April 24, 2002 | Backgrounder on Energy and Environment
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.
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.1 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.2 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 2020.3 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 2020.4 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.5 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.6 Government actions made things even worse as gas rationing, price controls, and the heavy hand of regulation interfered with energy markets.7
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."8 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."9 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.10 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.11 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.
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.
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.12 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.13 Concentration, therefore, is a key factor in determining the nation's energy security.14
In 2000, U.S. net imports of petroleum accounted for 53 percent of domestic petroleum consumption.15 Over 50 percent of these imports came from countries located in the Western Hemisphere, compared with about 24 percent from the Middle East.16 The U.S. Department of Energy projects that U.S. imports will increase to about 62 percent of domestic petroleum consumption in 2020.17 Oil imports are projected to rise from 10.4 million barrels per day in 2000 to 16.6 million barrels per day in 2020.18 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 2020.19
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.20 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 2020.21 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.22
Likewise, West African producers, including Nigeria and Angola, are expected to increase their export volumes to North America.23 The Caspian Basin region output is expected to rise to almost 3 million barrels per day by 2005 and to increase steadily thereafter.24 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-OPEC25 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.26 Two factors are behind the dependable growth in non-OPEC supply: (1) reduced costs for exploration and recovery, and (2) advanced technologies.27 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.28 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.
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"29 and could produce oil equivalent to half of all U.S. imports from Persian Gulf countries for 30 years.30 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.31
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.32
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.33 Congress and the White House need to lift the leasing restrictions and allow responsible exploration in these areas to enhance U.S. energy security.
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.34 It could also reduce skyrocketing price increases that accompany those supply interruptions.35 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).36 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."37 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.38
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 2000.39 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 2003.40 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.41 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 2005.42
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.43 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.
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.
2. BBC News Online, "Saudi Soothing Deflates Oil Price," April 9, 2002, at http://news.bbc.co.uk/low/english/business/newsid_11918000/1918428.stm.
6. H. Josef Hebert, "So Where's the Crisis?" Associated Press, March 23, 2000, at http://abcnews.go.com/sections/business/Daily News/oilprices_1970s-000324.html.
9. U.S. Department of Commerce, The Effect on the National Security of Imports of Crude Oil and Refined Petroleum Products, An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962, as Amended, November 1999, p. ES-9. The investigation was requested by Senators Jeff Bingaman (D-NM) , John Breaux (D-LA), Mary Landrieu (D-LA), Kent Conrad (D-ND), Michael Enzi (R-WY), Blanche Lincoln (D-AR), Trent Lott (R-MS), Byron Dorgan (D-ND), Max Baucus (D-MT), Frank Murkowski (R-AK), and Conrad Burns (R-MT); ibid., p. ES-1.
10. National Energy Policy, Report of the National Energy Policy Development Group, May 2001, at http://www.whitehouse.gov/energy.
12. James M. Kendell, "Measures of Oil Import Dependence," at http://www.eia.doe.gov/oiaf/archive/issues98/oimport.html, p. 3 (March 28, 2002).
16. White House, Report of the National Energy Policy Development Group, May 2001, p. 8-4; available at http://www.whitehouse.gov/energy/.
30. National Center for Public Policy Research, "Ten Second Response: Teamster Chief James Hoffa Warns Politicians in Both Parties Not to Stand in the Way of Oil Exploration in Alaska," Fast Facts on the Environment, at http://www.nationalcenter.org/TSR32902a.html (April 5, 2002).
32. Testimony of Carolita Kallaur, Associate Director, Offshore Minerals Management, Minerals Management Service, Department of the Interior, before the Subcommittee on Energy and Mineral Resources, Committee on Resources, U.S. House of Representatives, March 22, 2001, p. 6.
33. Testimony of John Felmy, Chief Economist and Director, Policy Analysis and Statistics Department, American Petroleum Institute, before the Subcommittee on Conservation, Credit, Rural Development and Research, Committee on Agriculture, U.S. House of Representatives, April 25, 2001, p. 8.
41. U.S. Department of Energy, Energy Information Administration, Energy Situation Analysis Report, March 28, 2002, at http://www.eia.doe.gov/emeu/security/esar/esar.html (April 2, 2002).