United States presidents since Richard Nixon have sought the development and implementation of a comprehensive energy policy without success. As a consequence, the country became heavily dependent upon foreign oil imports in the early 1970s. The first supply crisis occurred with the Arab Oil Embargo of 1973-1974, which, in his “Memoirs,” Henry Kissinger called the “worst crisis to the free world since World War II.”
American needs for energy, particularly petroleum, dictate our foreign policy and relations with other countries around the world. The fact that we are beholden to Middle East regimes, often unpopular in their own country, requires that we maintain a military presence in the region to protect our interest in the oil resources. This, in turn, has drawn us into numerous expensive and deadly police actions. And our efforts to democratize the countries are unsuccessful – perhaps because our motives remain suspect by the people living there.
Furthermore, our cost for foreign oil, approximately $1 billion per day in January 2012, slows our economy and wreaks havoc with our balance of payments. In short, our practice of paying billions of dollars to import oil, particularly to those nations that have been hostile to U.S. interests, has become untenable.
Ongoing Risks of Foreign Oil Dependence
As long as we continue to import oil, we will be subject to:
- Periodic disruptions in supply with adverse consequences on our economy and every American’s way of life
- Costly wars and unpopular police actions to ensure supplies of oil remain available
- Shortages that could compromise the military’s ability to protect our borders and global peacekeeping activities
- Economic reliance on the Middle East and other developing countries
- Continuous confrontations with the populace of the foreign producing countries
- An increasing upward spiral of foreign payments as China and India seek to expand their economies
Plainly speaking, there is nothing good that can or will come from our continued reliance on other countries. That said, increasing domestic oil production alone will not solve our energy problems.
Creating a Comprehensive Energy Policy
There is a solution; however, a comprehensive energy policy involves addressing the short-term issues while simultaneously instituting long-term measures to reduce our addiction to petroleum by making better use of alternate carbon fuels.
Having an adequate supply of petroleum to meet our current needs will involve increasing domestic production, continuing to develop and implement alternative fuels, importing more from our North American neighbors, and reducing consumption while also developing policies to use other domestic energy sources. This will lead to a reversal of the increasing national debt, a more enlightened foreign policy, and potentially less opportunity for environmental damage. In order to make this a priority, however, we must first understand the current situation – and where we’re headed.
The Existing Imbalance of Sources and Uses
Many U.S. citizens falsely believe that the country can control the price of oil through its level of production; hence, the mantra, “Drill, baby, drill!” Unfortunately, they are incorrect.
Oil is an international commodity, and the price of oil per barrel is set by international forces of supply and demand. Oil independence does not mean low prices for American consumers: Simply put, Americans consume a disproportionate share of the world’s existing oil production, using almost twice as much oil as we produce. The much-publicized new domestic reserve additions, as the result of the higher world price, are not sufficient to cover the gap between our domestic production and consumption.
Furthermore, countries such as China and India, with robust economies, growing populations, and rising standards of living, compete directly with the United States for the same resource, effectively creating more demand than supply. These conditions will not change in the foreseeable future.
However, developing a comprehensive energy policy in which we seek to capitalize on a range of domestic energy sources, including oil, coal, natural gas, renewable resources, and biofuels, would minimize the existing imbalance between demand and supply.
- The U.S. consumes about 19.1 million barrels per day (bbls/d) of oil while producing only 9.7 million barrels daily. The United States produced approximately 51% of its needs in 2010, relying upon imports to cover the shortfall.
- The U.S. imports approximately 9.4 million barrels each day – including 3.8 million barrels from the Persian Gulf and Africa. At the current price of $100 per barrel, the U.S. sends almost $1 billion each day overseas. During 2012, the country is projected to send $140 billion to countries with volatile governments.
- Domestic reserves have declined almost 50% since 1970. Historically, the additional reserves discovered each year are slightly below the level the nation consumes. The reserve figures include the oil that is available as a result of the use of a new “fracking” technology, as well as horizontal drilling techniques in the Baaken Shale Formation in North Dakota and the Eagle Ford Formation in Texas. Experts project recoverable reserves in both formations of 5.5 and 7.5 million barrels, or about nine months of U.S. consumption. For comparison, Canada has an estimated 175.2 billion barrels of proven reserves, while Saudi Arabia has an estimated 260 billion barrels of proven reserves.
- The potentially large new reserves of “near” oil (kerogen) in the Green River Formation in the Western U.S. won’t be used for years, even with immediate approval. These sources of oil have been well-known for decades, but have not been economically feasible. There is currently no commercial production of oil shale in this country due to historical economics and environmental concerns.
- The primary use of oil in the U.S. is for personal and commercial transportation. This accounts for approximately 70% of each barrel of oil produced. Since the cost of crude oil also represents approximately 72% of the retail gasoline price, international demand for oil sets the basic cost of gasoline in the United States.
Future Projections for Oil
As politicians are fond of saying, “There is no magic bullet.” As a consequence, there is little likelihood that conditions during the next decade will change substantially from the conditions that exist today. It is probable that even as we increase domestic production, we will be unable to increase it to the level we need to rely solely on domestic supply.
However, in our ability to complement the use of oil with other energy sources, we can begin to wean our dependence on oil from the Middle East and the problems and conflicts of interest that dependence automatically carries.
- World demand for petroleum will continue to increase. Americans and Canadians consume almost three gallons of oil per day per capita, mostly in automobiles. Other developed nations average 1.4 gallons, while India and China use less than one-half barrel per day per capita combined. Undeveloped nations use .2 gallons per day. Even though the U.S. per capita usage will likely decline due to high prices and the effect of conservation measures, the loss in American demand will be more than offset by the increase in usage in the world’s most populous nations: India and China. Furthermore, unless the world economies recede into a second recession, industrial production is expected to grow 2% to 4% annually worldwide.
- Oil prices will remain at current levels or higher. From 1958 to 1973, world crude oil prices were generally stable, costing around $3 per barrel. By the end of 1974, prices had more than quadrupled to $12.50 per barrel. Over the past 40 years, gas prices have generally increased, surging upward at each political crisis, and now exceed $100 per barrel, equating a price of $4 U.S. for a gallon of gasoline.
- The largest reserves in the world will remain in the Middle East. It is unlikely that political tensions in the region will recede significantly over the next decade, and they may escalate due to the rise of Islamic fundamentalists and Iran’s nuclear intentions. Supply disruptions are likely over the near term.
- Current worldwide price levels will result in greater reserve additions in America. New technology allows the recovery of reserves that were previously uneconomical to pursue, including more oil from existing U.S. fields thought to be used up, in formations previously non-productive (such as tight shales and deep offshore prospects), and new supplies from oil sands. In addition, high prices ($100 or more per barrel) make alternative fuels more attractive as a substitute for oil.
- New hydrofracking techniques used by U.S. refineries will add 4% to 8% additional production from a barrel of oil. In addition, there is adequate refinery capacity through 2020 at a minimum to meet America’s expected demand.
- There will be no increase in production in the Arctic National Wildlife Refuge or the Green River Oil Sands. Both sources are likely to be tied up in court for years by environmental protection agencies. In addition, each region will require substantial investment and infrastructure before coming on-stream.
- Our efforts to increase oil production and reduce consumption will be moderately successful. Domestic oil production will increase to 10.8 million bbls/d by 2020, while consumption will fall from 19.1 million bbls/d to 14 million bbls/d. The decrease in consumption will result from increased refinery efficiency (2.6 million bbls/d), reduced driving mileage (1 million bbls/d), and increased auto mileage efficiency (1.5 million bbls/d) by 2020.
- The United States will continue to import 3.2 million barrels shortfall of daily domestic production in 2020, despite efforts to increase production and damper consumption. Replacing 9.4 million bbls/d of oil within the continental United States would require doubling our current rate of production, an unlikely if not impossible increase based upon existing reserves and petroleum prospects. If a major new field of new reserves were identified in 2012, it would not bring significant production on-line before the end of the decade.
- The U.S. is likely to spend more than $1 trillion between 2012 and 2020 to meet our petroleum shortfall. The outflow of dollars weakens the United States’ competitive position and foreign trade balances.
- A significant percentage of U.S. imports, if not all, can be provided by Canada and Mexico. Canada is the largest supplier of crude oil to the U.S. and is investing heavily in the Athabasca Oil Sands of Alberta to increase production. While the U.S. will continue to have a balance of trade deficit, its supply of oil would be secure, coming wholly from “friendly allies” in the Western Hemisphere.
As more people throughout the world improve their living standards, the demand for oil continues to accelerate. Countries which have been exporters will use more of their production internally to satisfy their own citizens, further reducing the amount of oil which can be supplied to those countries who rely on imports to meet their demand. It is probable that oil will continue to be a very potent weapon in world politics, a weapon that can be used with increasing impunity since few industrialized nations can risk disruption in supplies without jeopardizing their own economies.
While the United States has significantly reduced its oil consumption and its vulnerability to foreign suppliers, the risk of confrontation between it and the emerging economies of China and India will increase as long as their respective economies depend upon petroleum. Developing and implementing a comprehensive energy policy that utilizes all of the United States’ natural resources – coal, natural gas, renewables, biofuels, and oil – and increased energy conservation efforts to satisfy increasing energy demands should be a national priority.