May 2014, Vol. 241, No. 5
Features
What the Oil Boom Means And Doesnt Mean For Energy Security
When we graduated from the United States Naval Academy in 1968, the American oil industry was in the midst of a boom. Domestic crude production had increased every year for nearly a decade, and Texas was the world’s swing oil producer, providing our nation with important strategic flexibility.
A barrel of U.S. crude oil cost less than $20 at the time, adjusted for inflation, helping to fuel an era of rapid economic expansion and prosperity. Most Americans thought this era of cheap and abundant oil would last forever.
Just five years later, in 1973, the OPEC oil embargo utterly shattered this comfortable assumption, and our nation was thrust into a new era – one defined by insecurity and scarcity in oil markets. Over the next 40 years, America would experience six economic recessions, each one preceded by an oil price spike. Tight and volatile oil markets tied vital American interests to the Middle East, which was now the world’s swing oil producer, and our rising dependence on imported oil sent tremendous amounts of American wealth overseas in one of the single largest wealth transfers in human history.
Today, we are entering an era of domestic oil abundance. After decades of steady decline, U.S. crude production has risen by more than 50% in five short years and may approach its record as soon as 2015. Meanwhile, total imports have plummeted to levels last seen in the 1980s, and the United States has become a major exporter of refined products.
The new American oil boom has put hundreds of thousands back to work, boosted American manufacturing and slashed our oil import bill by $150 billion. There have been national security benefits too. Surging U.S. oil supplies in 2012 allowed the international community to tighten Iranian sanctions without creating devastating economic effects, the fear of which had constrained action for years.
The turnaround in U.S. oil production is a testament to American ingenuity, know-how and innovation. Yet, for all its benefits, our newfound oil abundance has not altered an important, fundamental truth: the nation’s energy security today remains just as fragile as it was in 1973. The United States is not becoming the world’s swing oil producer, as we were in the 1960s, with the spare capacity to turn up production to compensate for natural or politically motivated supply shortages elsewhere in the world.
The 1973 embargo is often thought of as a crisis caused by America’s reliance on imports, and it is true that total oil imports were rising at the time. Shipments from the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) accounted for little more than 5% of U.S. petroleum supplies in 1973.
However, our true vulnerability was twofold: first, an overwhelming reliance of our economy on oil – particularly in the transportation sector, which relied on fuels like gasoline and diesel for 95 % of its energy with no scaled alternatives; second, loss of the spare capacity that had enabled us to defeat the OPEC oil embargo of 1967. As global oil prices skyrocketed in response to OPEC’s supply cut, American consumers had no choice but to pay more or travel less.
Four decades later, oil still powers 93% of our transportation, and American consumers still have no alternatives to oil. This dynamic exposes our economy and security to volatility in global oil markets.
Oil is priced in a global market, meaning that U.S. consumers pay the same global price for a barrel of oil whether it is pumped in Texas or Saudi Arabia. Despite the U.S. production boom, the global supply-demand balance remains tight and prices volatile. Demand continues to rise at a brisk pace in emerging market economies like China, the world’s largest car market and largest oil importer. And the surge in supply here has been offset by prolonged disruptions in Libya, Sudan, Iraq and elsewhere.
The Middle East and North Africa region is both the world’s largest oil producing region and the global market’s swing producer. It is also an area of frequent violence and instability. Countries in this region are undergoing profound change and unrest – which could affect everything from production facilities to vital shipping channels – and will likely get worse, not better, for the foreseeable future.
The most serious threat facing the region’s major producing counties is the potential for internal violence, often exacerbated by outside actors providing money, arms and surrogates. Current violence in Syria and Iraq, and future alarming scenarios, such as Iran attaining nuclear weapons capabilities or Saudi Arabia facing a prolonged or violent succession crisis, could also cause the region’s production to plunge.
An economic or political crisis in just one of the region’s countries causes the global price of oil to jump. In January 2011, Libya’s oil production was about 1.6 MMbpd. By March, clashes between protesters and security forces caused Libya’s oil production to decline to 500,000 bpd and then almost entirely collapse – to less than 100,000 bpd – by May. Between mid-February and mid-March, spot prices for Brent crude oil rose by about $10 per barrel. They then rose another $10 per barrel by mid-April to more than $120, a total increase of more than 20% in less than two months. The potential for further violence, instability and supply outages in Libya remains as groups struggle for power there.
The Middle East is far from the only major oil-producing region that contains unreliable suppliers. Venezuelan production, already underperforming due to poor investment and stewardship by its national oil company, is threatened by political uncertainty still unfolding after the death of Hugo Chavez. Russia, the world’s second largest non-OPEC producer after the United States, faces severe geographic challenges and technological deficiencies as it tries to access new supplies to replace depleting conventional fields.
America’s economic vulnerability to developments in major oil producing counties across the globe has profound national security implications. For decades, the need to prevent or avoid unrest in key producing regions or counties has limited U.S. foreign policy options and provided oil producing countries with leverage over the United States. It is the 7.5 MMbpd of Russian oil exports that gives President Vladimir Putin the confidence that he can withstand Western threats of economic sanctions. Additionally, our military stands watch as the protector of the world’s vital oil arteries, costing an estimated $83 billion annually.
Needed Steps
There are several important policy steps the United States should take to reduce the economic and national security risks associated with our nation’s oil dependence and our exposure to the global oil market.
First, the United States must substantially reduce the likelihood of crippling international oil supply interruptions and associated price spikes and increase the market’s resilience to crises. We can support the development of additional non-OPEC oil supplies around the globe, including here at home. We must involve other oil-consuming countries in a cooperative approach to protecting global oil infrastructure, including key oil transit routes. Building on current International Energy Agency (IEA) agreements, we must increase the speed and breadth of the major oil-consuming countries’ capacity to deal with supply interruptions when they occur.
As major combat operations end in Afghanistan, as they have in Iraq, we must develop a reinvigorated diplomacy-centered approach toward the Middle East. We must ensure the security of allies and friendly countries in the region from external threat with a more flexible military and intelligence posture. We need to assist countries like Iraq in dealing with current violence both through security assistance and improved governance and economic decisions, and we need to work for better governance to bolster economic and political stability in autocratic oil-producing counties, while also supporting transitions to more effective, moderate, representative and accountable regimes over time.
Taken together, these steps will ensure a more secure and resilient global oil market.
Still, the fundamental economic and security threat will endure as long as America remains deeply dependent on oil. To address this problem, America must turbocharge the wider use of alternative transportation fuels, particularly electricity and natural gas. We have abundant domestic supplies of these fuels, and their prices are determined by free market forces.
More than 150,000 medium- and heavy-duty trucks powered by natural gas are already on the road, and more than 180,000 electric vehicles have been sold in the United States. These numbers must be ramped up substantially to make a difference in our truck fleet of 9 million medium and heavy-duty trucks and the 250 million cars and light trucks currently on the road. The main barriers are now high vehicle prices and a lack of fuel distribution networks. Government-supported research and development efforts – but not government support for specific companies – is vital to making the discoveries that will reduce the costs of advanced automotive technologies.
It will take a public-private partnership to deploy natural gas refueling stations, electric charging stations and other critical infrastructure. It will take resources to make these investments today, but the payback in improved U.S. economic and national security will be huge.
In this new era of domestic energy abundance, the country must not be lulled into a false sense of security again. While the current benefits of the domestic oil boom are significant, long-term benefits depend on concerted progress to decrease the country’s reliance on oil and to build a more peaceful, secure and cooperative international community of oil producers and consumers.
Instead of being content with relative calm while awaiting the next crisis, America must seize the opportunity to secure a new era of lasting energy security.
Authors:
Adm. Dennis C. Blair is the former director of National Intelligence and former commander-in-chief of the U.S. Pacific Command. Gen. Michael W. Hagee served as the 33rd Commandant of the U.S. Marine Corps. Admiral Blair and General Hagee serve as co-chairs of the Commission on Energy and Geopolitics, a project of Securing America’s Future Energy (SAFE).
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