The warning signs of again having to beg for oil
Gasoline prices are below $2 a gallon in much of the country and the average price for a gallon of regular this year is expected to be at the lowest level since 2004. Happy Days are here again for America’s motorists. But for how long? And at what cost?
The cheaper fuel that is boosting sales of SUVs and leading to record gasoline demand is also increasing global dependence on the Middle East for oil. The International Energy Agency (IEA) highlighted recently that the Middle East now accounts for 35 percent of the world’s oil production — the highest level since 1975. The slump in petroleum prices since late 2014 has crimped production in higher cost areas, especially the U.S. Investment in exploration and production has fallen off a cliff. The longer prices stay near current levels the greater our reliance on the Middle East will become.
Some argue that the advent of U.S. shale oil, which added 4 million barrels a day to U.S. supply from 2011-2015, along with tougher fuel economy standards and more electric vehicles on the road means U.S. “energy independence” is at hand and that we may never see $100 oil again. Don’t bet on it. U.S. oil production is down over 1 million barrels a day over the past year and imports are growing again. In 2015, U.S. net oil imports dropped to only a quarter of U.S. consumption, the lowest level since 1970. This year, however, we will import over 30 percent of our oil and more next year. U.S. production could jump if prices rise, but not enough to offset reduced output elsewhere in the world plus growing global demand. Some predict the world could be short of oil by 2020 with prices escalating again. We have seen this movie before.
But won’t the fight against climate change reduce our need for oil? Perhaps. Norway’s Statoil has modeled what very aggressive introduction of electric vehicles might do to oil demand. With 90 percent of global new car sales in 2040 being electric or hybrids, Statoil estimates we could cut about 20 percent of today’s oil demand. Even if this optimistic scenario comes to pass, large investments would still be needed to compensate for the decline of existing oil fields. Supply could well decline much faster than demand.
With 50 percent of proven oil reserves and most of the lowest cost oil to produce, our reliance on the Middle East to meet global demand seems certain to grow. This raises significant risks given the instability in the region. We also should not forget that close to 20 percent of the world’s oil still moves through the Strait of Hormuz every day, only a small fraction of which can get to market via alternative routes.
The oil market has not yet entered a new paradigm. Our need for oil is not going away anytime soon, shale will not make the U.S. “energy independent,” and the Middle East will remain central to our economic fortunes. This has important implications for U.S. foreign and security policy.
We need to avoid unnecessary regulation that could hamper U.S. oil production (fracking is safe!). We also need to keep focused on constraining demand — more efficient vehicles, facilitating the move to electric vehicles and to natural gas for trucking and shipping, and consider either a carbon tax or higher gasoline taxes. We should continue to encourage and assist non-Middle East oil producers who seek to boost their output, in particular Mexico. In addition, we should not be treating our Strategic Petroleum Reserve (SPR) as a piggy bank — selling off our emergency oil stockpile to meet other budgetary requirements as Congress has directed. As our reliance on the Middle East grows again so does the risk of a supply disruption, U.S. shale is not a substitute for the SPR.
From the time of the first Arab oil embargo of 1973-74 until the shale boom took hold in 2011, “begging for oil,” as some have described it, was an important part of U.S. energy diplomacy. As a senior State Department official responsible for U.S. international energy policy from 20072010, I was personally involved in urging the Saudis and other key oil producers to keep the market “well-supplied” — code word for no artificial shortages and reasonable prices. The current low price environment and seeming abundance of oil can lull one into complacency, but the warning signs of our oil dependence are clear. Before long U.S. leaders could again be “begging for oil.”