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USAFA Discovery Magazine

September 2003

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Blood for Oil?

by

Richard L. Fullerton#

United States Air Force Academy

August 2003

 

The Bush administration offered many laudable justifications for the war with Iraq including the elimination of Saddam Hussein’s WMD programs, ridding the Middle East of a violent dictator with a history of unprovoked attacks against his neighbors, eradication of Baath Party support for terrorism, and liberation of the oppressed Iraqi people.  However, one justification categorically denied by the administration was that the war was about gaining access to Iraq’s lucrative oil fields.  In a CBS interview in November 2002, Secretary Rumsfeld unequivocally declared, “It has nothing to do with oil, literally nothing to do with oil.”[1]

Despite the administration’s repeated denials, “No Blood for Oil” became the rallying cry of anti-war activists worldwide.[2]  Even well-respected news magazines propagated the theory that we were invading Iraq to gain access to her oil fields.[3]  But there are far cheaper ways for the U.S. to get oil, and fighting simply to gain access to Iraq’s oil is not an economically or morally sound reason for war.  To understand these issues, we must first dispel some misconceptions about the world’s oil supply and our dependence on it.

The World Still Has Plenty of Oil

News of impending oil shortages and forecasts of looming energy crises have been reported off and on for more than a century.  In 1874, just twenty-five years after the world’s first oil well was drilled in Pennsylvania, the state’s geologist direly warned, “the U.S. [has] enough petroleum to keep its kerosene lamps burning for only four years.”[4]  But, of course, huge new oil fields were soon discovered in Ohio, Texas, and elsewhere.  After U.S. domestic oil production peaked in 1970 the frequency of “expert” warnings accelerated.[5]  In 1972, a group of experts known as the Club of Rome predicted the world’s oil supply would be exhausted by 1990.[6]  A Carter Administration study in 1980 cautioned that the world was running out of oil and peak production would occur around 1990.[7]  In 1984, the Worldwatch Institute’s State of the World book warned in bold print, “The combination of geological, economic, and psychological factors is likely to place end-of-century oil output well below the current level.[8]  More recently, a 1998 Scientific American article by geologists Colin Campbell and Jean Laherrere predicted a permanent decline in world oil production beginning in 2004.[9]  Of course, none of these alarming claims have come true.  Following each dire prediction, new oil fields have been discovered, and new technologies are increasing the amount of oil engineers can extract from existing fields. 

During the 1940s, experts placed the total quantity of the world’s recoverable oil at 600 billion barrels, by the 1970s those estimates had been revised to two trillion barrels.[10]  Today, the most recent U.S. Geological Survey (USGS) report forecasts a mean estimate of the world’s recoverable oil to be three trillion barrels – three times the cumulative amount the world consumed in the entire 20th century!  In November 2000, about the same time USA Today was republishing Mr. Campbell’s warnings of an impending decline,[11] officials of the US Energy Information Administration (EIA) were briefing in more professional, but less public, forums that the peak in world production remains decades away.[12]  Similarly, in March 2000, the project chief of the World Petroleum Assessment stated, “There is still an abundance of oil and gas in the world, . . . Since oil became a major energy source about 100 years ago, about 539 billion barrels of oil have been produced outside of the U.S.   We now estimate the total amount of future technically recoverable oil, outside the U.S., to be about 2,120 billion barrels."[13]

Despite all of the alarming press reports (which make snappy headlines and sell lots of papers) an objective review of the data suggests the world has plenty of oil left to satisfy our energy needs for decades to come.  As the American Petroleum Institute has noted, “normal market processes coordinated by price have never exhausted a non-renewable resource, and there is no reason to expect them to do so in the case of oil.  At this point, there are no market signals suggesting world oil resources are becoming scarcer than they were a half century ago.”[14]  Indeed, the inflation-adjusted price of oil was lower in 1998 than it had been in more than 50 years.   Even at today’s “high” prices, National Defense University economist Don Losman points out that, “a gallon of gasoline sells for less than a gallon of Coca Cola, milk, bottled water, or even discounted mouthwash.”[15]  Oil is cheap because it is surprisingly abundant.  If the world has an oil problem today, it is not a problem of how much oil but rather where the oil is located.

Location . . . Location . . . Location

Only about 3% of the world’s remaining proved oil reserves are found in the U.S.[16]  In contrast, two-thirds of the world’s reserves are located in the Middle East.[17]

Fig. 1: Distribution of Oil Reserves

Middle Eastern oil is also the cheapest in the world.  According to estimates by Cornell University economist Duane Chapman, oil production costs across the Persian Gulf are less than $5 per barrel, compared to $15 per barrel for oil extracted from North Sea fields and Alaska.[18],[19]  Based on these figures, Dr. Chapman estimates the remaining value of the Middle East’s untapped oil at $61 trillion.[20]  This vast treasure, in a sparsely populated and underdeveloped region, proved irresistible to Saddam Hussein on more than one occasion.  In 1980, he invaded and fought an eight-year war with Iran.  In 1990, he conquered Kuwait.  Had he successfully defeated and occupied both nations, he would have controlled a third of the world’s proved oil reserves—enough to replace Saudi Arabia as the dominant player in the world market.[21]  More importantly, he could have used those oil revenues to fund his weapons programs, dominate the region militarily, and transform his image into one of a modern-day Nebuchadnezzar.  It was these dangerous hegemonic aspirations that required a U.S. military response. 

The WORLD Oil Market

How dependent on oil are we, and how much oil do we need to keep things running?  In a study on the economic impact of oil price increases, Stephen Brown and Mine Yucel of the Dallas Federal Reserve bank noted that rising oil prices have preceded 8 of 9 post-WWII recessions.[22]  According to rules-of-thumb published by the EIA, a daily disruption of a million barrels of oil in the world market is likely to lead to a $3-$5 increase in the price per barrel of oil.[23]  A sustained $3 per barrel increase (roughly 10%) in the price of oil today could be expected to lower the U.S. Gross Domestic Product (GDP) growth rate by up to 0.1 percent over a two year period.[24]  Fortunately, our economy’s sensitivity to oil price shocks appears to have declined the last two decades, even though we continue to consume vast amounts of petroleum. 

World petroleum consumption has been relatively stable at about 77.5 million barrels per day (MMBD) for the past few years.  As the world’s largest oil consumer, the U.S. burned about 19.7 MMBD last year.[25]  At a market price of $25 per barrel, the direct cost of our nation’s oil habit is about $180 billion annually, roughly equal to about 1.8% of our nation’s $10 trillion GDP.  But the contribution oil makes to our economy is more significant than that small figure suggests.  Oil accounts for 39% of our total energy consumption and is used for 97% of our transportation needs.[26]  So, if there is such a thing as a vital economic interest, oil would have to be near the top of the list.  

But despite our seemingly precarious dependence on oil, it makes little sense economically to invade Iraq to obtain it.  Contrary to popular belief, the Persian Gulf is not even our primary source of imported oil.  The U.S. gets most of its oil imports from closer, western hemisphere nations—Canada, Mexico, and Venezuela.  Historically, the U.S. has obtained less than a quarter of its oil imports from the Persian Gulf.[27]  Since we import a little over half of all the petroleum products we consume, Middle Eastern suppliers account for only about one eighth of our consumption.  The value of oil we purchased from the entire Persian Gulf region last year was about $16 billion, and the value of the oil we obtained directly from Iraq was only about $3 billion.[28]  Given our nation’s exceedingly small reliance on Iraqi oil and the abundant number of alternative sources of oil on the world market, it is difficult to imagine spending $40+ billion on an invasion, and many billions of dollars more occupying and rebuilding Iraq just to gain access to her oil fields.[29]  We could have far more easily, and cheaply, bought the oil from any number of countries.  Even Saddam himself would have sold us all the oil we wanted to bring in more revenues for his cash-starved Baath Party and nation.  

One of the interesting ironies of the West’s growing reliance on Persian Gulf oil supplies is that the economies of the Middle East are far more reliant on our demand than we are on their oil.  Petroleum accounts for more than 85% of the export revenues of Saudi Arabia, Kuwait, Iran, Iraq, and the UAE, and only a tiny fraction of the land in these nations is arable.[30]  If they want to feed their people, they have to sell their oil.  That is why Maryland University professor and Brookings Institution fellow Dr. Shibley Telhami has stated,

“Historically, political alliances have not greatly altered the pattern of trade between oil countries and the rest of the world. . . . A case in point was Libya, which up until 1969, had been a strategic ally of the West and had hosted British and American military bases.  The overthrow of the monarchy in 1969 and rise of President Qadafi shifted Libyan politics in favor of the Soviet Union.  Yet its trade patterns before and after the coup were largely the same.  For example, the share of trade with Soviet Bloc nations stood at 1.9% in 1960 and 1965, 1.8% in 1970, 1.3% in 1975, and 1.0% in 1980.  Moreover, moderate states in the Middle East did not differ radically from pro-Soviet states in their trading:  the oil-exporting nation with the greatest share of trade with the Soviet Bloc was the Shah’s Iran, not Libya, Algeria, or Iraq.  The bottom line was that these states did what was in their economic interest, regardless of their political orientation.[31]

 

Oil is a fungible commodity, so even if Saddam had refused to sell Iraq’s oil to the U.S., it would have made little difference so long as he was willing to sell it to someone in the world market.  This is an important point worth repeating – the market for oil is a worldwide market and our nation cannot easily be deprived of oil by an economic embargo, even if the embargo were led by a despot like Saddam Hussein.

By now, readers may be scoffing if they are old enough to remember sitting in long gas lines during the infamous 1973 Arab oil embargo.  But the truth is, the production cuts by Arab nations in 1973 were not the main cause of the gas shortages and economic turmoil we remember so vividly.   First, consider the price increase of the time.  The chart below clearly shows that in absolute terms the magnitude of the world oil price increase in 1973 was about the same as the oil price rise during our first war with Iraq in 1991, and far smaller than the price spike caused by the Iran/Iraq war in the early 1980s.

Fig2: Inflation and Crude Oil Prices

Do you remember gas lines and consumer panics in 1991?  Of course not, because we did not experience gas shortages in 1991.  The U.S. was not cut off from Middle Eastern oil in 1991, nor were we cut off from Middle Eastern oil in 1973.  In the six months prior to the embargo, OPEC’s total production averaged 31.4 million barrels per day (MMBD).  During the three month embargo, OPEC’s production averaged 29.6 MMBD.[32]  So the size of the production cut in 1973, was about the same size as two different disruptions the world recently faced in December 2002 with political unrest in Venezuela and again in April 2003 with the war in Iraq and worker unrest in Nigeria—but I am sure we will not remember these recent disruptions in the same vivid way we remember the oil embargo.[33]  If the world’s oil prices oil did not rise that far, and production was not cut that severely, why was our experience in 1973 during the Arab oil embargo so bad?

One key reason the 1973 embargo had such an impact on our collective American psyche is because the Nixon administration attempted to mitigate the impact of rising oil prices by imposing price controls rather than letting the free market operate.[34]  Price controls, not the actual oil embargo, were the biggest culprit behind the widespread gasoline shortages at the time.  According to Jerry Taylor, natural resources studies director at the Cato Institute,[35]

 Price controls imposed in August 1971 by the Nixon administration prevented major oil companies from passing on the full cost of imported crude to consumers at the pump.  Big Oil’ did the only sensible thing, it cut back on imports and stopped selling oil to independent service stations in order to keep its own franchises supplied.  By the summer of 1973, gasoline prices were exploding, pumps were running dry, and long lines were commonplace.  And that was before the Arab oil embargo or production cutbacks were announced.”  

 

Afterwards, even the Saudi oil minister Sheik Yamani admitted, “[the embargo] did not imply that we could reduce imports to the United States . . . the world is really just one market.  So the embargo was more symbolic than anything else.”[36]  Indeed, the 1973 oil crisis was caused as much by the bad economic policies of the Nixon administration as by production cuts in OPEC. 

This is also why economic embargoes have a dismal record of success in changing the behavior of other nations.[37]  Unless all countries are willing to support the embargo, the target nation’s leadership can merely obtain whatever products they want through the countries that choose not to participate.   The only way the U.S. could truly be cut off from oil in the future is if every major oil exporter chose to forbid sales to the U.S., and to forbid sales to the nations we trade with – a highly unlikely event.

Energy Independence?

Just as the U.S. cannot easily be cut off from oil imports, we also cannot be readily insulated from economic shocks caused by oil shortages—even if we were completely self-sufficient in our own oil production.  To illustrate this point, consider the experience of Britain.   In September 2000, truckers blockaded British refineries and consumers participated in widespread protests over government fuel taxes and the rising price of gasoline.[38],[39]  But Britain was a net exporter of oil and the country’s North Sea fields produced more than enough petroleum to meet all of the country’s domestic demand.  Even though Britain was a crude oil exporter, its crude oil prices were determined on the world market.  Therefore, British citizens experienced the same fuel price increases in September 2000 that the French experienced on the other side of the English Channel, that we experienced here in America, and that the Japanese experienced in Asia.  Although the price of a barrel of crude oil depends on the quality of the oil, which varies significantly from region to region, the chart below shows that crude oil prices move very closely together, whether the oil is extracted from the Persian Gulf, the North Sea, or West Texas.  Even though Britain is an oil exporter, its North Sea (Brent) crude prices clearly rise and fall with the world market for crude.

Fig 3: Crude Oil Prices

In a free market, oil producers – domestic or foreign – will sell their oil at the world market clearing price.  The alternative is price controls, which ultimately will only lead to economic disaster (remember the Arab oil embargo).  So, as long as we use oil as a primary source of energy in the United States we will never be able to truly claim we are energy independent.[40] Whether our oil is domestically produced or imported from abroad, our economy will be subject to the same oil price shocks whether they are caused by storms in the North Sea, political unrest in Venezuela, or a handshake in OPEC.[41] 

An OPEC Threat?

The press and politicians frequently blame OPEC for causing large oil price increases, but those claims are usually greatly exaggerated.  Historically, OPEC has had difficulty maintaining high prices because cartel members have powerful incentives to cheat on their production quotas when oil prices rise.  Production agreements can even be difficult for OPEC to maintain when oil demand and prices drop.  In the late 1990s, when world oil demand fell following the Asian financial crisis, OPEC members wound up flooding the market and driving the real (inflation adjusted) price of crude to its lowest point in more than five decades.   In an attempt to solve the crisis, OPEC met in March 2000 to establish new quotas with a target price range of $22 to $28 per barrel.   Based on the cartel agreement, if OPEC prices deviated from the $22 to $28 price band for more than 10 consecutive days members would automatically adjust production to bring prices back into the target range.  Since adopting this policy in March, 2000, the price trigger has only been activated once, in October 2000 when OPEC acted to increase production by half a million barrels of oil per day to bring prices back down below the $28 threshold.[42]  So, contrary to the popular belief that OPEC exists only to raise oil prices, this is one example of OPEC responding to reduce world oil prices. 

Why would OPEC care to reduce the price of oil?  The OPEC cartel, particularly Saudi Arabia, understands that maintaining too high of a market price for too long of a period is not in their long-term financial interest.  High oil prices create strong incentives for nations and industries to invest in fuel efficiency improvements that ultimately reduce our demand for OPEC oil.  For example, when oil prices rose sharply in the early 1980s during the Iran/Iraq war, the demand for oil in the U.S. contracted by about 18%.  One reason our economy was able to respond with a reduction in demand was because we made improvements in fuel efficiency in the aftermath of the 1973 embargo. 

Prior to 1973, the U.S. enjoyed a long period of low, stable oil prices.  As a result, Americans lived and worked in poorly insulated buildings and drove big, gas-guzzling automobiles.  At the time of the Arab oil embargo the average fuel efficiency of U.S. passenger cars was just 13.4 miles per gallon.  Following the embargo, consumers began demanding more fuel efficient cars and by 1982 our passenger cars averaged 16.9 mpg, so it was easier to reduce demand when prices rose in the early 1980s.[43]  Our lack of energy consciousness prior to the oil embargo exacerbated the pain we felt in gas lines in 1973, but the improvements we made afterwards helped mitigate the burden of the price hikes during the Iran/Iraq war.  In recent years, with the exception of the explosion in SUV sales, we have been doing even better.   By 2001 our passenger cars were getting a respectable 22.1 mpg--a 64% increase in fuel efficiency relative to cars in 1973.[44]  Today, consumers can purchase hybrid cars, such as the Toyota Prius, which gets a whopping 45 mpg city/52 mpg highway.[45] 

Another reason OPEC is reluctant to raise oil prices too far is because high prices create incentives to develop energy substitutes.  An alternative to conventional petroleum that is already being exploited is the production of oil from bitumen (tar sands).  According to the USGS, the world has a trillion barrels of recoverable oil in bitumen deposits, most of which are located in Canada and Venezuela.[46]  Oil can be produced from many of these deposits at a cost of less than $25 per barrel, and Suncor Energy of Alberta, Canada reported production and capital costs of less than $15 per barrel in 2001.[47]  We also are able to convert the hydrocarbons in coal and natural gas to high quality synthetic liquid fuel substitutes for oil.  The Tulsa-based Syntroleum Corporation claims it can produce synthetic crude from natural gas at a cost of about $20 per barrel.[48],[49]  Conoco is also building a $75 million gas-to-liquids demonstration facility capable of producing 400 barrels of synthetic diesel per day in Oklahoma.[50]  Synthetic oil can also be produced from coal for about $30 per barrel, and almost a third of the world’s one trillion tons of coal reserves are located in the U.S.[51] 

In addition to these near substitutes for conventional oil, there are many other energy alternatives which can be tapped to reduce our reliance on petroleum.  Biomass (plant matter such as trees and crops) can be converted into clean-burning liquid fuels such as biodiesel, ethanol, and methanol--the fuel of choice in high performance auto races.  Today it only costs about $2 per gallon to produce ethanol from corn.[52],[53]  Biomass is also being used to generate about 37 billion kWh of electricity in the U.S. each year.[54]  Sustained high oil prices could also induce a move away from oil towards a greater usage of electricity produced by nuclear plants, wind turbines and solar power.  High gas prices could shift consumer preferences to newer hybrid electric car technologies, and eventually we could move to fuel cell powered vehicles.  Although improvements are still needed to make hydrogen production and storage more economical, most major auto manufacturers are already investing in fuel cell technologies.  Last summer, Honda’s FCX became the first fuel-cell vehicle to be government certified, making it the first commercially available fuel-cell auto in the U.S.[55]  Though it is hard to predict how our use of these different energy sources will grow in the future, it is certain they will collectively serve to moderate the price of oil.  That is why Saudi Arabia said their oil policy is aimed at creating, “a stable international oil market” where “wide and rapid swings in prices are undesirable.”[56]

Summing Up

By this point, I hope the reader is convinced that oil poses no real economic threat to our nation under normal, peacetime conditions.  There is plenty of oil left in the world to power our boats, cars and airplanes well into the future.  Although most of the world’s proven reserves are located in the Middle East, those nations depend on our revenues even more than we depend on their oil.  The market for oil is worldwide and we cannot be easily deprived of it; nor can we readily insulate ourselves from the turmoil caused by oil shocks elsewhere.   It is also highly unlikely OPEC or other oil exporting nations will attempt to engage in economic warfare against us using oil as a weapon.  If attempted, such a strategy would not succeed unless accompanied and exacerbated at home by economically incompetent policies, like price controls.  Were another embargo attempted, we would almost certainly find alternative suppliers to meet most of our oil demand and we could draw for up to two months on an inventory buffer stored in our Strategic Petroleum Reserve.[57]  Therefore, the only real oil vulnerability that we have is a near-term, catastrophic interruption in the world’s oil supply. 

About the only plausible scenario for a sustained and catastrophic interruption world oil production and trade would be a major military conflict or terrorist attack in the Persian Gulf.  To have the greatest effect, the conflict or attack would have to shut down the production or distribution capabilities of several nations—most importantly Saudi Arabia.  Saudi Arabia is by far the world’s largest oil producer and, more importantly, it has the greatest excess capacity.  Saudi Arabia’s excess capacity of about 2 million barrels per day (MMBD) is larger than the average daily production of most OPEC members.  This excess capacity enables Saudi Arabia to stabilize the supply of oil to the world market and make up for shortfalls in production from other nations.  For example, in 2002 Saudi Arabia produced an average of 8.7 MMBD, but boosted its output to 9.6 MMBD in April 2003 when oil stopped flowing out of Iraq.  Therefore, key Saudi oil facilities have become important centers of gravity in the world’s oil trade.[58]  The most important center of gravity to the world oil trade, however, is the Strait of Hormuz at the entrance to the Persian Gulf.  Almost 20% of the world’s daily consumption of oil is transported through this key chokepoint. [59]  So, an extended closure of the Strait of Hormuz could have a noticeable impact on the world’s economy.

Nevertheless, the U.S. should be content purchasing all the oil we need now and in the future from the peaceful and sovereign nations engaged in the oil trade throughout the world.  We have been a leading proponent of the principles of free trade since the close of World War II, and we ought not feel threatened by it or by the dependence we have on trade to secure everything from oil to semi-conductors.  Under normal conditions there is no real threat posed to our economy or way of life from the peaceful trade of oil in the world market.  However, that is not to say that we should refrain from engaging despotic regimes who threaten the Middle East region militarily.

Lured by the possibility of attaining great wealth from oil, Saddam Hussein had twice before demonstrated a willingness to attack his neighbors.  He shared borders with Iran, Kuwait, and Saudi Arabia and had arduously sought to develop his own nuclear weapons.  Had he succeeded in developing his own nuclear weapons, he could have posed a dangerous military threat.  But that, of course, points to a political rather than an economic motivation for the war with Iraq.   


References

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Notes

# The author thanks Duane Chapman of Cornell University for comments and discussions that helped motivate this paper.  The author also thanks Maureen Crandall of National Defense University for thoughtful comments.  The opinions, conclusions, and/or recommendations expressed or implied within are solely those of the author and do not necessarily represent the views of the United States Air Force Academy, the United States Air Force, the Department of Defense, or any other government agency.

[1] Donald Rumsfeld, interview, Infinity Radio, Viacom, CBS News, Nov. 15 2002.

[2] On 1 July 2003, a Google search of “No Blood for Oil” still produced 19,900 web sites!

[3] For example, see Jane Bryant Quinn, “Iraq:  It’s the Oil, Stupid,” Newsweek, Sept 30, 2002.

[4] The New Economics of Oil, pg 2. 

[5] The peak in U.S. oil production in 1970 was actually a sign of the abundance of cheaper oil elsewhere in the world.  Today, thirty years after the peak in U.S. production, with only 3% of the world’s remaining proved reserves, we are still the third largest oil producer in the world, extracting 7.7 million barrels of oil per day in 2002. 

[6] Meadows et al, pg 58.

[7] The Global 2000 Report to the President, pg 39, 175.

[8] Brown et al, State of the World, 1984, pg 50.

[9] Campbell, Colin and Jean Laherrere, “The End of Cheap Oil”  Scientific American, March 1998, pg 81.

[10] Hakes, Jay.  Long Term World Oil Supply Brief, Apr 18, 2000, pg 9.

[11] Campbell, Colin.  “Depletion and Denial,” pg 19.

[12]The EIA’s algorithm estimates peak production will occur sometime between 2021 and 2112, depending upon assumptions about the resource base and demand growth.  Under an assumption of a 2% annual growth rate in demand, the EIA’s best-guess estimate is that the peak will be in 2037. 

[13] Ahlbrandt,  March 2000. 

[14] Porter, pg 42.

[15] Losman, pg 6.

[16] Even with just 3% of the world’s reserves we are one of the top three oil producers in the world.

[17] Source:  BP Statistical Review of World Energy 2003

[18] Chapman, Dec 2001, pg 9.

[19] Saudi’s oil minister claims the Kingdom’s oil production costs are just $1.50 per barrel, less than a tenth of the cost of many U.S. oil producers.  See the EIA’s report on Saudi Arabia or Pearson’s “Saudi Arabia Energy Report”  

[20] Chapman, May 2003, pg 26.  Notably $61 trillion is about six times the value of U.S. GDP

[21] For a more in depth discussion see Chapman, 2003.

[22] Brown and Yucel, pg 1.

[23] Energy Information Administration, “Rules-of-Thumb.”

[24] Energy Information Administration, “Rules-of-Thumb”

[25]Major oil consumers also include Western Europe at 15 MMBD, the countries of the former U.S.S.R at about 4 MMBD, and China and Japan at about 5.2 MMBD each in 2001.  These figures as the figure for world consumption are for petroleum products, to include natural gas plant liquids.  Source:  EIA International Petroleum Information Table 1.7  OECD Oil Demand, 1997-Present

[26] Other components of U.S. energy consumption are coal (22%), natural gas (23%), and nuclear (8%), hydroelectric (3%), other renewables (3%)  Energy Information Administration, Annual Energy Review, Tables 1.3, 2.1e

[27]Japan gets 75% of the oil they consume from the Middle East, and the Persian Gulf has supplied between 30% and 45% of Western European imports over the last decade.  (EIA’s Persian Gulf Oil & Gas Exports Fact Sheet)

[28] 69% of the oil we purchased from the Middle East in 2002 came from Saudi Arabia, 20% came from Iraq, and 10% from Kuwait.

[29] In Sept 2002, the Congressional Budget Office (CBO) estimated the cost of a two-month war with Iraq to be $44B, with an additional cost of $1.4B to $3.8B for each month of occupation required after the war.  Most analysts considered this a very low estimate.  Larry Lindsey, the President’s economic advisor, was quoted as saying that a war with Iraq could cost $100B to $200B.  See Bush Economic Aid Says Cost of Iraq War May Top $100 Billion, Wall Street Journal, New York, Sept 16, 2002.

[30] Less than 2% of the land in Saudi Arabia, Kuwait and the UAE is arable.  Only about 10% of the land in Iran and Iraq is arable.  Oil revenues account for 90% of Saudi Arabia’s export earnings, 85% of Iran’s export earnings, 90% of Kuwait’s export earnings, and 95% of Iraq’s export earnings.  Source:  CIA World Fact Book 2002. 

[31] Telhami, pg 34.

[32] EIA Monthly Energy Review Table 11-1b

[33] “During the first week of April [2003], the disruptions in Iraq and Nigeria were estimated to have resulted in the loss of 2.7 million barrels per day of oil exports to world markets. . . .These disruptions came just as the previous one of almost the same size – the loss of 2.5 million barrels per day of Venezuela exports in December 2002 – was declining. . . . The two recent disruptions were roughly of the same size as the Arab Oil Embargo, although the price impacts were very different because underlying oil market conditions had changed.”  Source:  EIA OPEC Brief 

[34] The rise in prices associated with the embargo created a dilemma for the administration.  There was a considerable amount of public outrage over the large profits oil and gas producers earned as a result of the higher embargo prices.  But the price controls imposed to check producer profits had the unintentional effect of creating severe shortages. 

[35] Taylor and Van Doren.  “An Oil Embargo Won’t Work”  Wall Street Journal, April 10, 2002. 

[36] Taylor and Van Doren, April 10, 2002.

[37] According to Dartmouth professor Robert Pape, sanctions are successful less than 5% of the time (Pape, pg 106)

[38]CNN, Fuel Protests Widen Across Britain, Sept 10, 2000

[39] Although the price of crude is determined on the world market, the price consumers pay for gas varies widely across nations due to differences in taxes.  The U.S. has a relatively small tax on gas of about 42 cents per gallon.  Japan and many European Union countries impose high taxes of between $2.50 and $3.50 per gallon of gas which in turn makes consumer prices very high.  Iran and Iraq and some other Persian Gulf states subsidize gas for their citizens, bringing the price of gas down to less than 30 cents per gallon.  The impact of gas taxes and subsidies, has a huge effect on consumer behavior and helps to explain why the Europeans and Japanese drive much smaller cars than Americans.  For more on gas taxes and prices see Metschies (1999) and American Petroleum Institute (2001).

[40] As military professionals, some may wonder whether we should attempt to obtain energy independence in order to ensure we have enough oil to operate our military in a crisis.  The short answer to that question is that we already domestically produce far more than the minimum amount required to meet our military needs.

[41] For more on this subject, see Labonte and Makinen.

[42] EIA OPEC Briefing, pg 3.

[43] Source:  Federal Highway Administration (FHWA) Highway Statistics Summary to 1995, Table VM-201A, and Bureau of Transportation Statistics National Transportation Statistics 2002, Table 4-23. 

[44] Our economy as a whole was not as efficient using energy, either, as measured by our energy consumption per dollar of GDP.  Using 1996 inflation-adjusted dollars, in 1973 our economy consumed 2.4 barrels of oil per thousand dollars of GDP.  By 1982 increased efficiency had reduced that figure to 1.7 barrels of oil per thousand dollars of GDP, and in 2001 we were down to just 1.15 barrels of oil per thousand dollars of GDP.  U.S. efficiency has also increased since 1973 by about 25% for other energy sources besides oil.  Source:  EIA Monthly Energy Review, May 2003, Table 1.8.  Conversion factor of 5.8 Million BTU per barrel of oil.

[45] Hybrid cars, like the Prius, combine gas engines and electric motors.  When the car is stopped, the engine converts the car’s kinetic energy to electric power which is why these hybrid autos get better gas mileage in town (frequent stops) than on the highway, and why they never need to be plugged in to recharge batteries.

[46] Source:  EIA, “Are We Running Out Of Oil?”  International Energy Outlook 1999.  Canada and Venezuela each have deposits projected to produce in excess of 300 billion barrels of recoverable oil.

[47] Source:  Suncor Energy.  Suncor Energy, Inc. reported cash operating costs in under $9 per barrel in 2001, and projected cash operating costs of $7 per barrel in 2002.  Also of note, the government of Alberta, Canada reported that production of oil from tar sands deposits has already reached 645,000 barrels per day. 

[48] Syntroleum says it’s Fischer-Tropsch process has a capital cost of around $13,000 per daily barrel of diesel for a 20,000 to 25,000 bpd facility and an operating cost of between $3.50 and $5.70 per barrel.  Of course, the cost of production depends on the cost of natural gas.   Source:  ACTED Consultants, Chemlink, Australia, 1997. 

[49] The USGS estimates the world has about 9 quadrillion cubic feet of proved and undiscovered reserves of natural gas remaining, which is the energy equivalent of another 1.4 trillion barrels of oil.  Source:  USGS World Petroleum Assessment 2000—Description and Results, Table AR-1. 

[50] Source:  Conoco Gas Solutions.  http://gassolutions.conoco.com/

[51] Source:  DOE report,“Coal-based Liquid Fuels and Chemicals,”

[52] Average corn yield is 125 bushels per acre which can be used to produce about 300 gallons of ethanol (Hilker).

[53] Brown, Colleti, and Hallam. Table 10.

[54] Dept of Energy, Biopower Basics – Biomass at a Glance. 

[55] The FCX uses a pressurized hydrogen storage system, seats 4 adults, has a max speed of 93 mph and a range of 220 miles between fill ups. Honda Press Release, July 24, 2002. 

[56] October, 1999 quote from Saudi oil minister Naimi. Source:  EIA, “Saudi Arabia” brief.

[57] The Strategic Petroleum Reserve has a capacity of 700 million barrels and provides a supply buffer of up to 53 days when combined with domestic production.  Dept of Energy, “Strategic Petroleum Reserve – Quick Facts” 

[58] The Abqaiq oil processing facilities, export terminals at Ras Tanura, Juaymah and Yanbu, and the Petroline and Tapline pipelines are key Saudi facilities which handle millions of gallons of oil per day (EIA Saudi Arabia Brief).

[59] About 13 MMBD are shipped through the Strait of Hormuz.  Source:  EIA, “World Oil Transit Chokepoints”





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