Sharp increases in oil prices, a substantial degree of oil-import dependence, and worry about the political stability of a number of major oil-exporting nations and relentless pressure on prices from the growing Chinese economy ensure that oil in particular, and energy in general, remain firmly fixed in the public consciousness.
The United States currently consumes almost 20 million barrels of oil a day, nearly 60 percent of which is imported. And the share of imports in U.S. oil consumption is projected to grow steadily over the next 20 years to around 70%. This trend raises concerns about U.S. dependency on a world oil market increasingly dominated by supplies from the Persian Gulf, where an estimated two-thirds of the world's known oil reserves are located.
Fears that politically unstable Middle Eastern countries -- and perhaps some other important exporters -- have the United States by the jugular have led to many calls for reducing U.S. oil dependence, both to limit our exposure to the possibility of high sustained oil prices as well as to the greater certainty of periodic price gyrations. Environmentalists and their congressional allies have tended to emphasize energy conservation measures, such as higher fuel economy standards for new passenger vehicles and higher energy taxes, while the Bush administration has pushed for tax and regulatory relief for U.S. energy producers and the opening up of new areas for drilling, such as the Arctic National Wildlife Refuge (see below).
Oil Imports and Oil Intensity
However, on closer inspection the case for immediate and drastic measures to cut U.S. oil imports looks more questionable. For one thing, the oil intensity of gross domestic product (that is, the relationship between oil consumption and GDP) has declined by about 50% over the last three decades as a result of improved energy efficiency and structural changes in the economy. Whether trends in the years ahead will be equally dramatic is hard to say. But at least some continued decline in energy intensity seems likely, thereby suggesting that a given future oil shock will cause less economic disruption, relative to the GDP. And the case for policy measures inducing the private sector to consume less oil, thereby mitigating the impact of oil price shocks, is not ironclad: at least to some extent, individuals, but especially firms, are aware of the risk of future energy price volatility and will already take into account the benefits of reducing exposure to such volatility when making choices about energy investments and conservation options.
Naturally, we would be better off if we could somehow isolate ourselves from the risk of oil price shocks, but reducing oil imports does not automatically reduce our exposure to price volatility. Oil is a fungible commodity, meaning that its price in the United States will be driven by worldwide oil market conditions. The only way to reduce the economic disruptions from world oil price shocks is either to reduce the overall oil intensity of GDP through enhanced energy efficiency or to lean against oil price volatility itself through more active use of the Strategic Petroleum Reserve.
The World Oil Market: Limits to U.S. Policy Influence
Americans would also be a lot better off if world oil prices were determined competitively rather than being manipulated by Middle East countries, acting through OPEC. But again, the ability of the United States to counteract the abuse of market power by OPEC is limited. Most likely, a reduction in U.S. oil imports would have only a moderate effect on the world price, and it is difficult to reduce oil imports, as opposed to total U.S. oil consumption, or to favor imports from secure suppliers (such as Canada) without running afoul of WTO trading rules.
Might reduced dependence on imports confer an indirect economic benefit by necessitating less military spending in the Middle East? Perhaps. But keep in mind that Middle East military expenditures serve numerous objectives, not just oil security. Surely, the estimate by one analyst that gasoline at the pump justifies a price over $5 a gallon to reflect this military element is wildly exaggerated.
When it comes to the oil sector, it's easier to pose questions than to answer them. Are market forces signaling future oil prices much higher than were anticipated in projections of a year ago? Or are we perhaps overreacting to the sharp increases of the last few months and forgetting that real world oil prices have tended to show only a slight upward trend over the past quarter century? Still, couldn't a steadily increasing concentration of oil production in the Middle East invite the exercise of greater market power and contribute to the unsettling impact of greater volatility in oil prices? Without dismissing the possibility of harm through acts of disruption by extremist groups, should we not assume that the stakes that governments of oil-producing countries have in a stable world economy will inhibit policies and provocations detrimental to their self-interest?
Calls for radical policies to make the United States self-sufficient in energy within a decade are wholly unrealistic and misguided. Nevertheless, oil dependency remains a legitimate cause for concern. Studies suggest that some fairly modest taxation of overall oil consumption, perhaps in the order of $3 to $6 per barrel, is warranted on economic grounds for addressing the risk of disruptions from oil price volatility and certain market power issues. An environmental-protection element would justify some additional premium. For example, while the country's clean air policies have effectively reduced some important "externalities" from fuel combustion, the problem of greenhouse gas emissions remains essentially unaddressed. Yet the oil-burning transport sector accounts for around a third of U.S. carbon-dioxide emissions, making it a nontrivial factor in global warming. A case can also be made for more R&D to diversify our energy portfolio, thereby making us less oil-intensive over time. In the case of steep, short-term oil price spikes, the government should consider more aggressive withdrawals from the Strategic Petroleum Reserve (ideally, in coordination with Europe and Japan) to stabilize the market. In short, no single approach can adequately meet the oil dependency challenge. A combination of strategies -- both near- and long-term -- is needed.
ANWAR to the Rescue?
There has been much debate over the oil potentials of the Arctic National Wildlife Refuge (ANWR) and how these prospects might map into the oil-dependence issues so far discussed. Without expressing any judgment about the pros and cons of opening the reserve for development, we are content to point to factors that might be more prominently injected into the ANWR policy debate. Probabilities are, of course, central to the issue: while there is a small likelihood of very large discoverable reserves and a high likelihood of only modest discoveries, a United States Geological Survey (USGS) analysis points to a mid-range estimate of around 10 billion barrels. This magnitude -- while certainly significant relative to the country's present proved reserves -- might at best sustain a production rate a decade from now approaching, say, a million barrels a day, when global energy demand is forecast to hover around 100 million barrels per day. Since, as noted, oil prices are determined in a world market setting, it is hard to see how ANWR's roughly one percent contribution to this fungible global pool would lower our gas pump prices by more than a few pennies below levels otherwise prevailing.
ANWR opponents might seize upon such calculations to justify rejection of policies to proceed with development, arguing that the economic gain doesn't justify the environmental risk. Evidence of much larger reserves -- and therefore much greater output potential -- might weaken the environmental grounds for such opposition. Even so, given the inherent difficulty of "monetizing" the preservation of unique ecosystems in a benefit-cost framework, there will no doubt be continued dissent from some groups embracing the intrinsic and -- to them -- unmeasurable value of an unspoiled landscape, irrespective of the economic benefits foregone. Those hoping to be able to reconcile economic logic with spiritual values have their work cut out.
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Joel Darmstadter and Ian Parry are Senior Fellows at Resources for the Future, an independent energy and environmental research organization in Washington, D.C.
This web feature is an adaptation of an online commentary originally published February 4, 2004, and is based, in part, on RFF Discussion Paper 03-59, The Costs of U.S. Oil Dependency, by Ian W.H. Parry and Joel Darmstadter, distributed in December 2003.
RFF is home to a diverse community of scholars dedicated to improving environmental policy and natural resource management through social science research. Resources for the Future provides objective and independent analysis and encourages scholars to express their individual opinions, which may differ from those of other RFF scholars, officers, and directors.
