Wednesday, January 18, 2006

U.S. Foreign Policy Needs to Get Over Fears of Implausable 'Oil Weapon' Says New Study by Roger J. Stern

PhysOrg carried a story today on a new study by Roger J. Stern titled "Oil market power and United States national security," which appears in the Jan. 16-20 online Early Edition of Proceedings of the National Academy of Sciences.

Stern's article argues that the the decades-old belief that petroleum-rich Persian Gulf nations must be appeased to keep oil flowing is imaginary, and the threat of deployment of an "oil weapon" - i.e. an OPEC oil embargo - is in fact toothless. His review of economic and historical data also presents the controversial claim that untapped oil supplies are abundant, not scarce.

From PhysOrg:


Stern's analysis, titled "Oil market power and United States national security," appears in the Jan. 16-20 online Early Edition of Proceedings of the National Academy of Sciences. In the article Stern argues that the longstanding U.S. security concern that our oil supply could be threatened is wrong.

The real security problem, says Stern, comes from market power. Persian Gulf oil producers, he says, collude to command artificially high prices that could never exist in a competitive market. Excessive OPEC profits result, he says. These contribute to instability in the region, terror funding and the likelihood that a Persian Gulf superpower could emerge if one state captured the oil production of its neighbors. Because of these threats, the United States has concluded it must use military force to block state-on-state aggression in the region and to contain terrorism.

"U.S. appeasement of the oil market power not only helps create these problems, it makes them inevitable," said Stern, a doctoral student in the Department of Geography and Environmental Engineering. "Why do we follow this schizophrenic policy? We do it because we believe the 'oil weapon' might be used to reduce our supply if we somehow offend the OPEC countries. My research shows the oil weapon is completely implausible." According to the journal article, recent history shows that attempts to use an oil weapon have consistently failed. The idea, Stern says, dates back to the mid-1930s, when the League of Nations considered cutting off oil to Italy as punishment for its aggression in Ethiopia. The league realized the oil weapon couldn't work, however, because non-league nations could continue to supply Italy. Keeping oil out of Italy would have required a blockade, an idea dismissed as impossible to enforce. What was true for Italy then is true for the United States today, Stern says.

By the 1950s, Stern says, the low price of Persian Gulf oil imports jeopardized the profits of smaller U.S. oil producers. To restore shrinking market share, the U.S. oil industry successfully lobbied Congress to limit imports, arguing that reliance on foreign oil would undermine national security. U.S. producers argued that low-priced, abundant imports were dangerous because they might someday be withheld. "The oil weapon of U.S. politics descends from this confection," Stern writes in his article.

In the early 1970s, fear of the oil weapon moved to center stage once again. An influential article in Foreign Affairs predicted fuel shortages and economic disaster if the United States did not honor Middle East oil producers' wish that Israel's borders be redrawn. The United States defied this wish, and in 1973 Persian Gulf states unleashed the oil weapon in response. They vowed to cut supplies to the United States if Israel did not return to its 1967 borders. But because the United States could obtain fuel from elsewhere, Stern argues, and because the Persian Gulf nations were dependent on oil revenue, their "attack" was quickly abandoned. Panic buying kept prices high for a while, but actual supply fell only a small amount. Still, fear of a fuel cut-off remained. "Diplomats misread the market," Stern writes. "The oil weapon is impotent, but belief in it is not."

Stern's hypothesis is that "threats do arise in the oil market, but not from the oil weapon but from the (OPEC) cartel's management of abundance." Stern said his research shows that since 1970 the cost of extracting oil in Saudi Arabia has dropped by more than one-half, a clear sign of abundance. He argues that Persian Gulf oil prices are being kept artificially high in order to generate monopoly profits for these nations.

"Because of oil's enormous returns, Gulf states try to seize control of each others' fields," Stern says. "Iraq invaded Iran and Kuwait for this purpose. Our military is there today trying to keep regional peace and prevent a new superpower. Yet this policy allows aggressive oil states like Iran to grow ever-richer and more dangerous from the product they sell to us."

U.S. leaders, Stern says, must stop allowing fear of the oil weapon to dictate foreign policy. Instead, he says, they must find ways to reduce our fuel demand. "It's like we're holding a gun to our own heads: Our belief in the oil weapon constrains our concept of what we can and cannot do in the Middle East and in our own economy," he says. "It also blinds us to the huge opportunity to make ourselves more secure by reducing our oil consumption."

John J. Boland, an expert on utility economics and environmental policy who serves as Stern's faculty advisor, said the journal paper, part of Stern's doctoral thesis, raises important issues. "It's a pretty significant article," he said. "One thing Roger does is attack the perception that petroleum is scarce. That's a very unpopular position, one that is aggressively disputed by our government, even though other analysts have also raised this idea."

Added Boland, who is a professor emeritus in the Department of Geography and Environmental Engineering at Johns Hopkins: "This paper presents an unpopular perspective that has profound implications for our nation's energy policy and foreign policy."

If Stern's historical analysis of past OPEC oil embargoes is correct and that panic buying, not real significant reductions in supply was the main result, then he may have something here. However, I would argue that the world is quite a different place now than in, say, 1967.

According to the Transportation Energy Databook (TDB), U.S. oil consumption has nearly doubled between 1965 and 2003 (the latest year of data in the TDB) from 11.51 million barrels per day (mm bbl/d) to 20.04 mm bbl/d. Furthermore, U.S. domestic oil production has fallen from 7.8 mm bbl/d in 1965 to only 5.74 mm bbl/d in 2003. As would befit such a situation, our share of imported oil has also rissen dramatically from 32.2% to 71.4%, more than doubling since 1965.

Additionally, the worldwide demand picture looks completely different now with developing countries like China and India becoming major oil consumers and expanding their consumption rapidly. The TDB reports the developing nations (i.e. now OEDC countries) now account for over 30 mm bbl/d of demand, up from onl 8.33 mm bbl/d in 1965. Such countires now account for 38.7% of worldwide demand making the worldwide oil market an entirely different place than in the 1960s.

My point in all of this is to say that the United States is facing increasing competition for foreign oil supplies while its consumption is rising and its domestic production is falling. It may not be as easy for the United States to secure alternate supplies of oil in the event that OPEC nations would unleash the 'oil weapon' and embargo sales to the U.S.

Stern's point that OPEC countries depend upon oil revenues and would be loath to cut-off their most glutenous consumer is obviously correct, but when there are other consumers out there now that are gulping up oil nearly as fast as the United States, they may be able to find a suitable replacement for their U.S. sales revenue - I'm sure China wouldn't mind taking over our oil contracts in the Middle East.

As for the claim that oil supplies are plentiful, not scarce, I would have to see his reasoning, but that seems hard to believe to me. The Peak Oil debate is hardly uncontroversial, but there seems to be substantial evidence that world oil demand is outsripping additions to supply and this situation shows no real signs of changing.

Ultimately though, I firmly agree with Stern's conclusions that we must reduce our oil consumption. It is clearly in the United States' interests - from an economic, national security and environmental standpoint - to reduce oil consumption. This can be accomplished in a number of ways from hydrogen to synthetic- of bio-fuels to efficient vehicles to a transition to electric vehicles and plug-in hybrids. Let's start this
before we face the threat of another 'oil weapon' or another war in the Middle East to secure our interests there.


Vincent DePillis said...

"glutenous"? should be a word if it is not. Sounds like a dumb article. Cost of extraction seems like way to narrow a way to look at supply.

Bob Buchanan said...

You should read the article.

We have been "about to run out of oil" since the beginning of the last century. Reserves, even Proven Reserves, have been rising since the mid-19th century (that's after we took a bunch out of the ground). Besides, Stern's real issue is that our strategy towards OPEC, et al, is wrong. His thesis deserves careful analysis ... if correct we need to change what we are doing.