Energy Security Much Improved, but Never Challenge-Proof

Over the past nine months, a series of accidents and mishaps have disrupted oil production and transportation in the North Sea and now in Alaska.

The irony is that these areas are two of the most important pillars on which the industrial world rebuilt its energy security after the oil shocks of the 1970s. Alaskan oil development, which only received its go-ahead in the midst of the 1973 embargo, has proved to be central to America’s position, accounting today for a quarter of total U.S. oil production. The Alaskan spill has occurred at a time when energy security itself has been coming to the fore again. The volatility of oil prices has added to the uneasiness; in a matter of six months, the price of oil has gone up almost 40%.

Yet, by many measures, we have seen a considerable improvement in U.S. energy security. America is considerably more energy efficient than it was in 1973, when the first oil shock hit. Oil is now produced and exported from many more countries than was the case in the early 1970s, and energy users have greater flexibility to switch among fuels. The automobile fuel efficiency standards and Alaskan oil production have each proved to be worth about two million barrels per day to the United States--one in terms of reduced demand and the other in terms of increased output.

Moreover, various important measures for energy security are now in place--including the International Energy Agency and the U.S. Strategic Petroleum Reserve, which contains the equivalent of 86 days of oil imports. When the sensible idea of such a reserve was first raised by President Dwight D. Eisenhower in the aftermath of the 1956 Suez Crisis (which also saw an oil disruption), his Cabinet dismissed the idea as ridiculous. Now, it is seen as a wise insurance policy--and one that might have saved everyone a lot of hardship at the end of the 1970s.

Today, there is a sizable security margin. Oil and energy are not the constraints on economic growth that they were in the 1970s and early ‘80s. In fact, the oil price collapses of 1986 and 1988 have been like giant “tax cuts” for consumers, contributing to the unexpectedly strong economic growth of the past few years while helping to keep down inflation. While people still grope for the new meaning of “power” in international relations, it is no longer in terms of confrontation between consuming and producing countries, between North and South, but now in terms of the relationship between the United States, Japan and the other industrial countries.

Yet recent trends are spurring renewed concerns. America is a high-cost oil producer; in the new market that has come with the oil-price collapse, the United States does not easily compete. U.S. oil production has fallen by more than 10% since 1985. Meanwhile, demand has risen by 14%. The effect can be seen in oil imports. They had risen to 46% of total consumption in 1979, when the Shah of Iran’s fall from power triggered the second shock. Imports declined to just 27% of consumption in 1985, but now are around 40% and are generally expected to exceed 50% sometime in the 1990s.

Some believe that the severity of the price collapse, the sharp decline in energy investment and the tighter balance between supply and demand will set the stage for a new crisis. Whether that actually happens depends on a variety of factors. Will conservation lose its momentum in the advanced countries? Will economic growth recover in the developing world, setting off explosive growth in demand for oil? Will non-OPEC production continue at present levels, or decline? In answering that last question, future exploration in Alaska will be one of the most important factors, since it is widely considered to be one of the last best hopes for finding major new oil resources in the United States.

But one further question will also affect the outlook--the new environmental agenda. The environment is becoming as important as security in evaluating energy choices. While eyes are currently fastened on the Alaskan oil spill, the real focus is on clean air and the atmosphere. The result could be a major shift toward natural gas as a clean fuel, a new emphasis on research and investment in new technologies, and a new rationale in the 1990s for conservation. Whether that will work with or against security remains to be seen. The environment is, like defense or medical care or education, a “good,” which means that someone has to pay for it. We can certainly look forward to major political battles as to how the bill will be divided up.

The dramatic shifts in oil prices over the past few months underscore the volatility in the energy scene and how rapidly circumstances can change. Both current realities and four decades of experience (though surprisingly little-recognized) tell us that it would be remarkable if we get to the end of the 1990s without our energy security being challenged in one way or another--whether by politics, pressures in the balance between supply and demand or by various combinations of “accidents” and surprises. Such challenges do not, however, necessarily mean a new crisis. That will depend on conditions in the marketplace, economic and political institutions, the values and priorities and objectives of consumers and producers--and on the memory of hard-learned lessons.