Two
unrelated political crises--the increasing tensions in the Middle
East and the political instability in Venezuela--have boosted world
oil prices and sent a wake-up call to U.S. policymakers about the
urgent need to address America's energy security. The U.S. Senate
will soon vote on an energy bill that will do little to increase
domestic production and reduce America's dependence on vulnerable
foreign imports. Unless the Senate follows the lead of the House
and takes this opportunity to enact key provisions of the
Administration's balanced energy plan, the nation's energy security
will remain at high risk.
National
Security Requires Energy Security.
On April 8, Saddam Hussein declared that Iraq would halt
oil exports for 30 days or until Israeli military forces ceased
their counterterrorist operations in Palestinian territory. This
cutback threatened to deprive the world market of approximately 1.7
million barrels of crude oil per day, or almost 4 percent of
international supplies. The announcement sparked a $1.00 per barrel
hike in the price of crude oil in New York trading to $27.23 per
barrel. Iran and Libya stated
they would follow suit if other Muslim oil-exporting states joined
the effort to use oil as a political weapon against Israel.
But
when Saudi Arabia, the world's largest oil exporter, indicated it
would help make up any shortfall, oil prices fell. Then
the world market was roiled by political unrest in Venezuela, the
fourth largest oil exporting nation. Popular discontent with
leftist President Hugo Chavez's policies led to a massive labor
strike against the national oil company that exports up to 2.5
million barrels of crude oil and refined products per day.
These crises, which imposed considerable
economic costs on all oil-importing countries, drove home the
danger in allowing America's dependence on foreign oil supplies to
continue, let alone to grow. In 2000, the United States imported 53
percent of its total oil consumption, which the U.S. Department of
Energy projects will rise to 62 percent by 2020. Of those 2000 imports,
Venezuela provided 14 percent while Iraq furnished about 9 percent.
Disturbingly, despite its hard-line policy on Iraq, the United
States is the biggest consumer of Iraqi crude oil, buying more than
half of Iraq's oil exports and providing Baghdad with a rich source
of funding.
The
Department of Energy's Energy Information Administration (EIA)
predicts that the United States will become increasingly dependent
on oil imports from the volatile Middle East, with imports from
this region increasing from about 24 percent of total oil imports
in 2000 to about 50 percent by 2020. This level compares with the
15 percent and 23 percent of oil it imported from that region
during the 1973-1974 and 1979-1980 Middle Eastern oil crises,
respectively. But as evidenced by the 1973
Arab oil embargo and the 1979 Iranian revolution, an abrupt and
prolonged loss of Middle Eastern oil wreaks havoc on the U.S.
economy, increasing unemployment and boosting inflation. Oil peaked
at $39 a barrel in 1981, contributing to double-digit interest
rates, inflation at 9 percent, and unemployment close to 8
percent.
Government actions made things even worse as gas rationing, price
controls, and the heavy hand of regulation interfered with energy
markets.
The
recessions of the 1970s, the early 1980s, and the early 1990s all
were preceded by a rise in oil prices. In 1979, President Jimmy
Carter called the energy crisis "a clear and present danger to our
national security." Twenty years later, in a
response to a bipartisan request from 11 U.S. Senators, the U.S.
Department of Commerce conducted an investigation into the nation's
increasing oil imports. That study, released in November 1999,
concluded "that petroleum imports threaten to impair the national
security." Yet the nation is even
more dependent on foreign oil today than it was in the 1970s, when
Congress and the White House began to discuss energy security and
national security in a serious manner.
Achieving energy security will require
more than rhetoric--it requires action. The United States needs a
coherent energy policy for both energy security and national
security. It has been almost a full year since President George W.
Bush first proposed a balanced long-term plan to enhance U.S.
energy security and solve the nation's energy needs responsibly. The House
of Representatives then passed H.R. 4, the Securing America's
Future Energy Act (SAFE) of 2001--a comprehensive bill
incorporating many of the President's proposals.
Since then, however, spiking crude-oil
prices have pumped up gasoline and natural gas prices and energy
costs for businesses and consumers even as the economy turned the
corner on the recession. Although the Senate
leadership has recently allowed floor consideration of an energy
bill (S. 517), in its current form, that bill would fail to reduce
the nation's vulnerability to oil supply interruptions.
Implementing a
Comprehensive Energy Plan.
There is still time for Washington to implement a coherent
energy policy to enhance the nation's energy security. To do so,
however, the Administration must push forward with its energy
initiative. Now that procedural moves have kept the Senate from
seizing an opportunity to open a small portion of the Arctic
National Wildlife Refuge (ANWR) to exploration, the Administration
should fight to revive ANWR oil production in the House-Senate
conference committee. If this approach fails, the Administration
also should consider developing ANWR as an adjunct to the Strategic
Petroleum Reserve (SPR), which would be held in reserve and brought
onstream only in an oil crisis.
At a
time of increasing uncertainty in the Middle East and Venezuela
about oil production levels, the United States cannot afford to
squander an opportunity to increase domestic oil production. If the
Senate continues to block efforts to bring ANWR oil onstream, it
will be responsible for increasing, not decreasing, America's
vulnerability to energy disruptions and crises in oil-producing
regions around the world.
Expanding Non-OPEC Oil Supplies
The
Bush Administration and Congress generally agree that oil imports
should be reduced. Measures of oil import dependence, while
important, can provide limited guidance to energy security if
viewed in isolation. Heavy reliance on oil imports does not
necessarily mean that the United States is vulnerable to an oil
disruption. For example, if the world
oil supply came from many producers and one suddenly stopped
exporting oil, it would have little effect on U.S. or world
supplies and prices, even at a high rate of dependence by the
United States. Concentration, therefore,
is a key factor in determining the nation's energy security.
In
2000, U.S. net imports of petroleum accounted for 53 percent of
domestic petroleum consumption. Over 50 percent of these
imports came from countries located in the Western Hemisphere,
compared with about 24 percent from the Middle East. The U.S.
Department of Energy projects that U.S. imports will increase to
about 62 percent of domestic petroleum consumption in 2020. Oil
imports are projected to rise from 10.4 million barrels per day in
2000 to 16.6 million barrels per day in 2020. Oil imports from the
Persian Gulf will almost double over the same period, rising from
2.2 million barrels per day in 2000 to 4.2 million barrels per day
in 2020.
At
the same time, more than 50 percent of the total North American
imports in 2020 are expected from the Atlantic Basin, with
significant increases in crude oil imports anticipated from Canada
and from Latin American producers that include Brazil, Colombia,
Mexico, and Venezuela. Production volumes in
Mexico, for example, are expected to exceed 4.1 million barrels per
day by the end of the decade and remain near that level through
2020.
Canada's output is also expected to increase over the next two
years to add an additional 700,000 barrels a day from a combination
of offshore projects and oil from tar sands.
Likewise, West African producers,
including Nigeria and Angola, are expected to increase their export
volumes to North America. The Caspian Basin region
output is expected to rise to almost 3 million barrels per day by
2005 and to increase steadily thereafter. Oil production from the
former Soviet Union (FSU) is expected to reach 10 million barrels
per day by 2005 and exceed 14.8 million barrels per day by 2020,
implying export volumes greater than 6.9 million barrels per
day.
After two decades of steady growth (at 1.1
percent annually), non-OPEC supply from proven reserves
is expected to continue that trend, increasing steadily from 46
million barrels per day in 2000 to 61.1 million barrels per day in
2020, posing significant competition for the OPEC producers. Two
factors are behind the dependable growth in non-OPEC supply: (1)
reduced costs for exploration and recovery, and (2) advanced
technologies. Additionally, over the past
25 years, non-OPEC supplies from Alaska's North Slope, Mexico, the
North Sea, and the Caspian Basin all have exceeded oil production
expectations. Expanding supplies of
oil from these regions would further enable the United States to
reduce its import vulnerability from the Middle East and improve
the nation's energy security.
Augmenting Domestic Oil Supplies
The
most practicable way to limit U.S. vulnerability to disruptions in
foreign oil supply is to augment domestic oil production. A
potential supply of reliable domestic oil is located in Section
1002 of the Arctic National Wildlife Refuge located in the upper
northeast quadrant of Alaska. This area has been described as "the
largest unexplored, potentially productive onshore basin in the
United States" and could produce oil
equivalent to half of all U.S. imports from Persian Gulf countries
for 30 years. Only a small sliver of
those 2,000 acres would be needed to tap into this source--leaving
a full 99.99 percent of the 19 million acres of ANWR untouched by
exploration.
Congress approved exploration of Section
1002 in 1995, but President Bill Clinton vetoed that legislation.
If he had signed it, the United States would be well on its way to
enhancing the nation's energy security. Last August, the House of
Representatives corrected this politically motivated but unwise
step by authorizing oil and gas exploration in Section 1002. Given
the growing instability in the Middle East and U.S. dependence on
foreign oil, it is past time for the Senate to open up Section 1002
to that exploration--both for energy security and for national
security reasons.
Promising areas of oil and natural gas
discoveries are also located offshore in the Gulf of Mexico, in the
Eastern Gulf of Mexico, and on the Atlantic and Pacific Outer
Continental Shelves (OCS). However, federal law prohibits
exploration on the OCS and in the Eastern Gulf of Mexico. A recent
comprehensive assessment by the Department of Interior's Minerals
Management Service (MMS) estimates that the total amount of
undiscovered, conventionally recoverable resources in the U.S. OCS
is 75 billion barrels of oil.
Advanced technologies allow industry to
pinpoint resources more accurately, extract them more efficiently
and with less surface disturbance, minimize associated wastes, and
restore sites to their original or even better condition. Congress
and the White House need to lift the leasing restrictions and allow
responsible exploration in these areas to enhance U.S. energy
security.
Building Up the U.S. Strategic Petroleum
Reserve
A
ready stockpile of oil that can be drawn from to replace any
interrupted imports is essential to sound energy policy, and a
potent measure for dealing with foreign supply interruptions. It could
also reduce skyrocketing price increases that accompany those
supply interruptions. To be effective, however,
the stockpile must be managed correctly and used solely for its
intended purpose--to compensate for supply shortfalls--not to
dampen price hikes.
To
alleviate the economic disruptions caused by the 1973-1974 Arab oil
embargo, Congress in 1975 authorized the establishment of the
Strategic Petroleum Reserve in the Energy Policy and Conservation
Act (EPCA). The legislation authorizes
a drawdown of the SPR upon a finding by the President that there is
a "severe energy supply interruption."
In
1990, Congress liberalized that drawdown authority to allow for the
SPR's use to prevent minor or regional shortages from escalating
into larger ones, and it has further broadened it to include
instances in which a reduction in supply appears sufficiently
severe to bring about an increase in the price of petroleum. It
must be severe enough to "likely...cause a major adverse impact on
the national economy." The policy governing SPR
use generally has been that SPR oil is to be used to ameliorate oil
supply shortages and their consequences (including higher prices),
but not to regulate prices explicitly.
The
Clinton Administration established a risky precedent for the use of
SPR oil in 2000. Due to high gasoline prices and concerns about the
supply of and prices for home heating oil in an election year,
President Clinton directed a release of 30 million barrels of oil
from the SPR in September 2000. Under a so-called
swap, bidders would return 31.5 million barrels to the SPR in 2001.
This "repayment" schedule was extended, however, in March 2001,
postponing the return of nearly 24 million barrels of the "swapped"
oil until January 2003. President Clinton in effect
used the SPR, which was established to protect Americans from
cut-offs of oil imports, to manipulate prices.
In
response to renewed concerns about domestic energy security, the
House in October 2001 passed a resolution expressing its support
for filling the SPR to its authorized capacity of 1 billion
barrels. As of March 28, 2002, the SPR contained about 561 million
barrels of oil. It has a maximum drawdown capability of 4.18
million barrels per day for 90 days, with oil beginning to arrive
in the marketplace 15 days after a presidential decision to
initiate a drawdown. On November 13, 2001,
President Bush ordered the filling of the SPR to its current
physical capacity of 700 million barrels. Oil shipments have begun
and are expected to be completed by 2005.
Strengthening Energy Security
U.S.
dependence on foreign oil has increased steadily since the 1973
Arab oil embargo. Projections show the nation's dependence
increasing to over 60 percent by 2020 if Congress fails to take
necessary actions to enhance energy security. Both the White House and
the House of Representatives have acted responsibly to reduce the
nation's vulnerability to supply disruptions by proposing measures
that would increase domestic production by opening up 2,000 acres
in Section 1002 of ANWR to oil and gas exploration and filling the
Strategic Petroleum Reserve to its maximum capacity.
Regrettably, the Senate leadership until
recently has repeatedly stalled passage of a comprehensive energy
plan. Moreover, the plan it has allowed the members to debate is
seriously flawed.
The
Bush Administration and Congress should take steps now to increase
energy security and strengthen national security. Specifically, the
Administration should:
- Push forward
with filling the Strategic Petroleum Reserve. The
likelihood that a producer state will use oil in an attempt to
influence U.S. policy is directly related to its chances of
success.
The greatest benefit of having a stockpile, like that of the
nation's nuclear arsenal, may be its mere existence, which would
reduce the prospects for successful oil blackmail and deter hostile
states from attempting to cut back oil production or to disrupt
U.S. oil imports.
- Persuade the
conference committee on energy legislation to open ANWR for
exploration and examine the option of developing it as an adjunct
to the SPR. ANWR could be explored and developed, and the
pipeline infrastructure built, but oil wells capped until they are
needed to be tapped during an oil crisis. The oil companies that
develop ANWR could be compensated for their investment by being
allowed to draw oil from SPR supplies elsewhere. Because ANWR oil
would not come on-line for at least five years, SPR oil released
before then would be exchanged for greater amounts of ANWR oil,
which would provide a net increase in long-term energy
security.
- Encourage the
Senate to act quickly to implement the measures of the balanced
Bush energy plan by affirming the provisions already passed by the
House. If the Senate fails to do so, it will have missed a
sensible opportunity to make the nation more secure and less
susceptible to crises in oil-producing regions around the
world.
Conclusion
The
Iraqi oil cutback and Venezuelan oil-worker strikes have once again
driven home to Americans their potential vulnerability to oil
supply disruptions and oil price hikes. Congress must bear in mind
the uncertainty of long-term dependence on oil imports from
volatile regions such as the Middle East as it weighs the costs and
benefits of developing additional oil supplies inside the
boundaries of the United States.
President Bush has proposed a balanced
energy plan that will enhance the country's national and energy
security. Last August, the House of Representatives passed
legislation that would implement many of those measures. It is time
for the Senate to act responsibly and pass an energy package that
enables the nation to increase energy security and improve national
security for the future.
Charli
E. Coon, J.D., is Senior Policy Analyst for Energy and the
Environment in the Thomas A. Roe Institute for Economic Policy
Studies, and James Phillips is
Research Fellow in Middle Eastern Affairs in the Kathryn and Shelby
Cullom Davis Institute for International Studies, at The Heritage
Foundation.