Petroleumworld`s
Opinion Forum:
viewpoints on issues in energy & international politics.

Sunday´s
Opinion

US Oil Outlook

By Gawdat Bahgat

In his State of the Union speech late January 2006, President George W Bush acknowledged that the US is “addicted to oil” and called for reducing the nation’s dependence on Middle Eastern oil by 75% by 2025. This call represents another step towards articulating a long-term energy strategy. This essay reviews different administrations’ efforts to draw a response to the US’s growing dependence on imported oil. Special attention is given to the Energy Policy Act of 2005, signed into law by President Bush in August that year. The study argues that American policymakers, both republicans and democrats, have failed to adequately articulate a long-term energy strategy. Furthermore, reducing dependence on the Middle East is not the cure for America’s “addiction to oil”. Rather, the global oil market is well integrated. The source of oil matters less than its availability. Given its geological characteristics, the Middle East will continue to occupy the driver’s seat in satisfying America’s and the world’s growing appetite for oil.

America’s Quest For Curbing Dependence On Oil

Since the 1930s, policymakers in Washington have considered articulating and implementing a national energy policy. Under Franklin D Roosevelt’s administration, there was a strong belief that the government could not solve the economic problems facing the country without playing a role in oil policy, which was considered a vital factor in the economic recovery. The intention was not to nationalize or make the industry public but to coordinate its activities. With the US involvement in the Second World War, the struggle over the formulation of a governmental oil policy intensified. Despite the heavy drain on its oil supplies during the war, the US still occupied a strong position with respect to petroleum. In 1950, the US provided 52% of the world’s crude oil production. By 2004, that figure had dropped to about 8.5%. Foreign oil has been imported into the US in ever-increasing amounts, and the ambition of “oil independence” was sought by many policymakers in Washington.

President Eisenhower was convinced that the growing share of imported oil in US energy consumption represented a challenge to the country’s national security and its prominent role in world affairs. His energy policy had two objectives: to reduce the share of foreign oil; and to rely more on supplies from Canada and Mexico than from faraway producers. The program stimulated production levels that eroded domestic reserves rather than creating stockpiles and spare capacity. In the late 1960s and early 1970s, oil companies found that it was more profitable to pay additional import fees than to use domestic oil, since domestic production costs were higher than the total cost of imported oil plus the import fees.

The Nixon and Carter administrations had to deal with some of the most serious oil crises. In the early 1970s, American domestic oil production began its steady decline. Consequently, the nation’s dependence on imported oil increased. Nixon announced a plan called “Project Independence,” the aim of which was to develop domestic resources to meet the nation’s energy needs without depending on foreign suppliers. He wanted to achieve a state of self-sufficiency within a decade. This unrealistic goal was never achieved. Mr Nixon’s successor, Gerald Ford, recommended a comprehensive energy program that featured higher taxes on imported oil and the gradual phasing out of price controls that the government had placed on domestic oil. Mr Ford also signed the Energy Policy and Conservation Act, which authorized the establishment of the Strategic Petroleum Reserve. Coming to office in January 1977, Jimmy Carter judged the energy crisis to be a national emergency and offered a program to deal with it – a program that he asked the nation to accept as the “moral equivalent of war.” The policy focused on reducing overall energy consumption and increasing reliance on coal and renewable sources of energy. Also, at the president’s request, Congress created a new cabinet post, Department of Energy, in 1977.

The collapse of oil prices that followed the global oil glut in the mid-1980s undermined the sense of urgency to take drastic action to control and restrain the American appetite for more energy. Throughout the 1980s and 1990s, the centerpiece of US energy policy was to foster at home and abroad deregulated markets that efficiently allocated capital, provided a maximum of consumer choice, and promoted low prices through competition.

President Bush’s Energy Policy

The rise of oil prices since the late 1990s and President Bush’s and Vice President Cheney’s involvement in the oil industry prior to taking office have put energy at the top of the administration’s policy. In his second week in office, the president established the National Energy Policy Development Group, headed by the vice president, directing it to develop a national energy policy. After four years of long negotiations between policymakers in Washington, both houses of Congress approved an energy bill and the president signed it into law in August 2005. The more than 1,700-page Energy Policy Act of 2005 (Public Law 109-58) includes the following provisions:

Does not open the Arctic National Wildlife Refuge (ANWR) to oil and gas leasing. This highly controversial issue is still subject to debates and bargaining between policymakers and environmentalists.

Requires that amounts of renewable fuel be blended into the nation’s gasoline supply, increasing from 4.0bn gallons in 2006 to 7.5bn gallons in 2012. This renewable fuel includes ethanol and fuel derived from wood, plants, grasses, agricultural residues, fibers, animal waste, and municipal solid waste.

Does not impose any limits on greenhouse gases, new inventory or credit trading schemes. It creates a new cabinet-level advisory committee to develop a national policy to address climate change and to promote technologies to reduce greenhouse gas emissions.

Expands the daylight savings time (DST) by about a month. Effective in 2007, DST will begin the second Sunday in March (instead of the first Sunday in April) continuing through the first Sunday in November (instead of the last Sunday in October).

Contains $14.5bn in tax incentives, aimed at making capital investments in new technology, plant, and equipment cheaper. They also include a two-year extension of the wind energy tax credit and a 30% solar energy tax credit.

Significantly expands the federal role in the process of government review and permitting of liquefied natural gas terminals.

Provides incentives to generate electricity from advanced nuclear power plants, and includes several provisions aimed at promoting new construction of nuclear power plants.

Creates new investment tax credits for advanced clean coal facilities. It authorizes $200mn per year for fiscal years 2006-14 for distribution by the Secretary of Energy to projects that use or develop clean coal technology.

In short, the Energy Policy Act of 2005 provides incentives to encourage investments in fuel-efficiency, renewable sources, clean coal technology, and nuclear plants. It is too early to provide an accurate assessment of the impact of these incentives on the overall US energy policy. For the foreseeable future, oil will continue to dominate the US (and the global) energy mix, particularly in the transportation sector. Furthermore, the large and growing gap between US domestic production (7.2mn b/d in 2004) and consumption (20.5mn b/d in 2004) will continue to be filled by imported oil

The Road Ahead

It is important to distinguish between vulnerability to disruption in world oil supplies and dependence on imported oil. By diversifying the sources of its oil supplies, the US can reduce the former. However, as the world’s largest economy and largest oil consumer (about 24.9% of world’s total), holding only 2.5% of world’s proven oil reserves, the US is certain to remain dependent on imported oil. Indeed, US proven oil reserves have declined by more than 17% since 1990 and in early 2006 is at 50-year lows. Accordingly, the US Energy Information Administration projects that the nation’s total crude oil production will decline from 7.2mn b/d in 2004 to 4.6mn b/d in 2025. This means the percentage of US oil consumption satisfied by imported oil will rise from 58% in 2005 to 70% in 2025.

Most of this imported oil is likely to come from OPEC producers, particularly from the Gulf states. Given the geological characteristics of the Gulf region (abundant reserves, low production costs, access to global markets) producers there are certain to meet the US’ and the world’s growing appetite for oil in the foreseeable future. On the other hand, non-OPEC oil production is projected to reach a peak between 2007 and 2011. According to the International Energy Agency, the prospects for Russian and Caspian oil are very uncertain.

This projected growing dependence on Middle Eastern oil producers does not need to be troublesome. Since the mid-1970s the region has proven a reliable source of oil. Despite political upheavals and wars, major producers have refrained from using their oil as a political weapon. Since the early 2000s Middle Eastern states, as well as other OPEC members, have been producing at almost full capacity. They have embarked upon substantial investments, both upstream and downstream, to ensure that the world economy benefits from regular and secure oil supplies. In the medium term, between end-2004 and end-2010, over 100 projects, with an overall estimated cost of some $100bn are being undertaken by 10 OPEC member countries (excluding Iraq). Thus, OPEC crude oil production capacity is projected to increase from 32.5mn b/d to at least 38mn b/d by 2010.

Instead of unrealistic calls for “oil independence” and reducing dependence on the Middle East, the US should focus on contributing to economic development and political stability in the region. A stable and prosper Middle East is the best guarantee for steady oil supplies. This would benefit the region, the US and the global economy.

 

Gawdat Bahgat is Director of the Center for Middle Eastern Studies, Department of Political Science, Indiana University of Pennsylvania, USA.Petroleumworld not necessarily share these views.

Editor's Note: This article was was written for Middle East Economic Survey- MEES and originally publish in MEES,VOL. XLIX, No 9, 27-February-2006. Petroleumworld reprint this article in the interest of our readers.

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator. Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Internet web links to http://www.petroleumworld.com are appreciated.

Petroleumworld 06/04/06

Copyright ©2006 Gawdat Bahgat/MEES. All Rights Reserved.

 

Send this story to a friend

Your feedback is important to us!
We invite all our readers to share with us
their views and comments about this article.

Write to editor@petroleumworld.com

Any question or suggestions, please write to:
editor@petroleumworld.com

Best Viewed with IE 5.01+
Windows NT 4.0, '95, '98 and ME +/ 800x600 pixels