For three decades, the rich world has talked about curbing its addiction to imported oil. But, despite the anxious rhetoric, the oil-supply problem has become worse and energy security more complex. Notwithstanding politicians’ repeated calls for energy independence, over the past 30 years the United States, for example, has doubled its dependence on imported oil, which now accounts for nearly two-thirds of its oil needs.
Threats to cut oil supplies in order to change a country’s foreign policy have a long history, particularly where the Middle East is concerned. Arab members of the Organization of Petroleum Exporting Countries called for an embargo at the time of the 1967 war, but it had little effect because the US was then largely self sufficient.
But by the 1973 Yom Kippur war, the Arab oil embargo had a greater effect, owing to America’s growing demand for imported oil. The embargo drove up prices and unleashed a period of inflation and stagnation worldwide. It also demonstrated that oil is a fungible commodity. Even though the embargo was aimed at the US and the Netherlands, market forces shifted oil among consumers, and in the long term all consuming countries suffered shortages of supply and the same price shock. Oil embargos turned out to be a blunt instrument that hurt many besides the targeted countries.
In the aftermath of the oil price shocks, energy security policy has had four components. By liberalizing energy prices, governments allowed markets to encourage conservation and new supply. In addition, governments introduced modest subsidies and regulations to encourage conservation and renewable energy sources. Some governments began to store oil in strategic petroleum reserves that could be used to for short periods in a crisis. Rich countries also helped to create the Paris-based International Energy Agency, which coordinates policies (including strategic reserves) among consumer countries.