Jeffrey Frankel
The risk of an oil shock means we should keep some reserves underwater.
In the wake of the April oil well blowout off the coast of Louisiana, policy makers are rethinking the issue of offshore drilling. Clearly the last decade's neglect of safety rules by federal regulators needs to come to an end. But what larger implications should we draw for domestic oil drilling?
The tension has long been between those who give primacy to the environment, on the one hand, and those who give primacy to business on the other. Probably some of the first group oppose all oil drilling and some of the latter support all oil drilling (even when the government unconscionably offers oil leases on federal lands at below-market rates, as it often has historically). As so often, the right answer lies in between.
Yahoo! BuzzEver since Sept. 11, 2001, "energy security" has received increased emphasis. The energy security argument is viewed as able to tip the balance in between the dueling environmental and business arguments. Usually it is taken as self-evident that the energy security goal argues in the direction of increased exploitation of domestic oil resources: "Drill, Baby, Drill." But some of us have long thought that a more appropriate slogan for the policy of using domestic reserves as aggressively as possibly would be "Drain America First." A true understanding of energy security could tip the balance the other way instead, in the direction of conserving American energy resources. Oil wells such as the Deepwater Horizon site, once it is capped, should be saved, their future use to be made conditional on a true national emergency, such as a long-term cut-off of Persian Gulf oil resulting in a global oil price of $200 a barrel or more.
Public debate is hampered by the lack of a working definition of energy security. A goal of ending U.S. imports of oil would not be attainable, in the foreseeable future, given the gulf between domestic deposits and our consumption (wind and solar will not give us enough energy to make up the difference, certainly not for many decades.) A goal of ending imports from specific geographic regions such as the Mideast would not be relevant, because oil is mostly fungible: a sudden fall in global supply would raise the global price and thus have virtually the same effect on the American economy regardless whether the cut-off occurs in a region where we had been buying our oil or not.
What, then, should be the goal of energy security policy? Imagine that at some point in the coming half-century, there is a sudden cut-off in oil exports from the Persian Gulf (or the Arabian Gulf, as our non-Iranian friends on the Arabian Peninsula prefer to call it.) Perhaps as a result of military conflict between the U.S. and Iran, Islamist revolutions in Saudi Arabia and Gulf emirates, or terrorist use of radiological weapons. Precedents, of course are the oil shocks of 1973-'74 (precipitated by the Arab oil embargo in connection with the Yom Kippur War), 1979 (the fall of the Shah of Iran) and 1990 (Iraq's invasion of Kuwait).
What would be the impact of a big new shock on the economy of the U.S. and other industrial countries? The quantity of oil in the Strategic Petroleum Reserve (SPR) could at best help tide us over only for a few months. If the global crisis threatened to go on for years, the economic effects could be severe. This fact currently constrains U.S. foreign policy and military policy, which is part of what we mean by the phrase energy security. Also important for our national security are two more points. First, our oil imports currently transfer every year many billions of dollars to dictators and extremists who are potential enemies. Second, our military runs on oil, as did Japan's in 1941, which is largely why it went to war.
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