Petroleum Insecurity: America's Choice

by John Howley, energy policy consultant,
and Ned Stowe, FCNL Senior Legislative Secretary

Friends Committee on National Legislation, June 2004

 

Our nation's economic well-being today depends on maintaining secure access to petroleum supplies at stable prices. If domestic oil production continues to decline and demand continues to grow, the U.S. increasingly will have to look for foreign oil to meet its needs.

Two-thirds of the world's remaining oil reserves are in the politically volatile Middle East where wars have already been fought over the control of oil, where the U.S. is currently occupying by force the country with the second largest proven reserves, and where U.S. foreign and military policies increasingly are condemned. The vast majority of proven oil reserves around the world are controlled by authoritarian, undemocratic governments with poor records of advancing human rights or human development for their citizens.

Within these trends are the seeds for further violence and suffering. Today, we in the U.S. face a choice: continue to increase our dependence on imported oil using any means necessary to secure access to it, including war and threats of war, or, undertake a sustained, national mobilization to free us from oil dependence by reducing consumption and investing in energy efficiency, renewable fuels, and public and alternative transportation.

By reducing our reliance on petroleum, and helping other countries (both the oil-rich and the oilpoor) do the same, we can make our country safer, our economy stronger, and our world less vulnerable to economic crises and war.

Petroleum and Economic Security

Petroleum is not just another form of energy. The economic prosperity which the U.S. has enjoyed for the past half century was created in large part thanks to cheap oil. Naturally occurring and abundant (for now), relatively easy to store and transport, oil packs a lot of energy per pound. This makes it especially valuable for transportation. Without it, food would not be delivered to stores, most people could not get to work, and most of the transportation system would shut down. Petroleum products also heat many homes and businesses, provide the raw material for many manufactured products, and fuel the generation of electricity.

U.S. reliance on imported oil has grown as fast as politicians' promises of "energy independence." The U.S. is the world's largest economy and biggest consumer of petroleum-25 percent of world consumption. Oil is the dominant fuel in the U.S. energy market, meeting almost 40 percent of total U.S. energy needs. Currently, the U.S. consumes more than 20 million barrels per day (mb/d). By 2025, if nothing changes, the U.S. will be consuming more than 28 mb/d.

Transportation (personal cars and trucks, freight hauling, airlines, shipping, and railroads) is responsible for the largest portion of U.S. oil consumption by far, and it is the fastest growing sector in terms of oil consumption.

In 1998, for the first time, the U.S. imported more than half of its oil needs, and, by 2003, the U.S. imported more than 56 percent. U.S. domestic oil production has been declining since its peak in 1970 while total U.S. oil consumption has been increasing steadily since the mid-1980s. By 2025, if these trends continue, the U.S. will need to import more than 70 percent of its needs.

Oil imports are not cheap. World crude oil prices are at their highest level in more than twenty years, up more than 50 percent since 2003 when the Iraq war began. In March 2004, the U.S. spent $13.8 billion on oil imports, amounting to 30 percent of the trade deficit for that month. If U.S. oil imports continue at this rate and price for a full year, the U.S. could spend more than $165 billion on oil imports.

Dependence on imported oil is very risky. The flow of oil from oil-producing countries to oil-consuming countries can be disrupted by weather, accidents, transportation breakdowns or shortages, manipulation by cartels, unanticipated increases in demand, labor strikes, social unrest, sabotage, and war. When shortages occur, the price goes up. If we were talking about pistachios or broccoli, consumers would simply buy something else to eat and the national economy would be unaffected by shortages and price spikes. However, because we cannot easily stop using petroleum in the short-term, our economy remains vulnerable to the inflation, unemployment, and economic insecurity that a volatile, uncertain global oil market can cause.

Oil and the U.S. Military

From Britain's successful gamble to convert its navy from coal to oil on the eve of World War I to Hitler's failed invasion of the Caucasus and Japan's invasion of the South Pacific in World War 11, petroleum has been both the object of and the key to successful military conquests. Similarly today, securing global oil supplies is a key objective of U * S * foreign and military policies, and maintaining ample oil supplies gives the U.S. government the capacity to assert its interests around the world through military force when it so chooses.

Today, troops, tanks, combat aircraft, transport ships and most battle ships cannot move without oil. In peace time, the U.S. military, the largest oilconsuming organization in the world, consumes about 110 million barrels of petroleum products each year (more than one percent of total U.S. consumption). In war, the U.S. military consumes far more fuel. The Abrams MIA tank consumes on average one gallon of fuel for every six-tenths of a mile it travels. The fuel-efficiency of combat aircraft is much worse. No military commander wants to limit the intensity, scale, or duration of military operations because of a lack of fuel, and the U.S. military has gone to great lengths to make sure this never happens.

For decades now, the U.S. government has charged its military planners with developing and implementing strategies to ensure access to foreign oil supplies. For the military today, this is no small challenge, as most of the remaining proven oil reserves are to be found in the strife-torn Middle East.

The strategic challenge is compounded further by the physical vulnerability of the petroleum production, transport, and storage systems. Highways, seagoing tankers, storage tanks, long pipelines across international frontiers, and remote production facilities are highly vulnerable to attack by determined adversaries. For example, Middle

East expert Robert Baer observes, "The most vulnerable point and the most spectacular target in the Saudi oil system is the Abqaiq complex... For the first two months after a moderate to severe attack on Abqaiq, production there would slow from an average of 6.8 million barrels a day to I million barrels, a loss equivalent to one third of America's daily consumption of crude oil.

For decades, U.S. taxpayers have been paying a high price to protect the flow of oil from the Persian Gulf and other oil-rich regions. Although the Pentagon does not provide specific information about the military cost of protecting Persian Gulf oil, estimates range from 25 cents to $1 per gallon of oil exported from that region.

Now, with the war in Iraq, which sits atop the second largest proven oil reserves in the world, the military cost and challenge of securing oil in the region-measured in both blood and treasure-has skyrocketed. Anthony Cordesman, a leading Middle East security expert, believes continuing the present U.S. military strategy in the Middle East will require doubling the U.S. military budget from $400 billion to $800 billion per year.

Global Oil Demand Is Growing. Will Supplies Grow, Too?

All totaled, today, the world is consuming a little more than 80 mb/d (29 billion barrels per year). By 2025, global demand is expected to grow by more than 50 percent to 121 mb/d (44 billion barrels per year). Increasing demand in the U.S. and in China and other developing countries in Asia are expected to account for 60 percent of the growth in demand through 2025. Where will the additional 40 mb/d come from?

It is uncertain that enough new oil will be discovered to meet this demand. Although the U.S. Geological Survey, the U.S. Department of Energy, and the oil industry express confidence that about 3 trillion barrels of oil remain to be exploited around the world, of which about one-third are counted as "proven" reserves at today's prices, skeptics point out that production at most major oil fields has already peaked or soon will. Many new huge discoveries-each on the order of several billions of barrels-will be needed just. to. replace declining production from aging fields, let alone to meet increased demand. Skeptics observe that there have been few discoveries of this magnitude in recent decades. Many predict a peak in world oil production sometime between 2010 and 2020.9 Oil: A Future Source of Conflict With China?

With the accelerating infusion of foreign capital and technology, growing foreign reserves, and a large surplus of labor, China is fast becoming a major industrial power. Its economy grew by more than nine percent in 2003, and is expected to become the third largest in the world by 2015. Auto sales and highway construction are growing at an astounding rate; 2 million new cars were sold last year, up 75 percent over 2002.10 Demand for electricity has exceeded supply in many new industrial areas, leading to blackouts and a subsequent rapid rise in purchases of diesel-fueled generators. As a consequence, China's demand for oil grew by 11.4 percent to 5.5 mb/d in 2003, and it surpassed Japan to become the world's second largest oil consumer after the U.S. China is on track to exceed 6.0 mb/d in 2004.

China is not only an emerging economic competitor to the U.S. With the collapse of the Soviet Union, only China has the potential to become a military rival of the U.S. With its growing technological capacity, large population, and rapid industrial growth, China eventually will have the potential to assert its power militarily in East Asia and to challenge U.S. military dominance there, if it chooses to do so.

However, China has an "Achilles' heel": it does not have the large petroleum reserves it needs to fuel its rising economic power. In 2003, China imported 35 percent of its petroleum needs; by 2025, China's overall demand for oil is expected to almost double, and it will need to import more than three-fourths of its needs (8.6 mb/d)

Like the U.S., China is looking to the Middle East for its future supply while also scouring the world from Africa to the Caspian Basin to Russia. However, China's dependence on imported oil will leave it strategically vulnerable in a military confrontation with the U.S.-a fact that is likely of key interest for military planners in both countries. The U.S. military currently dominates the sea lanes and skies.

For Oil-Dependent Countries, All Roads Lead Back to the Persian Gulf

The Financial Times reports that "Oil executives accept that few big finds remain to be made and that the future will be increasingly dictated by the leaders in the Middle East, who maintain a tight grip on most of the world's yet-to-be-exploited fields. Meanwhile the trusted old reserves of the U.S. Gulf, Alaska and the North Sea are showing signs of age." About 60 percent of the world's remaining proven oil reserves are controlled by Persian Gulf governments, and, of these, Saudi Arabia controls the most by far. Not only is most of the world's remaining known oil found here, but the oil is also the cheapest in the world to produce.

Based on projections of growing oil demand in the U.S. and around the world, the Energy Information Agency (EIA) projects that oil production in Persian

Gulf countries will need to more than double by 2025, as will U.S. oil imports from the region. OPEC's share of total world oil exports will need to increase from 44 percent in 2001 to more than 60 percent in 2025.

This large increase in output will not be possible without significant new investment in the oil production capacities in the region. Since the 1970s, when oil production was nationalized throughout the region, many of the governments there decided not to invest significantly in expanding their production capacity, spending the oil revenues instead on military hardware, public works, social programs, or the personal enrichment of the ruling families. As a consequence, the region's output can be doubled only if there is a significant infusion of foreign capital and expertise--mainly from U.S., European, Russian, or Chinese oil companies.

Will the Persian Gulf and OPEC regimes cooperate? They have their own interests to pursue, which may not coincide with the interests of oil-importing countries. They are interested in keeping supplies tight and prices high-though not so high that people stop consuming their oil. They are not interested in expanding their capacity too quickly.

What will they do with their oil revenues? Most are relatively closed and highly controlled societies. Many of the regimes are undemocratic and oppressive. Often they have used their oil revenues to buy weapons to threaten or intimidate their neighbors, and, in the past, Libya, Iran, and Iraq have pursued the development of weapons of mass destruction. They disagree strongly with U.S. policies in the Israeli-Palestinian conflict and in Iraq.

What do the people on the "Arab street" think? Popular sentiment in the region is becoming increasingly bitter against both the ruling regimes and U.S. foreign policies in the region. Human rights and prodemocracy activists decry the oppressive, undemocratic regimes which have been empowered by oil money from the U.S. and the West. Meanwhile, violent extremist groups such as al Qaeda have found fertile ground for recruitment and have tapped into widespread social discontent. They are angered by what they see as a morally corrupt, historic collusion between the ruling regimes and Western powers, fueled by oil money.

As a consequence, the interests of the oilconsuming countries and Middle East oil-producers could diverge sharply, and, as the U.S. and the rest of the world learned in the 1970s and the 1980s, the oil spigot can be constricted or even turned off with devastating economic effects by either the coordinated action of hostile governments or by regional war. This could happen again for any of a variety of reasons.

Progress to Reduce Oil Dependence Stalled

Although it still uses much more oil than others, the U.S. is nonetheless much less oil dependent than it was three decades ago. As a result of the oil shocks of the 1970s when producers in the Persian Gulf cut the supply of oil and the price skyrocketed, the U.S. has made great progress in using oil more efficiently The economic recession that resulted from the price shocks reduced oil consumption throughout the economy Homeowners and landlords switched from oil to gas heat. Manufacturers and utilities cut back on burning petroleum to run factories and generate electricity Congress ordered domestic auto manufacturers to dramatically increase the fuel efficiency of cars they produced via corporate average fuel efficiency (CAFE) standards. It also lowered highway speed limits to 55 miles per hour. And, the economy shifted from energy-intensive manufacturing to less energy-intensive services.

As a result, from 1977 to 1985, the fuel efficiency of new cars increased 40 percent, U.S. oil consumption declined by 17 percent, and oil imports were cut in half, while the economy grew 27 percent. The "petroleum intensity" of the U.S. economy, or the ratio of the amount of oil consumed per unit of gross domestic product (GDP), has continued to decline steadily since then.

However, when oil prices fell in the late 1980s and 1990s, Congress dropped the ball. Federal gasoline taxes remained relatively low, and CAFE standards stayed frozen at 1985 levels. Further, CAFE standards had a loophole: light trucks, then a small part of the vehicle market, were allowed much lower fuel efficiency standards. Soon, relatively cheap gas prices and massive advertising by automakers encouraged consumers to buy big, gas-guzzling trucks, vans, and off-road vehicles to drive to work or pick up groceries. The Sports Utility Vehicle (SUV) was born-overweight and inefficient but cheap to build and extremely profitable. Light trucks (SUVs, pickup trucks, and minivans) now account for more than half of new vehicles sold. Meanwhile, most other industrial countries moved to lock in their improvements in petroleum efficiency by increasing automotive fuel taxes. Drivers in the United Kingdom, for example, now pay more than $3 equivalent in taxes per gallon compared to an average tax of less than 40 cents per gallon in the U.S. As a result, today, far more people in Europe and Japan rely on public and alternative transportation (walking and biking) for their daily transportation needs; public transportation systems are far superior to those in the U.S.; and cars and trucks are much more fuel efficient.

Today, the U.S. economy remains much less energy efficient overall than the economies of Japan and Western Europe, in large part because of these different policy approaches. On average it takes about one-third more energy to produce a unit of GDP in the U.S. today than it does in Europe or Japan. 19

Bush Administration "s Oil Strategy

To insulate our economy against future oil price shocks, the Bush Administration has pursued a "supply-side" strategy to increase oil production domestically and strengthen relations with nonOPEC oil-producing countries abroad. If U.S. sources of supply were diversified and non-OPEC production were increased, then OPEC's power to control world oil prices would be weakened. This approach underlies the National Energy Policy issued by the Bush Administration in May 2001.20 Domestically, the plan would encourage more drilling for gas and oil on public lands and off-shore by providing tax and royalty incentives, subsidies, and environmental regulatory relief. This would include opening the Arctic National Wildlife Refuge (ANWR) in Alaska to oil and gas exploration. The Administration believes new technologies, which have lowered the cost of both developing new reserves and getting more oil out of old reserves, will help stimulate domestic production and temporarily halt the decline of U.S. oil production.

Overseas, it is no coincidence that the main "theaters" of military operations in the U.S. "war on terror" and the war in Iraq are in the oil-rich Persian Gulf region or nearby. The U.S. government first began covertly funding and training Islamist extremists in the region in the 1980s to resist the Soviet occupation of Afghanistan, which the U.S. government perceived to be a threat to Persian Gulf oil reserves. A decade later, many of these same extremists formed al Qaeda which arose in reaction to U.S. and Western ties to regimes in oil-rich countries in the region.

Iraq, of course, sits atop 115 billion barrels of proven reserves, the second largest in the world. Regardless of the official stated purpose of the U.S. invasion of Iraq, the U.S. government clearly did not want Saddam Hussein to continue controlling so much oil wealth.

To support these and future military operations, the U.S. has strengthened military ties (e.g. provided military aid and training, deployed troops, established bases, sold weapons, or negotiated security agreements) in countries throughout the region and nearby, including Afghanistan, Bahrain, Djibouti, Egypt, Iraq, Israel, Kuwait, Kyrgystan, Oman, Pakistan, Qatar, Saudi Arabia, the United Arab Emirates, and Uzbekistan.

The U.S. has fleets deployed in the Mediterranean and the Persian Gulf. It is seeking to establish forward operating bases in Algeria, Morocco, and Tunisia and aircraft refueling bases in Senegal and Uganda. It continues to operate large bases in Turkey and Diego Garcia and is planning to move forces from Germany to new bases in Romania, Hungary, and Bulgaria to the east, where they will be closer to anticipated zones of conflict in Central Asia and the Persian Gulf.

To reduce reliance on Persian Gulf oil, the Bush Administration has sought to strengthen relations with other non-OPEC, oil-rich countries. In 2004, Defense Secretary Rumsfeld visited Kazakhstan, promising security assistance for Kazakhstan's oil pipelines and facilities on the Caspian Sea, where an estimated 7 billion to 9 billion barrels of oil were discovered in the 1990s (the largest oil discovery anywhere in 30 years).

Also in 2004, Azerbaijan, Georgia, and Turkey signed a U.S.-backed deal to build an oil pipeline to bring Caspian Basin oil to ports on the Mediterranean. The U.S. government has military ties with each.

In 2003, the U.S. government increased its military aid and provided more military trainers to Colombia to improve protection for an oil pipeline there, and in 2004, the Administration sought to double the number of U.S. military advisers and contractors in the country. Colombia exported about 260,000 barrels of oil per day to the U.S. in 2002.

Next door in Venezuela, the Bush Administration has actively supported efforts to oust the regime of President Hugo Chavez. Venezuela is a key OPEC member, and the Administration would prefer a regime that is more friendly to U.S. interests.

In 2003, President Bush traveled to Nigeria, the largest oil producer in Africa and a major oil exporter to the U.S. U.S. oil imports from West Africa are expected to increase to 25 percent of U.S. imports by 2025. Most will come from Nigeria and Angola, from whom the U.S. already imports almost I mb/d. Reportedly, the U.S. is considering building a naval port and air base on the nearby island nation of Sao Tome and Principe, which has potentially rich oil and gas deposits off shore.

The Bush Administration's intensive, costly, and provocative efforts to secure access to foreign oil through military force and building military relationships primarily with oppressive, undemocratic regimes, and its environmentally harmful efforts at home to increase domestic oil production, stand in stark contrast to its insignificant efforts to reduce U.S. oil dependence. This misguided policy seems certain to lead to future oil insecurity and violent conflict. The U.S. needs a more sensible energy policy focused on reducing oil demand.

Policies to Reduce Oil Dependence

The current U.S. "supply-side" strategy is a very risky one. At best, it means a large increase in overseas military presence and high oil import bills while still leaving the U.S. vulnerable to market disruptions. At worst, it means more violent conflict and more economic instability.

The U.S. can and should choose a different "demand-side" approach. This approach would seek to make petroleum less important to the U.S. and the world economy. Such a strategy might include some combination of the following policy options: (1) increasing fuel taxes with offsets for the working poor, (2) expanding and improving public transportation, (3) increasing the corporate average fuel efficiency (CAFE) of new cars and trucks, (4) providing incentives for consumers and firms to purchase high-efficiency vehicles, (5) promoting renewable fuels, and (6) investing in research and development.

Increase fuel taxes with offsets for the working poor. The International Energy Agency observes that the price of oil has been the most influential factor affecting oil consumption rates. The price shocks of the 1970s and 1980s did far more to reduce oil consumption and carbon dioxide emissions than all of the energy efficiency and climate policies enacted by the industrialized countries in the 1990s. Die Economist concludes: "The best way to curb the demand for oil and promote innovation in oil alternatives is to ... impose a gradually rising gasoline tax.

Raising the price of transportation fuels (including diesel, gasoline, and aircraft fuel) by at least $1 per gallon, through a gradual increase in fuel taxes over several years, would be one of the most effective and efficient ways to reduce U.S. oil dependence and begin to shift the economy toward more secure, safe, energy efficient, and environmentally sustainable energy and transportation systems.

To improve the political feasibility of increased gasoline taxes, the substantial tax revenues should be earmarked (a) to expand and improve public and alternative transportation, (b) to offset some of the cost of rising fuel prices for low and middle income households through adjustments to the tax code or the Earned Income Tax Credit, and (c) to advance other initiatives to reduce oil dependence.

Improve and expand public transportation. Robert Shapiro, on behalf of the American Public Transportation Association, observes: "If we are serious about weaning ourselves from Middle Eastern oil, the data showing that using rail to go to and from work requires one-tenth the energy of using an automobile for the same trip should compel everybody's serious attention."

Increasing ridership on public transportation remains a relatively untapped source for reducing U.S. oil dependence. The U.S. lags far behind most other industrialized countries in ridership, yet public transportation is clearly far more energy efficient than private automobiles. On average, public transportation consumes half the energy of private vehicles in terms of passenger miles per unit of energy. Electrically powered rail systems are even more efficient, using about one-tenth the energy per passenger mile as private vehicles.

Today, public transit users in the U.S. save approximately 50 million barrels of oil per year. If the U.S. increased its ridership to European levels (about 10 percent of daily travel needs), we could cut oil imports by as much as 40 percent (4-5 mb/d). Public transportation ridership has been steadily increasing across the U.S., faster than the use of private vehicles. The key to accelerating this trend is to make public transportation more convenient, attractive, and affordable and to make private transportation more expensive.

Raise fuel efficiency standards. According to the National Academy of Sciences, the present CAFE standards save 2.8 million barrels per day. Today, the CAFE standard for cars is 27.5 miles per gallon (mpg), and in 2005, for light trucks, the standard will be increased to 21 mpg from the current 20.5 mpg. Yet, as The Economist points out "the average fuel efficiency of American vehicles has been near a 20-year low for the past two years."

Proven new technologies, such as high-efficiency hybrid-gasoline-electric and advanced diesel engines, now make it possible to increase fuel economy dramatically without reducing comfort or safety. The increased cost of these fuel-efficient technologies is more than paid back by gas savings over the life of the vehicle. Reaching a combined average of 40 mpg for cars and light trucks over the next decade would reduce oil consumption by an amount roughly equal to what we currently import from the Persian Gulf (about 2 mb/d).

Variations on CAFE, like "feebates," are also possible. Feebates are taxes paid by purchasers of cars that exceed the fuel economy standards. These fees are then rebated to purchasers of more fuel-efficient vehicles. A similar mechanism, tradable credits, could be set up for manufacturers who would purchase the right to sell gas-guzzlers from manufacturers of gas-sippers.

Provide incentives to develop and expand renewable fuels. Ethanol from cellulosic biomass (e.g. from naturally occurring grasses or agricultural and lumber by-products) could supply as much as 25 percent of current demand for gasoline, at a fraction of the cost and energy-intensity of corn-based ethanol. Taxing renewable ethanol at a much lower rate than petroleum-based fuels could be a key way to promote this alternative.

Invest in research and development to reduce oil dependence. Using hydrogen in fuel cells to generate electricity to run cars may offer an important alternative to oil dependence in the future. However, there are a number of significant hurdles that must be overcome before this technology can become an economically feasible substitute for oil on a large scale. It may take 20 years or more for further research and development.

In 2003, President Bush announced an important hydrogen fuel research and development initiative. However, currently, it is relatively underfunded and it is focused primarily on developing nuclear energy and fossil fuels to produce the hydrogen. We should invest more in fuel cell research and development, but it should be redirected toward developing renewable sources of hydrogen.

Expand tax incentives for fuel efficient vehicles. While the U.S. develops other ways to power transportation decades from now, Congress can help accelerate the transformation of the U.S. vehicle fleet today to a higher level of fuel-efficiency with incentives for individuals and firms to get rid of gas-guzzlers and to purchase high-efficiency vehicles that are available today


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