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08/14/2003
Post-Saddam, Part II
Following up on part I, here are some further thoughts on the
topic of energy.
Since October 1973 and the Arab oil embargo, at which point the
price per barrel zoomed from $2.90 to $11.65 (you remember the
gas lines), each of the 7 U.S. presidents since has vowed that
America would achieve energy independence, and /or at least
reduce its dependence on foreign oil.
Yet today, imports are 50% of total oil consumption and are
projected to reach 60% by 2010. When only 4% of proven
reserves are in the U.S. and 2/3s in the Persian Gulf, this
obviously creates a problem, especially when 25% of U.S.
imports come from the Gulf states. [In the case of Japan it’s
75%, with China having the potential to be even greater.]
A study out of Oak Ridge National Laboratory found that oil
shocks over the last 30 years have cost the U.S. economy some
$7 trillion, and as you all know by now, every recession of the
last 40 years has been preceded by a significant increase in oil
prices.
Simply diversifying the origin of U.S. oil imports, though, is not
an adequate answer. As Timothy Wirth, C. Boyden Gray and
John Podesta note in a recent Foreign Affairs piece, like any
other commodity – “the last unit sold determines its price. The
United States could shift all its purchases to sources that are
relatively safe politically, such as Canada and Mexico, and it
would still not be protected. The global price is what matters
most.”
And herein is the problem with Saudi Arabia, as we touched on
in part I. A ‘dirty bomb’ going off at a large Saudi port would
severely impact the U.S. and global economy, regardless of
where America is obtaining its energy.
Writing separately in Foreign Affairs, Leonardo Maugeri, an
executive with Italian energy giant ENI notes, “Cheap oil has
always been and remains a curse for industrialized countries and
is the most elusive enemy of oil security. It constricts the
development of expensive energy alternatives and new oil
regions. It discourages conservation and perpetuates lax Western
consumption habits. Finally, it increases dependence on the
Persian Gulf countries with the lowest production costs.”
It doesn’t help the Persian Gulf nations, either, because Saudi
Arabia, Iraq, the United Arab Emirates, Kuwait and Iran are far
too dependent on oil while their demography has changed
dramatically, with the population in the region doubling in
twelve years, 60% of which are under the age of 21. Magueri
adds, “This demographic explosion has created expectations and
frustrations to which stagnant, single-industry economies cannot
give a credible answer. Only sustained oil revenues allow these
countries to temper social unrest by preserving huge social
assistance programs Therefore, frustration and violent revolt
may erupt whenever the minimum living standards are
endangered by decreasing oil prices.” Recruitment for groups
like al Qaeda soars during these periods.
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There is another topic deserving of a note or two and that is
electricity distribution, which coincidentally generates 4% of
U.S. GDP each year (about $225 billion in revenues). The
system in the U.S. is possibly the most vulnerable of the nation’s
infrastructure and as Wirth, Gray and Podesta add, the
transmission grid is as important as the highway system.
Yet our electricity network is antiquated, fragile and inefficient,
largely operating on 50-year-old technology.
“Running today’s digital society through yesterday’s grid is like
running the Internet through a telephone switchboard. Routine
outages and power-quality disturbances cost U.S. businesses tens
of billions a year. A serious accident or act of sabotage could
cripple major regions for days or weeks and do enormous
damage to the economy.”
The system is currently taxed to its limit, impacting the reliability
and quality of industries ranging from telecommunications to
data storage, biotech to financial services.
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On a slightly different topic, looking at the importance and
availability of energy for the world as a whole, of the 6 billion on
earth, 1/3 enjoy energy on demand (electricity at the flick of a
switch, for example), 1/3 have such services intermittently, and
the final 1/3 lacks access to modern energy services, the latter
also being the group living on $2 a day.
As for the U.S., 2/3s of our oil consumption goes into the
transportation sector, which is why some of us get ticked when
our auto companies continue to act like they can’t increase fuel
efficiency.
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Finally, Max Singer has a piece in the August 18 issue of the
Weekly Standard that may generate some attention in certain
circles. His claim is that the West “overestimates” the power of
the Arab oil states, talking about how there is more
“unconventional” oil vs. “conventional,” the latter representing
oil that flows easily.
Canada, for example, has far larger reserves than even Saudi
Arabia if you include its “unconventional” sources, with Singer’s
point being that the cost of finding this crude is continually
coming down to the point where it is increasingly becoming
more economically feasible to drill for it.
But the counter to Singer’s appeal is that we are still at least 5
years from these unconventional sources having any major
impact on supply; due to the fact that these projects take years
and years of planning, much of which hasn’t found its way yet
into the strategic planning departments of the major energy
producers. Singer, in the long run, is probably correct, but it
doesn’t help us in the here and now.
[I do agree with Singer’s other main position, however, that the
United States does not need to be so deferential to the Saudis.]
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Sources:
“An Energy Strategy for the Future,” Timothy Wirth, C. Boyden
Gray, & John Podesta. Foreign Affairs, July / August 2003.
“Not in Oil’s Name,” Leonardo Maugeri. Foreign Affairs, July /
August 2003.
“Saudi Arabia’s Overrated Oil Weapon,” Max Singer. The
Weekly Standard, August 18, 2003.
Hott Spotts will return August 21 with a little discussion on the
Sunnis and Shiites.
Brian Trumbore
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