No Matter What, the Oil Will Flow

Energy security is becoming the byword for politicians anxious to do something on the home front to support the war on terrorism. Apparently the belief that reliance on foreign oil is a dangerous Achilles’ heel during wartime--particularly during wartime in the Middle East--is hard-wired into our collective DNA. Accordingly, Americans are anxious to sacrifice something--gas-guzzling cars, Arctic caribou, whatever--to become less dependent on foreign oil.

Don’t bother. Oil imports aren’t a problem, and energy independence is no solution.

First, even if every drop of oil we consumed came from Oklahoma, Texas and Alaska, a cutback in OPEC production would raise domestic oil prices as high as if all our oil came from Saudi Arabia. That’s because there are no regional markets for oil--only global markets--and regional prices invariably rise to the world price. In 1979, for instance, Britain was energy-independent. All the crude oil it consumed came from the North Sea. Yet the oil price spike of 1979 hit Britain as hard as it hit Japan, a country dependent on oil imports. No country can wall itself off from the world market.

Second, once oil is in the tanker or refinery, there is no controlling its destination. During the 1973 embargo, for instance, oil that was exported to Europe was resold to the U.S. or ended up displacing non-OPEC oil that was diverted to the U.S. market. It was no more possible for OPEC to keep its oil out of U.S. ports than it was for the U.S. to keep its grain out of Soviet silos several years later.

Third, reliance on foreign oil imports does not affect our military capabilities. Defense Department officials have testified that the military could fight two major regional wars the size of Operation Desert Storm nearly simultaneously while using only one-eighth of the current U.S. domestic oil production.

Fourth, energy independence--even if achievable--would be harmful because higher prices would be paid for energy than is necessary. After all, the U.S. imports Persian Gulf oil for a reason: It’s significantly less expensive than domestic petroleum or non-fossil fuel alternatives. Artificially limiting our access to foreign oil is to artificially limit our access to cheap oil--hardly a wise policy in a recession.

That’s not to say that we shouldn’t increase domestic oil production or conserve energy. It’s just that those policies cannot be justified on the grounds of energy security. The case for drilling in the Arctic National Wildlife Refuge is not that it will immunize our economy from OPEC. It can’t. The real case for drilling there is twofold. First, ANWR might hold so much crude that it could reduce OPEC’s share of the market, reducing the cartel’s leverage over world prices. Second, oil exploration is the most productive use of some of the land within that region.

It’s doubtful, however, whether drilling in ANWR would do much to bring down oil prices. Industry’s best estimate is that it could produce about 1 million barrels of oil per day at its peak. That’s a 1.25% increase in global production that, all things being equal, would reduce world oil prices from $20 per barrel to about $18. That’s not inconsequential. But it’s not a cartel-breaker either.

But assume for the sake of argument that ANWR holds about 5 billion barrels of economically recoverable reserves (a reasonable estimate given what we know). That oil would have a discounted value of about $30 billion. That’s a lot of wealth we could create for an economy nosing into a recession.

Regardless, we likely won’t have to worry about politically inspired attempts to use oil as a weapon against the U.S. in the current conflict. OPEC nations are first and foremost profit maximizers. Never once have they allowed foreign policy considerations to get in the way of the bottom line, self-serving declarations to the contrary notwithstanding.

The October 1973 embargo is a good case in point. The announced 5% monthly production cutbacks were canceled within a month. By Dec. 25, OPEC had agreed to a 10% increase in January production. The promise to tie oil exports to Israeli withdrawal from the occupied territories had a shelf life of only two months.

The United States has a lot of things to worry about right now. Reliance upon foreign oil imports isn’t one of them.