Washington (Platts)--11May2009

The United States must drastically lower its foreign crude imports and
increase its own fossil fuels production to boost American economic and
national security, according to a RAND Corporation report released Monday.

The US imports 58% of its total oil consumption and consumes 25% of the
world's oil production, while producing only 10%, RAND said in its report,
prepared for the US Chamber of Commerce.

Because of the US' reliance on foreign oil, it faces a dramatic repeat of
the "oil-shock" during the Arab oil embargo following the US support of Israel
in the 1973 Yom Kippur War, RAND said.

The federal government could save as much as 12%-15% of its 2008 defense
budget, or as much as $72 billion, if it no longer depended on crude that
flowed from the Persian Gulf, Rand said. The dependence on foreign oil
enhances the ability of "rogue" states such as Venezuela and Iran to thwart US
policy goals, RAND added.

"In light of these findings, the United States would benefit from
policies that diminish the sensitivity of the US economy to an abrupt decline
in the supply of oil," said RAND.

Boosting domestic fossil fuels production, such by opening the Arctic
National Wildlife Refuge in Alaska, along with more production along the Outer
Continental Shelf, would help US national security efforts and reduce incomes
for "rogue oil exporters" and their contributions to Hamas and Hizballah,
considered terrorist organizations by the US, RAND said.

RAPS CORN-BASED ETHANOL

The US also needs a coordinated and well-distributed policy of using its
Strategic Petroleum Reserve to offset supply disruptions, RAND said.

"The absence of a publicly-stated policy on when the SPR will be used has
the potential to trigger panic hoarding if market participants fear a major
supply disruption, bringing on the very conditions that SPR use was supposed
to ameliorate," it said.

The US should also boost its use of unconventional fossil fuels produced
from coal, oil shale, oil sands and stranded natural gas, RAND said. Interior
Secretary Ken Salazar, who has often touted ending US dependence on imported
oil, especially from the Middle East, as a key way to improve US security, has
been reluctant to commercialize widespread oil sands leasing, saying more
study on the environmental costs is needed.

But RAND knocked any reliance on corn-based ethanol as a substitute for
fossil fuels. "Using corn for ethanol is economically inefficient and has
harmed US national security," RAND said. "Diverting corn from foods to ethanol
production has pushed up world market prices for grains and other foods, which
in 2008, resulted in riots in a number of developing countries," it said.

The US should consider a excise tax on oil, RAND said. "Raising fuel
taxes is the most direct way to curb US consumption of oil," it said,
acknowledging that US consumers would be face "sticker-shock" if all the
needed changes were made.

"The gap between US production and consumption is so large that
eliminating it would entail extraordinarily costly charges to patterns of
consumption and production of fuels," RAND said.

--Daniel Goldstein daniel_goldstein@platts.com