01-07-06

High oil prices, political instability in oil-producing states, the rise of energy-hungry China, jihadist terrorism and the return of "resource nationalism" are factors constantly cited in Washington these days as evidence that national security is being undermined by unrestrained consumption of oil.
Petroleum, once seen as the energy source that fuelled the "American century", has more recently been interpreted by some legislators, policymakers and pundits as the Achilles' heel of global dominance.

Daily op-ed pieces, many in fact written by neo-conservatives, state that US dependence on imported oil strengthens assertive petro-states that work against America's interests, bankrolls jihadist terrorism, and allows producers to leverage their market power now that prices are high. Others warn of Chinese energy "mercantilism" sowing the seeds of conflict between the United States and China.
This year President George W. Bush said in his State of the Union address that "America is addicted to oil, which is often imported from unstable parts of the world". He then pledged to make US dependence on the Middle East a "thing of the past" by promoting alternative fuels -- to rapturous bipartisan applause. Not since the 1973-74 Arab oil embargo and price hike has US oil consumption generated such concern.

Indeed, the current high-price environment (now about $ 73 per barrel) and assertiveness by energy producers, especially Russia, Iran and Venezuela, have accelerated fears in Washington that the US is strategically vulnerable. It's frequently claimed that Presidents Vladimir Putin, Mahmud Ahmadinejad and Hugo Chavez wouldn't be so defiant of the US if oil prices weren't so high and if their nations didn't have substantial energy reserves.
Recently the Financial Times reported on a study by the US military's Southern Command. It noted that the trend toward greater state control over energy assets in Latin America "will hamper efforts to increase long-term supplies" and that"long-term energy production in Venezuela, Ecuador and Mexico are currently at risk".

Some Republican and Democratic legislators have expressed fear about the geopolitical impact of the current dynamics of the oil market. As a result they have drafted bills that aim to curb consumption by improving fuel efficiency of vehicles, encouraging use of alternative sources of transport fuel such as ethanol, facilitating investment in technologies to develop hybrid and electric cars, and improving diplomatic channels with other major energy consumers.
Yet what is the likely success of efforts to wean the US off dependence on imported oil, and will it have the desired effect on the market and the actions of oil-producing states? There has been much rhetoric and hyperbole about these issues, and some of the arguments made in the current debate range from reasonable to alarmist.

Per capita oil consumption in the United States is higher than in the rest of the industrialized world, and US import dependence is steadily rising. It's therefore long overdue to look at measures that can reduce consumption that will have environmental, economic and geopolitical benefits. But it's also important to be realistic about the size of the task required to reverse the trend of rising oil demand, as well as about the accuracy of alleged dangers to energy security constantly highlighted today.
In 2005 the world consumed about 83.7 mm bpd, with 25 %, or about 20.8 mm bpd, consumed in the US alone. Of this demand the US Energy Information Administration (EIA) says that 58 % was supplied by imports, a figure forecast to increase to 70 % by 2025, when imports will nearly equal total consumption today. While the EIA forecasts oil demand growth in Europe and Japan to be flat from now until 2030, US oil demand is expected to grow by 37 % over the same period.

It will therefore take a huge amount of US political willpower to mandate the kinds of actions necessary to reduce substantially the level of oil imports over the next 20 years. Some tough measures, including, for example, higher gasoline taxes and more stringent fuel-economy standards for vehicles, would be politically costly for both Congress and the White House.
Proposals so far to promote the use of ethanol, expand the fleet of hybrid cars, or even increase domestic supplies by opening up new areas for exploration and production will have a modest impact at best on reducing import dependence. The EIA recently noted that government-mandated actions to curb consumption normally have a limited volumetric impact within 5 to 10 years, even if a greater impact can be seen in the longer term.

Oil is also a fungible commodity. Therefore the only way to eliminate imports from a foreign source, such as the Middle East, is to eliminate the market for imports overall by making domestic supply equal local demand. But US oil production is flat while demand keeps rising. As long as the US imports oil -- and it will for some time to come -- some of that will originate from the Middle East.
US refiners cannot buy crude oil from Iran because of US law, but the Islamic Republic readily supplies the markets of China, Japan, India, the rest of Asia, and Europe.

Even if "energy independence" in the US were to be achieved, it would not be insulated from tensions in oil-producing countries or the actions of hostile states, especially in the Middle East. The US is actually less dependent on Persian Gulf oil than Europe and Japan, but the tankers that sail through the Strait of Hormuz are the lifeblood of the global economy, and would be even if the US didn't import any oil. This fact has been the key motive for the US maintaining its dominant security role in the Persian Gulf.
Furthermore, growing demand in Asia, especially China and India, will provide lucrative alternative markets to Persian Gulf producers that possess about two-thirds of the world's oil reserves. The EIA forecasts that 43 % of the growth in demand between 2003 and 2030 will come from Asian nations. Over the same period the organization also forecasts that OPEC Persian Gulf producers of Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates will supply 31 % of the forecast increase in world production capacity.

There needs to be greater understanding of what is required to reduce US dependence on imported oil dramatically, as well as better awareness of what the limitations are in measures taken to help achieve energy security. Similarly, high prices and tight market fundamentals have led to an exaggeration in the op-ed-page world of the perception of the threat posed by oil producers.
It has been argued that
(1) high prices automatically make producers radical, less democratic, and antagonistic toward consuming nations;
(2) resource nationalism is actually something new; and
(3) the US and China are inexorably heading toward war over resources.

While high prices have encouraged some petroleum exporters -- Russia, Iran and Venezuela -- to throw around some geopolitical weight, or at least threaten to do so, for many others there has been little, if any, change in their geopolitical outlook. Some have eroded the political rights of their citizens, while others have not, or continue to stumble in the opposite direction.
If high prices were the sole determinant of a producer's actions, then Libya would not have sought an exit from international isolation at a time when prices had reached record levels.

Nor would Saudi Arabia and Kuwait -- and many others -- have ignored Hugo Chavez' call for OPEC to cut production in June. Iran's approach to its nuclear program is at least determined by its perception that the US has been weakened by its military presence in Iraq as it might be by the price of oil.
Conversely, when prices were low during most of the 1980s, the Islamic Republic was hardly viewed in the West as a less radical entity, nor did Saudi Arabia attempt to become more democratic at that time for fear of the House of Saud losing popular support.

There has been a wealth of academic literature that explains the poor record of rentier states reforming their political systems for reasons that are far too lengthy to discuss here. Yet there are plenty of variables to look at in assessing what motivates a producer's actions, and to relate it solely to the price of crude oil is a little too anecdotal.
Similarly, the term "resource nationalism" has been raised as a reflection of the current market power imbalance in favour of energy producers against consumers. While resource nationalism is not a new phenomenon, high prices have exacerbated anxiety about it. Russia, Venezuela, Bolivia and Ecuador are cited as countries displaying nationalism, whereby energy assets have been either nationalized or where the state has demanded higher royalty payments.

Producing countries whose reserves are owned by national oil companies might feel less inclined to open up to foreign investment while prices are high, preferring instead to reap the benefits of greater revenue than increase output. This may in turn lead to a protracted period of higher prices if markets remain tight.
Current estimates are that international companies can invest in about 17 % of the world's petroleum reserves, either independently or as part of joint ventures with national oil companies, with the rest being the sole preserve of state-owned companies. According to The Economist, the top five companies in terms of reserves are the national oil companies of Saudi Arabia, Iran, Iraq, Kuwait and Venezuela.

It is not news that producers want a bigger piece of the pie when prices are high, but neither is the fact that, particularly in the Middle East, the bulk of oil reserves around the world are state-owned. That region, which has two-thirds of the world's oil reserves, went through its wave of nationalization during the 1970s.
Not all recent examples of resource nationalism involve significant oil producers. Bolivia nationalized natural-gas assets. Ecuador is a substantial producer regionally, but it produces less than 1 % of global supply. Developments in Russia and Venezuela will be watched more closely.

Finally, the role of China in the global oil market has been another issue generating anxiety. China is now the second-largest oil market in the world, edging past Japan in recent years. It consumed 6.6 mm bpd of oil in 2005.
Similarly to the US, Chinese oil production is flat, while demand is steadily rising. In response, Chinese state-owned oil companies have been acquiring energy assets in the Middle East, Central Asia, Africa and Latin America, prompting speculation that China is embarking on a resources grab to fuel its rise to superpower status.

Inevitably, the argument goes, China is on a collision course with the United States, as it will cultivate close ties with oil producers inimical to US interests, namely Iran. It has also been stated that China may even challenge the United States' role as the security guarantor of the Middle East as well.
US-China relations are mixed, butboth powers have a common interest in the stability of oil supplies as significant consumers who are also increasingly dependent on imports. This can be used as a source of cooperation with the right policy mix by both states, and does necessarily imply an automatic degeneration into conflict.

China's energy acquisitions may not always be economic, but ultimately if this is the case it will be China that pays the price. Furthermore, its development of oilfields leads to a greater level of global oil supply, rather than resulting in a situation where one more barrel of oil for China means one fewer barrel for everyone else.
Overall, China's energy policy is more defensive in nature, and it does not seek direct confrontation with the US over energy supplies. Treating China as if it does, however, may eventually lead to the realization of a self-fulfilling prophecy.

The debate over the linkage between oil dependence and national security is a valid one, but needs to be tempered with a realistic assessment of what the problem actually is, and a clear understanding of what's required to be done about it.
Prices are high and markets are tight, but there's no reason to run for the hills just yet.

Peter Kiernan is a Middle East and energy analyst in the Washington, DC, area.