Rising Tide of U.S. Oil Imports Sparks Debate on Energy Security

June 17, 1996
Patrick Crow Energy Politics Editor U.S. Net Oil Imports as a Share of Oil Consumption [22276 bytes] U.S. Crude Imports During March 1996 [17325 bytes] Oil Disruptions, 1951-90 [41450 bytes] Imports of crude oil and petroleum products into the U.S. are high and headed higher. Imports last month were about 10.5 million b/d, the largest volume since the mid-1970s.
Patrick Crow
Energy Politics Editor

Imports of crude oil and petroleum products into the U.S. are high and headed higher. Imports last month were about 10.5 million b/d, the largest volume since the mid-1970s.

Imports have continued to climb steadily in recent years to a level of more than 50% of the national consumption of 17.5 million b/d. That trend worries many in industry and government who are concerned about its effect on national security.

The Clinton administration has formally declared that rising imports threaten national security but has taken only modest steps to prop up domestic production. It also has sold millions of barrels of crude oil from the Strategic Petroleum Reserve, put in place as a bulwark against oil supply disruptions.

Environmental groups say rising imports are inevitable and thus are a strong argument for increasing emphasis on energy efficiency and renewable energy programs.

Many producers think the trend underscores the need to encourage domestic oil production in various ways.

By contrast, some oil analysts think the trend means nothing at all. They argue that changes in the world oil market since the 1970s-development of a futures market, diversity of supply, and increased competition, for example-have made the level of U.S. import dependence an irrelevant matter.

Demand climbs

The Energy Information Administration has forecast that U.S. oil demand will reach levels in 1996 and 1997 not seen since the 1970s. It forecasts demand at 18.15 million b/d in 1996 and 18.46 million b/d in 1997, comparable to record highs of 1977-79.

It said U.S. imports of light products will nearly double to almost 1.6 million b/d in 2015, with most of it coming from refiners in the Caribbean and Middle East, where refining capacity is expected to rise significantly.

Jay Hakes, EIA administrator, told a congressional hearing, "The Organization of Petroleum Exporting Countries, with its vast store of readily accessible oil reserves, is expected to be the source of marginal supply to meet future incremental demand."

EIA said OPEC supply will be about 35 million b/d in 2000 and more than 52 million b/d by 2015, about twice its level of production in 1990.

Persian Gulf crude production will be about 40 million b/d by 2015, compared with about 20 million in 1994. With world oil consumption rising to 93 million b/d by 2015, Persian Gulf supplies will provide 43% of the world's oil consumption by 2015, compared with about 30% in 1994.

EIA said technical innovations will help push production in non-OPEC nations higher, to a little more than 41 million b/d in 2010. It will then decline slightly to 40 million b/d, near the 1994 level, in 2015.

EIA sees a substantial increase in world oil consumption during the next 20 years, rising from about 69 million b/d in 1995 to more than 74 million b/d by the end of the decade and as high as 100 million b/d by 2015.

Developing nations in Asia will show demand growth greater than 5%/year, while OECD nations will have growth of less than 1%/year.

EIA predicts U.S. oil production will drop from 6.7 million b/d in 1994 to 5.3 million b/d in 2005, then rebound during 2005-15 as a result of technology improvements and rising prices.

Therefore, it expects imports to supply 57% of U.S. demand in 2005 and remain at about that level through 2015, compared with 45% in 1994.

It said OPEC, outside of Iraq, had an estimated 3.2 million b/d of spare productive capacity in 1995, or more than 90% of the estimated 3.5 million b/d worldwide. Saudi Arabia and Kuwait alone have almost two thirds of the world's excess capacity.

EIA said, "Today, OPEC is producing at more than 90% of capacity (assuming sanctions on Iraq continue and its capacity is not counted), compared with only 63% in 1985. Thus, the cushion to increase production in the event of another supply disruption may be significantly smaller than it was as recently as 1989."

Risk scenario

Deputy Energy Sec. Charles Curtis recently said, "It is now generally agreed among forecasters that global demand, mainly from developing nations, will grow by 25-35% during the next 15 years.

"According to EIA, the world will need another 20 million b/d of oil by 2010. The International Energy Agency projects even greater growth in demand, following the inexorable tide of population growth, urbanization, and industrialization.

"The Persian Gulf, with two thirds of the world's oil reserves, is expected to supply the vast majority of that increased demand-more than 75%, according to EIA. Within 15 years, the Persian Gulf's share of the world export market may surpass its highest level to date, 67%, attained in 1974.

"The growing dependence on imported oil in general and Persian Gulf oil in particular has several potentially serious implications for the nation's economic and national security."

Curtis said when the Persian Gulf recaptures the dominant share of the global oil market, large price increases will be more likely.

"If these forecasts prove out-and I would acknowledge they may not-Persian Gulf nations' oil revenues may triple from over $80 billion/year today to nearly $250 billion/year in 2010, a huge geopolitical power shift of great concern.

"This could represent more than a $1 trillion increase in wealth for Persian Gulf producers over the next decade and a half. That money could buy a tremendous amount of weaponry, influence, and mischief in a chronically unstable region.

"The final piece in the geopolitical puzzle is that during the first oil crisis, countries that were competing with us for oil were our NATO allies. But during the next oil crisis a new, important complication will arise: Competition for oil will increasingly come from rapidly growing countries of Asia.

"Indeed, in the early 1970s, East Asia consumed well under half as much oil as the U.S., but by the time of the next crisis East Asian nations will probably be consuming more oil than we do. These nations already are establishing stronger diplomatic ties with the Persian Gulf."

He noted there have been six oil supply disruptions of 2 million b/d, an average of one every 5-10 years, all originating in the Middle East.

And in the U.S., since 1970 sharp increases in the price of oil have always been followed by economic recessions.

DOE's Oak Ridge National Laboratory in Tennessee estimates the cost to the U.S. economy during the past 25 years of overreliance on OPEC oil, including the cost of price shocks, at $4 trillion.

Middle East politics

Elihu Bergman, former executive director of Americans for Energy Independence who now is a Washington energy policy analyst, said, "Increasing oil demand by itself is not likely to trigger a repeat of the crises and temporary price spikes of 1974 and 1980.

"IEA has forecast a 50% increase in the real price of oil over the next 10 years to $28/bbl by 2005, which could be accommodated under stable economic and political conditions.

"However, an unforeseen shock in a tightening market-like the invasion of Kuwait or an insurrection in Saudi Arabia-could result in a sudden price spike with the adverse consequences experienced in the past.

"With 66% of known global oil reserves, the Persian Gulf remains the key factor in the supply/demand equation. It also remains an unstable region with considerable potential for unpleasant surprises.

"The increasing political alienation in gulf countries is real and likely to increase as political and economic grievances mount. The principal causes are unmet expectations about the distribution of economic wealth, curtailed from the heady days of the early 1980s, and the sharing of political power. Within this volatile environment, militant Islamic movements, both indigenous and foreign, provide a ready made outlet."

Bergman said Iran and Iraq continue their threatening behavior, and the Saudi Arabian government, "which functions like a family business," is experiencing increasing internal unrest while facing a change in the monarchy.

"We should realize that the principal certainty in Middle East politics is still uncertainty and our version of the rational calculation of national interest is still not employed by regimes and publics in the region."

Shockproof market?

Philip Verleger, a Washington analyst, recently told a congressional hearing a true market for oil and energy has developed during the past 20 years.

He said, "Oil exporting countries lost control of the market, oil prices and supplies were deregulated in consuming countries, and markets for other forms of energy were deregulated.

"As a result of this, it is hard to imagine that one group of producers or one producing country will ever again be able to exert prolonged control over the price of oil.

"While dependence on oil from the Middle East is likely to increase, I believe it is extraordinarily unlikely that Middle East producers or producers from any region will ever again be able to exert control over oil prices as they did in the past."

He explained that is because the greater openness of the world economy will make users more responsive to changes in prices.

"Consumers will switch to other fuels if oil prices rise, increase conservation, or change the characteristics of operations. In a competitive global economy, it will be very difficult for the laggard to survive and, as a consequence, change will be accelerated."

Administration's stance

The Clinton administration has concluded that the nation's growing reliance on oil imports threatens national security but took no special measures to combat them (OGJ, Feb. 27, 1995, p. 31).

President Clinton ordered DOE to continue efforts to reduce energy consumption and increase production.

The action came in response to an Independent Petroleum Association of America petition filed under Section 232 of the Trade Expansion Act.

DOE's Curtis said the nation's best defense against rising imports is to continue to pursue a policy of supply diversification and energy R&D.

Environmental groups also have been lobbying Congress to ensure that funding levels for energy conservation and alternative energy programs are continued.

Curtis said, "Competitive pressures in the private sector and budget pressures in government are combining to cause a deferral of needed investment that could provide the nation important tools to blunt the effects of a growing dependency on Middle East oil."

Last week DOE complained that a House appropriations subcommittee dealt "a devastating blow" to the nation's ability to protect the environment and increase energy security.

The panel cut the administration's request for $735 million for renewable energy and conservation programs by more than $235 million, a 32% reduction following an equally large reduction in last year's budget.

Energy Sec. Hazel O'Leary said, "The congressional leadership boasts that they are 'taking care' of the environment. At the same time they are cutting by one-third the most beneficial and effective pollution prevention programs in the world."

The proposed cuts affect clean industrial technologies, energy-efficient building technologies, new gas fired appliances, and fuel efficient vehicles, including the Partnership for a New Generation of Vehicle program.

Contrarian view

Glenn Schleede of Energy Market & Policy Analysis Inc., Reston, Va., said world energy markets have changed dramatically and favorably since current government energy policies and spending programs were conceived.

"These changes in energy markets need to be taken into account as you consider DOE's proposals to spend another $2-2.5 billion on energy supply and conservation technologies."

He said past energy market forecasts have drastically overestimated energy prices, distorting many government and private sector decisions and resulting in billions of dollars of added costs for consumers, taxpayers, and investors.

Schleede said EIA has substantially lowered its price forecasts. That should require the government to take a fresh look at the rationale for DOE's energy technology development programs and its claimed energy savings from conservation and renewable energy programs.

"We should not overreact to recent DOE officials' warnings about a looming energy crisis. There are many reasons to believe that another energy crisis is less likely today than previously."

He pointed out there have been many changes in energy markets since the oil price shocks of 1973-74 and 1979-81. "These points often seem to be ignored by those who want to maintain a 1970s perception of an energy crisis."

Real energy prices have declined steadily since the early 1980s. In constant dollars, Schleede said, crude oil prices were down by 71% in 1995 from the high reached in 1981 and refinery gasoline prices, including taxes, were down 45%.

What's more, U.S. energy efficiency has improved even though energy prices have continued to decline in real terms since the early 1980s. During 1973-95, U.S. energy consumption increased 17.5% while gross domestic product increased 72.8%.

Schleede said despite the rise in U.S. oil imports, they constitute a declining share of total U.S. merchandise imports, declining from a high of 32.1% in 1980 to only 7.3% in 1995.

He also said much of the money for oil imports returns to the U.S. as payments for exported merchandise and services. The dollar outflow for oil, in constant dollars, has declined from a high of $138 billion (1994$) in 1980 to $53 billion in 1994.

Schleede argued most alternatives to market pricing of oil would be more costly to the economy than continued reliance on imports. And he noted proved world oil reserves have grown significantly from 664 billion bbl in 1973 to 1 trillion bbl in 1996.

Most oil producing and exporting countries depend on oil revenues to meet domestic economic needs, and that is a strong incentive to restart any interrupted oil production and exports. "Not all oil from OPEC is insecure."

And Schleede said projected growth in developing nations is less than certain, and they may not be able to attract required capital.

Overlooked opportunity

Edward Murphy, American Petroleum Institute's statistics director, said, "Oil imports were a threat in the early 1970s due to the highly structured nature of the international petroleum markets with long term fixed contracts that made it difficult to rechannel oil supplies.

"The situation has changed dramatically now, as the world oil market is much more of a commodity market than it was in the early 1970s.

"And the threat of a producing country embargoing the U.S. is much, much less than it was then. Maybe it's no longer even worth discussing."

Murphy said the U.S. since the 1970s has become more reliant on crude from the Western Hemisphere, where there are politically friendly countries. "That is not to say that a disruption of some sort couldn't happen. A war, revolution, or blockage of the Straits of Hormuz or the Bosphorus, for instance, would result in an increase in oil prices."

Murphy said the most impressive thing about the nation's higher oil import level is that it is so unnecessary.

He said studies have shown U.S. exploration and production costs for many large companies are less than $10/bbl, while world oil is selling for about double that.

"There is ample evidence that there is a lot more oil and gas that could be found and produced in the U.S.-much of it on the federal offshore.

"We couldn't replace all of those imports, but we could be importing a significantly smaller amount," he said, adding that the increased U.S. output would help put a damper on world oil prices.

"Right now, our economy is paying more for oil than we should be."

The other gulf

John Lichtblau, chairman of Petroleum Industry Research Foundation Inc., New York, told an International Association of Energy Economists meeting in Budapest the Gulf of Mexico will change the U.S. import picture.

He noted the U.S. is far less dependent on oil imports than any European country, Japan, or Korea.

U.S. crude oil production, which has been declining steadily from nearly 9 million b/d in 1985 to about 6.5 million in 1995, will continue to decline in the next 10 years, but at a much slower rate, Lichtblau said.

The slowdown and even temporary reversal of the decline in the late 1990s will be due mainly to sharp production increases in the Gulf of Mexico.

"New technology and reduced operating costs have recently opened this area to large actual and planned production increases," Lichtblau said. "Last year's production of 950,000 b/d may double by 2000 and stay there until 2005 and beyond. This would briefly offset declining production in the rest of the country.

"Some of the new technologies and techniques may be applied in onshore production and over time could possibly change the long held standard image of inevitably declining U.S. production and hence ever growing reliance on crude imports. However, for now we see total U.S. production rising only slightly to about 2000 and declining again to 2005."

Lichtblau added. "We can expect to see a moderate but noticeable shift in the composition of imports from crude to products during the next 10 years. This will reflect the fact that no new refineries have been built in the U.S. for many years, while a number of existing ones have been shut down. Operating plants whose capacity has been raised operate at an annual average of 90% of capacity."

Two views

The views of Lichtblau and Sen. Jesse Helms (R-N.C.) underscore the extremes in the oil import question.

In a Senate floor speech, Helms observed that API reported the U.S. imported 8.7 million b/d during the week ending May 31, up 900,000 b/d from the same week a year earlier.

He said, "Americans relied on foreign oil for 57% of their needs last week, and there are no signs that this upward spiral will abate. Before the Persian Gulf war, the U.S. obtained about 45% of its oil supply from foreign countries. During the Arab oil embargo in the 1970s, foreign oil accounted for only 35% of America's oil supply."

Helms, Senate foreign relations committee chairman, said, "Politicians had better ponder the economic calamity sure to occur in America if and when foreign producers shut off our supply or double the already enormous cost of imported oil flowing into the U.S."

But Lichtblau said attitudes have changed in the U.S., and there is tacit acceptance of growing dependence on imported oil.

"Until recently," he said, "there was a highly politicized fear in the U.S. of ever becoming more than 50% dependent on imported oil, even including Canadian imports. There is still talk from various special interest groups that our growing import dependency threatens our national security."

He said the government's position is "The economic benefits of low cost foreign oil supplies outweigh security risks, and therefore nothing needs to be done to arrest this trend."

Lichtblau predicted that position is likely to remain the basis of U.S. oil import policy.

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