Monday, September 1, 2014
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The Wrong Way to Think About Oil

In his recent State of the Union address, President George W. Bush declared, “America is addicted to oil.” He announced a program of energy research that would reduce American oil imports from the Middle East by 75% over the next two decades. But even if his program succeeds, it will not do much to increase America’s energy security. The United States gets only a fifth of its oil from the Persian Gulf.

Americans are not alone in worrying about oil as a security problem. China and India, the two largest countries in the world, realize that their high rates of economic growth also depend upon foreign oil. While the two countries together consume slightly less than half as much oil as the US, their consumption is increasing faster. When poor countries consume as much per capita as rich countries, will there be enough oil to go around?

China and India have been crisscrossing the globe making financially and politically costly deals to try to lock up the output of new oil-producing countries. For example, when Western countries discouraged their oil companies from dealing with Sudan’s government because of its inadequate response to the genocide in Darfur, China was quick to buy up the country’s oil.

Some petroleum experts argue that world oil production will peak in a decade or so. Others reply that new discoveries and improved technologies for extracting oil from existing fields make such projections too alarmist. Because accurate statistics about reserves in countries like Saudi Arabia are not available, it is impossible to settle the dispute definitively. But the majority of experts agree that the world will not run out of oil anytime soon – even with growing Chinese and Indian demand. Over a trillion barrels of reserves have been proven, and more are likely to be found.

In any case, arguments about the size of world oil reserves and when global production will peak misses the key security issue. The heart of the problem is not the overall quantity of oil, but its location. Two-thirds of proven reserves are in the Persian Gulf, one of the world’s most volatile regions.

Oil supply is likely to be vulnerable to political disruptions long before issues arise from overall scarcity of supply. For China and India, that just reinforces their desire to lock up oil supplies from countries outside the Persian Gulf. Similarly, it led Bush to his declared objective of cutting imports from the region by 75% over the next two decades.

At first glance, Bush’s task looks easy. The US uses about 21 million barrels of oil a day, and imports about 2.5 million of it from the Persian Gulf. Even before new technologies produce that amount of fuel, the US could switch to imports from Nigeria, Venezuela, and other countries. But even if those countries remain stable, America will not be safe. What matters is the total amount of oil a country imports, not where it comes from.

Suppose there is a crisis in the Persian Gulf over Iran’s efforts to get nuclear weapons. Iran has threatened to cut oil exports if the United Nations Security Council imposes sanctions against it for violating its nuclear pledges. Most experts predict that such a move would drive the price of oil – including the Venezuelan, Nigerian, and other oil that the US, China, and India consume – above $100 per barrel. The rapid spike in prices would harm all economies that import oil, regardless of where it comes from.

The world learned that lesson following the 1973 Arab-Israel war. Arab oil-exporting countries embargoed oil sales to the US and the Netherlands to punish them for their support of Israel. But the oil destined for the US and the Netherlands was shifted to other countries like Japan, while oil destined for other countries found its way to the US and the Netherlands. Oil is a fungible commodity, and markets clear at a common price. When the dust settled, it turned out that American, Dutch, and other importers all suffered roughly the same degree of shortfall and paid the same damaging high price.

This means that China and India are deluding themselves if they think that preferential deals for Sudanese or Iranian oil will provide them with security. When a disruption occurs, China, India, and the US will all find that they face equal prices ­­– and thus equal pain. In the meantime, China’s mercantilist misunderstanding of markets means that it often overpays for what it mistakenly thinks is energy security.

Bush is similarly mistaken. Even if he cuts imports from the Middle East, America will not enjoy energy security unless it curbs its overall thirst for oil. In the past, rising prices helped slow oil consumption in the US. The US uses only half as much oil per dollar of production as it did before the price spikes of the 1970’s. But over half the oil Americans use goes for driving cars and trucks. The US will not solve its energy security problem until it gets better at fuel economy, possibly by a combination of technology, gasoline taxes, and regulations.

Oil was not the cause of the Iraq War in the simplistic sense that American control of Iraqi oil would make it more secure. The world’s dependence on Persian Gulf oil means that all countries have an interest in maintaining stability in that region, while improving energy efficiency and increasing the diversity of their overall energy supplies.

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