by Gawdat Bahgat
06-06-06
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 centrepiece 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 4.0 bn gallons in 2006 to 7.5 bn gallons in 2012. This
renewable fuel includes ethanol and fuel derived from wood, plants, grasses,
agricultural residues, fibres, 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 $ 14.5 bn 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 $ 200 mm 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 (7.2 mm bpd in 2004) and
consumption (20.5 mm bpd 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 7.2 mm bpd in 2004 to 4.6 mm bpd 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
$ 100 bn are being undertaken by 10 OPEC member countries (excluding Iraq).
Thus, OPEC crude oil production capacity is projected to increase from 32.5 mm
bpd to at least 38 mm bpd 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.
Dr Bahgat is Director of the Centre for Middle Eastern
Studies, Department of Political Science, Indiana University of Pennsylvania,
USA.
Source: MEES