Oil Change International

Exposing the true costs of fossil fuels

The Price of Oil: Energy Insecurity

The industry and its allies claim that more drilling, more subsidies, or more pipelines are necessary for U.S. energy security.

In fact, continued reliance on oil is a strategy for ongoing energy insecurity.  Oil is the most volatile energy commodity in the world. Reducing our use of it is the only genuine energy security strategy.

The International Energy Agency (IEA) defines energy security as “the ability of a given country to obtain uninterrupted availability of its main energy sources at an affordable price.”

Oil is a geopolitically strategic commodity that is more vulnerable to both market manipulation (e.g. OPEC) and regional instability than any other form of energy. But producing more oil at home does not insulate American consumers from oil’s volatility.  Keeping oil at an affordable price, or more to the point, maintaining an affordable and effective transport system, is in no way guaranteed by producing more domestic oil.

As the U.S. Department of Energy recently stated: Even if the United States was entirely self-sufficient in oil, domestic crude prices would remain coupled to the global market and be subject to the global dynamics of supply/demand, as well as international events.

So while an increase in American oil supply may increase the global supply of oil, the affect this added supply can have on U.S. oil prices is very limited. This is because American oil prices are linked to global prices, which are buffeted by events in numerous oil supply regions. Additionally, the privatized American oil industry has no incentive to maintain spare production capacity that could be used to cool prices in the event of a price shock. Indeed the structure of the North American oil industry is such that its imperative is to sell its product to the highest bidder.

America has been consuming less oil since 2005 and producing more in recent years. This has reduced the balance of oil imports to consumption.[1] But during this time oil prices, and gas prices at the pump, have hit all-time records: 2012 may be the best year for U.S. oil production since the 1990s but will likely also be a record year for gas prices.

This is primarily because global oil prices have been buffeted by instability in key oil producing regions. The situations in Libya, Syria, Yemen, Sudan and Iran have kept oil at a premium in recent months. And that has affected the U.S. despite the fact that the United States does not directly import much oil from those countries.

Growing oil production in the Americas may suggest that the global center of oil production is shifting towards the Western Hemisphere. But analysts warn that this will not significantly change the volatility of the global oil market.

In a comprehensive analysis of emerging oil resources in the Western Hemisphere and elsewhere, Leonardo Maugeri of the Harvard Kennedy School said this: The unconventional oil revolution in the U.S. and the Western Hemisphere must not obscure the fact that through 2020 and beyond, more than 50 percent of the global oil supply will continue to come from a geographic arc stretching from Russia to the Persian Gulf. Every major event concerning this geographic arc will be critical to the overall stability of the global oil market.

Following similar logic the Congressional Budget Office recently concluded that: Improving U.S. energy security is principally about reducing costs to U.S. consumers from disruptions in the oil supply. Because the world market dictates the price of oil, increased domestic production would probably not dampen price changes resulting from disruptions. Reducing the amount of oil used could reduce the cost of disruptions to U.S. consumers.

So subsidizing more oil production is not an energy security strategy. But subsidizing and supporting efficiency and alternatives clearly is.

 


[1] The question of by how much net imports have come down depends on what you measure. If we only measure net imports of crude as a percentage of net crude oil into U.S. refineries the decrease is less dramatic than some recent claims. See EIA, This Week in Petroleum, May 25, 2011. http://www.eia.gov/oog/info/twip/twiparch/110525/twipprint.htm