over-all foreign policy was far from perfect. In some instances, notably the embargo on shipments of strategic materials to the Soviet bloc and the prohibition on all exports to Red China, the policies were in agreement; more often, however, they were in conflict. One of the repeatedly emphasized objectives of American foreign policy is to preserve good relations with countries in the Western Hemisphere and to prevent penetration by Soviet influence. To avoid giving offense to Mexico and Peru and Canada, President Eisenhower for four years resisted strong pressure from domestic producers to raise import duties on lead and zinc. But in 1955, when he imposed quantitative restrictions on imports of oil, he threatened Venezuela's principal export industry. His action added fuel to the smoldering resentment in that country toward other aspects of American economic policy and contributed to the explosion of anti-American feeling that greeted Vice President Nixon in May 1958 in Caracas. The reaction in Canada, also an exporter of oil to American markets, was less spectacular, but it may have been equally profound. Like many Americans, Canadians could not understand how shipments of oil from Alberta into our West Coast ports could actually endanger American security. The President's justification of the restrictions on grounds of national defense seemed to disregard the economic conditions and political arrangements which guarantee that all Canadian fuels and raw materials will be available to the United States in time of crisis. If the principle of collective security has any meaning, it should have been applied in this case.
In general, measures affecting raw materials have displayed virtues and defects characteristic of American democracy. When the Federal Government faced an emergency it accomplished prodigies of improvisation. It mobilized economic and technological resources, accumulated vast stores of strategic materials and, by purchase contracts, tax incentives and loans, greatly stimulated production at home and abroad. These measures were expensive, but they produced results. In times of peace, however, or near peace, it is legitimate to require that results be obtained as far as possible at minimum costs. Raw materials policies failed to meet this test.
Congress and the President often failed to adapt measures affecting supplies of raw materials to the changed economic conditions which made the country increasingly dependent on foreign sources. They failed, also, to bring raw materials policies into agreement with the changed position of the United States in world affairs and with the new objectives of American foreign policy. These failures are not to be attributed to ignorance or stupidity, but rather to certain characteristic defects of the democratic process which afflict national policy in many areas.
First is the dead weight of tradition which slows the adaptation of policies to changed economic conditions. Most Congressmen and Senators are acquainted with the facts of export and import trade; most of them, it may be assumed, know that domestic mines cannot provide substantially increased supplies of manganese, tungsten, lead and zinc except at costs which would prove burdensome to fabricating industries. Their speeches and their votes, however, indicate that many of them still cherish the delusion of national self-sufficiency. Likewise, legislators know that the United States needs the diplomatic, economic and military support of allied countries in the free world in the conflict with international Communism, and that simultaneously it is striving to prevent the spread of Soviet influence among the uncommitted nations. Yet Congressional debates often display attitudes on foreign policy which though they might have been relevant to the situation of the United States in 1890 are anachronistic in view of its present difficulties and responsibilities.
More important than tradition in explaining the Government's failure to bring policy into harmony with the changing national interest are the pressures of special and local interests--miners, oil producers, wool growers and others. These pressures, of course, have not been confined to measures affecting the supply of raw materials. The triumphs of well-organized special interests over the national interest are an all too familiar feature of American history.
New policy should not be designed only to remedy old errors. If it is to fit the needs of the next 20 or 25 years, Congress and the President must anticipate the economic, technological and political changes which will modify the conditions of supply and demand for raw materials in this country and in the free world. Should American policy be based on the expectation of worldwide shortages? Or of surpluses? What measures would be appropriate to protect the national interest in each case?
Since wars and the threat of wars can upset predictions based on economic reasoning, certain assumptions are necessary about the probable state of our international relations. There are three possible alternatives: (1) an all-out atomic war; (2) a prolonged third world war fought with conventional weapons; and (3) the continuance of the present state of tension between the United States and the Soviet Union.
An all-out war fought with nuclear weapons would be such disaster that any calculation of trends in demand for industrial materials would be useless. In a protracted war, world-wide in scope and requiring full-scale industrial mobilization, the military demand for certain materials would absorb practically the entire available supply; it would leave only a bare minimum for essential civilian needs and necessitate extraordinary programs of substitution and conservation. As things stand now, the continuance of the present state of no peace, no war, punctuated perhaps by armed conflicts of limited scope and duration, seems the most probable of the three alternatives. This is the assumption, then, which will underlie the following discussion.
Plainly, our resources of metals and minerals cannot be renewed. As the richest veins of ore are worked out and the most productive oil fields are drained, real costs will rise. On the other hand, the demand for fuels and the basic materials does not seem to be subject to any comparable limitation, since human wants, except for food, are indefinitely expansible. Thus, it is argued, dynamic demand is bound to collide with relatively static conditions of supply: and the result will be scarcity. An examination of the actual trends in supply and demand shows, however, that the a priori reasoning which leads to this pessimistic conclusion is based on questionable assumptions.
Although the increase of population in the United States may not continue at the amazing rate recorded in 1940-1950, the next 25 years will still bring significant gains. Elsewhere in the free world, accelerated rates of increase are predicted. But in industrialized countries the demand for raw materials does not expand in proportion to the growth in population. As living standards rise, changes occur in the way people spend their incomes; they devote relatively less of their incomes to commodities and more to intangibles--education and the arts, recreation, medical care, beauty treatments, and other items in which wages rather than materials are the principal costs. In the next decades the changing age grouping of the population--the increasing proportion of older people--will probably reinforce this trend.
We may expect, also, that structural changes in industry will cause the consumption of raw materials to rise more slowly than the index of industrial production. An increasing proportion of American industrial output will consist of highly fabricated products--automobiles and airplanes, typewriters, accounting and calculating machines, radio and television apparatus, and other products in which materials make up a less important element of cost than labor. For these reasons a relatively smaller expenditure on materials will be needed to sustain the expected rise in gross national product. Reasoning in this way, the Paley Commission estimated that in the United States a doubling of the total output of goods and services in the period 1950-1975 would require only a 50 to 60 percent increase in supplies of materials.
Defense production will show the same sort of change. Expenditures for military hardware (if we assume no significant relaxation in U.S.-Soviet tension) will increase, but probably without a proportionate increase in the demand for metals. Ballistic missiles and their accessories are highly fabricated products that require relatively heavy inputs of labor. In their consumption of metals they may have the same relation to the airplanes (which they will partially displace) as the plane had to the destroyer and the battleship. Moreover, the new weapons will not require greatly increased quantities of any single material. In addition to aluminum and titanium, it has been reported that they will use alloy steels containing chromium, nickel, molybdenum, vanadium, columbium, cobalt and tungsten.
Rising standards of living in the industrialized countries of Western Europe and in Canada, Australia, New Zealand and Japan will add to the drain on the supplies of materials available to the free world. Patterns of consumption in these countries, however, are similar to those of the United States, and probably will become increasingly so; hence the growth of their materials consumption, relative to gross national product, will presumably resemble ours.
Economists have traditionally held that agricultural production, including food and raw materials, is subject to the Law of Diminishing Returns. After a certain stage in production is reached, further increments of output, other conditions remaining constant, can be obtained only at the expense of disproportionately large inputs or other economic factors. But in the next 20 to 25 years the real costs of rubber, wool and other raw materials of agricultural origin may not in fact rise, because of changes in "other conditions"--technological advance in seed selection, for example, and in the breeding of animals. Economies of scale may in some instances accompany expansion in the size of productive units.
As regards metals and other mineral resources, the outlook for expansion of supplies from domestic sources in the United States is not promising. The declining yield of the older oil fields, the need of drilling ever deeper wells and other circumstances indicate the progressive exhaustion of our petroleum reserves. It seems improbable that the discovery of new oil fields will greatly change the present supply situation within the next 20 or 25 years. We may expect, however, that technological advance will make possible further economies in the extraction of coal and oil, thus stretching out the life of our fuel resources. Within the near future, moreover, atomic energy will supplement fuel oil in the heating of homes, offices and public buildings, and in the generation of power for public utilities and manufacturing. For highway and air transport we shall continue to depend on petroleum, but redesign of internal combustion engines (for example, introduction of fuel injection systems) will bring economies in fuel consumption. Increasing traffic congestion, and perhaps greater reverence for life, may check the trend toward heavier and faster cars.
Geologists do not expect in the near future to uncover new deposits of ferrous or nonferrous ores in the United States as rich and as easily accessible as those exploited in the past 50 years. "The mineral frontier, which seemed endless in its capacity to yield new sources of raw materials, has all but disappeared insofar as new deposits are concerned."[i] The country has been so thoroughly combed by prospectors that surface outcroppings cannot be expected to yield large new supplies. New methods of exploration, it is true, may reveal the existence of hidden deposits, although no one can now foretell how large they will be or whether they can be worked at a profit. New and more economic processes of milling, concentration and refining will probably make possible the more extensive use of low-grade ores.
The outlook for supply is not uniform for all metals. Domestic reserves of two light metals, magnesium and titanium, which have come into greatly increased use in postwar years, appear adequate for foreseeable future demands. Whether or not the refined metals can be produced at a cost low enough to stimulate widespread use will depend on the availability of large supplies of cheap electrical energy. Electric power may also prove a limiting factor in the future expansion of aluminum production.
At the end of World War II, a trained observer predicted that the "potential effect of substitutes on the mineral position of the United States may be regarded as of minor importance." He foresaw no likelihood that plastics would to any significant degree serve to replace metals.[ii] But the following decade witnessed the development of an enormous new industry, the production of polymeric materials. Utilizing a few readily available substances --coal and oil, water and, in lesser amounts, chlorine, silicon and fluorine--the chemical industry has produced cheap and effective substitutes for nonferrous metals, for iron and for natural rubber, wood, glass, cotton and wool.
American industries in postwar years have learned to economize in the use of minerals. They utilize a greater variety of resources and new techniques of exploration and discovery, of mining and processing. There is reason to expect that with a continued high level of demand and continued research by private firms and government agencies this progress will continue. Industrial engineers will exercise their ingenuity in substituting for copper, lead and zinc, as these become scarcer, the more abundant light metals, aluminum, magnesium, silicon and titanium.
But even under the most favorable assumptions regarding technological advance, the outlook for the United States would be grim if it had to depend exclusively on its own resources. Attempts to achieve self-sufficiency could result only in lower standards of living and a decline in national power. If we enlarge the scope of our inquiry, however, and compare the potential raw-material supplies of the free world with prospective demand, we find a very different situation. The formerly abundant mineral resources of the United States have been greatly depleted by a century of rapid industrial expansion and the demands of two world wars. But in the underdeveloped countries, in Latin America, Africa and Southeast Asia, vast supplies still await exploitation. In Canada, new discoveries and the rapid development of mineral industries--uranium, iron ore, oil, nickel, and other nonferrous metals--have revealed large possibilities of low-cost expansion. Increased production of oil in Venezuela, the Middle East and in Africa, of copper in Chile and in Rhodesia and of nonferrous metals in Mexico and in South America, all give promise of abundant supplies at no increase in real costs.
Fear has sometimes been expressed that as the underdeveloped countries become industrialized their consumption of domestically produced materials will cut into the supplies available for the United States and the consuming countries of Western Europe. This is a possible but not a necessary consequence. Industrialization need not check the expansion of raw materials production; the two kinds of economic activity may supplement rather than conflict with each other. But even if industrialization should absorb some of the materials which otherwise would have been exported, the resulting decrease in the next 20 years in the supplies available to industrialized economies could not be large. The underdeveloped countries now account for less than 20 percent of the total free world demand for materials. Even a very high rate of industrialization would not cause a large absolute increase in the quantities of materials they consume.
To sum up: the evidence available does not indicate that there is to be a world-wide shortage of fuels or industrialized materials in the next 20 or 25 years. It will be physically possible for the free world to obtain metals, fibers and other materials in quantities sufficient to satisfy its requirements at real costs which will not exert a downward pressure on the standard of living in the industrial countries.
But the unsolved part of the problem is not one of geology or economics; it is political. The question is not, "Will the supplies physically available in the producing countries be adequate for the needs of the free world?" It is, "On what terms will the nations with ore deposits and oil wells allow them to be exploited by American or other investors?" Will they permit extractive industries to produce and export the products freely, or will they impose onerous restrictions? Will their legislation and administrative regulations provide a favorable climate for the inflow of capital, equipment, technology and management skills?
In the coming decades, therefore, American policy regarding raw materials will need to give close attention to the underdeveloped countries--in the Western Hemisphere (Canada as well as the Latin American republics), in the Middle East, in Africa and in Southeast Asia. Our purpose should be to encourage the expansion of low-cost production and to make sure that neither nationalistic policies nor Communist influences deny American industries access on reasonable terms to the basic materials necessary to the continued growth of the American economy.
Lenin and Stalin taught that the underdeveloped countries were stepping stones, first to the domination of Europe and ultimately of the world. The U.S.S.R., accordingly, has been trying to win them over by subversion, by propaganda, and recently by programs of aid and trade. As a source of economic aid the United States has far surpassed the U.S.S.R. In trade, also, in imports of raw materials, we occupy a far stronger position. In both aid and trade the larger dimensions of the American economy provide important advantages. But the outcome of the contest may depend quite as much on our economic policies as on national income and the volume of our industrial production.
The underdeveloped countries will need markets for the expanded production resulting from new capital investments. At present the United States buys about five times as much from them as does the Soviet Union. But its state monopoly of foreign trade enables Soviet Russia to use its import buying as an instrument of political penetration. Its recent purchases from Egypt, for example, have surpassed those of the United States. The United States is not in a position to manipulate trade in this way. Now that stockpile goals have been so largely attained, the Government's purchases of strategic materials from abroad have practically ceased and importing is conducted almost exclusively by business firms in pursuit of profits, regardless of foreign policy objectives.
Nevertheless, the Government does have at its disposal various means of influencing trade in raw materials to the advantage of the underdeveloped countries as well as to its own. Our tariff policy should supplement and not conflict with our economic assistance; it should support and not stultify our protestations of good neighborliness. For four years Mexico and Peru, for instance, have been worried by agitation in this country for increased duties on lead and zinc. Canada and Venezuela resent our restrictions on imports of oil.
To get the maximum economic advantage from foreign trade, to obtain adequate supplies at minimum real costs, the United States should abolish all import duties and quotas and adopt a policy of complete free trade in raw materials. In the short run, this sweeping change would not cause a great expansion in imports nor seriously displace American labor and capital. The exporting countries would not at once experience great economic gains. Politically, however, the new policy might accomplish more than hundreds of visits and speeches of important dignitaries in replenishing the sadly depleted reservoir of good will toward this country.
It must be recognized, however, that in terms of practical American politics complete free trade in raw materials is a chimera. Despite this, the present Administration and its successors should make every effort to bring about freer conditions of trade, using to the hilt the powers delegated by Congress and striving to get them enlarged. The President should set his face against attempts to impose further restrictions on imports of raw materials, whether by higher duties or by quotas, and subject to searching scrutiny all claims for tariff protection based on grounds of national defense. If he finds that import competition or any other reason causes production of an essential commodity to fall below minimum defense requirements, he should recommend to Congress the payment of a subsidy, a much less clumsy and less expensive device than tariff protection. Steps in this direction were taken in the incentive payments provided to wool growers in the National Wool Act of 1954, and also in the Domestic Minerals Stabilization Plan proposed in April 1958 by Secretary of the Interior Seaton.
National strength depends upon the best use of all kinds of national resources--the services of scientists and engineers and the initiative of businessmen, as well as on our reserves of oils and metals. Import restrictions and stockpile purchases which perpetuate production from high-cost mines or from depleted oil fields weaken rather than strengthen the national economy. They also weaken the system of free enterprise and the efficient functioning of democratic institutions. Every new measure of government aid eventually brings government regulation and provides the camel of government control with more ample accommodations in the tent of private enterprise. In addition, the lobbying and vote-swapping which accompany government assistance to producers of raw materials bring discredit on democratic institutions. It is doubtful whether government assistance provided under such conditions actually promotes either national welfare or national security.
To obtain these objectives, the President and the Congress, instead of dealing with oil, copper or wool separately as occasion arises, must begin to look at our raw materials policy as a whole. They will then be able to coördinate it with foreign policy. American objectives in the field of international relations, both economic and political, cannot be achieved in isolation, but only in close cooperation with other countries in the free world. Our economic and our military potential depends heavily on the economic and military potential of our allies, and on their willingness to lend us their support. Our raw materials policies should therefore assist and not hinder the effective functioning of their economies, and give evidence of consideration for their welfare as well as our own.
[i] Howard A. Meyerhoff, "What Is Involved in Metals Conservation Today?," The Annals of the American Academy of Political and Social Science, May 1952, p. 40. "The pick-and-shovel prospector will soon strike pay dirt only in western movies," J. Frederic Dewhurst and Associates, "America's Needs and Resources," New York: 20th Century Fund, 1955, p. 759.
[ii] "Plastics provide substitutes for some mineral products, but as yet offer no likelihood of being put to major use; their ultimate significance as replacements for minerals probably will be small." Elmer Walter Pehrson, "Our Mineral Resources and Security," Foreign Affairs, July 1945, p. 654.