Bruce M. Everett USAF Air Command and Staff College September 20, 2010 American Energy Security: Myth and Reality

Three observations on the oil market. A quick history of US oil supply. Why arent we energy independent? A definition of energy security. Outline

Observation #1 The world is NOT running out of oil

Reserves (667 GB) Source: BP Production (23 GB) In 1980, the world had 667 GB or 29 years of proven reserves of conventional oil. Since then, we have consumed 727 GB. How much do we have left? Billion barrels Ratio = 29 Global Oil Reserves

Source: BP Answer = 1,400 GB 45 years Billion barrels Ratio = 45 ? Global Oil Reserves Ratio = 29

World conventional oil resources 1,000 Billion barrels 1,400 Cumulative production Remaining proved reserves

World conventional oil resources Billion barrels USGS new & undiscovered (95% confidence) 775

World hydrocarbon resources 1,140 Billion barrels Proved natural gas reserves

4,300 Billion barrels Heavy oil World hydrocarbon resources

4,400 Billion barrels Coal World hydrocarbon resources

Billion barrels Shale 2,600 World hydrocarbon resources

Billion barrels ~15 trillion B or ~500 years at current consumption. Methane hydrate resources may be a thousand times greater. These resources include only molecules we have identified. World hydrocarbon resources

Hydrocarbon production is constrained by technology and economics, not by the availability of molecules.

Copper In the Bronze Age (1,200 BC), Cu was expensive and recycled. Since 1900, world Cu production has grown from 0.5 mt to 15 mt. Real prices are 20% lower.

Resource industries are a race between depletion And technology. Technology can win over very long time periods.

Observation #2: The oil market is NOT an Easter egg hunt

World Oil Reserves- Year End 2009 Billion barrels Sources: Oil & Gas Journal, BP 9% 1,400 Western Oil Companies 149US 23 Canadian 19EU 5Australian 2Other Booked reserves: 130 GB

Billion barrels Sources: Oil & Gas Journal, BP 1% World Oil Reserves- Year End 2009 Chinese Oil Companies Sinopec CNOOC PetroChina Booked reserves: 16 GB (mostly in China) Locking up supplies? 9% 1,400

The US and Canada are the ONLY countries in the world which permit private ownership of subsoil resources.

Ex US/CanadaYear 1900Today Reserve ownershipCompanyGovernment Exploration decisionsCompanySpecified Development decisionsCompanyJoint RegulationsLittle or noneHeavy Government profit share5-10%70-95% Pricing basisCompanyMarket Technology transferLittle or noneExtensive What do companies get from an oil deal?

Billion barrels Sources: Oil & Gas Journal, BP 1% World Oil Reserves- Year End % 1,400 ~90% of world oil reserves are directly controlled by national oil companies (NOCs).

Question: How do NOCs allocate oil? Answer: They sell it to private companies at the market price.

Question: How do countries acquire oil? Answer: Private companies buy it at the market price.

There is a single global oil market Oil can be moved from any coastal location to any other coastal location for <$2 per barrel. Hundreds of refineries. Considerable flexibility to handle different crudes. Active spot, futures and options markets = liquidity. Oil trading is a commercial, not political activity. Oil is not sold under long-term contracts at set prices.

In 2009, the US imported ~11½ million barrels per day of crude oil and petroleum products

#1: Canada (21%)

#2: Mexico (10%)

#1: Canada (21%) #2: Mexico (10%) #3: Saudi Arabia (9%)

#1: Canada (21%) #2: Mexico (10%) #3: Saudi Arabia (9%) #4: Venezuela (9%)

#1: Canada (21%) #2: Mexico (10%) #3: Saudi Arabia (9%) #4: Venezuela (9%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%) #2: Mexico (10%) #3: Saudi Arabia (9%) #4: Venezuela (9%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%) #2: Mexico (10%) #7: Algeria (4%) #3: Saudi Arabia (9%) #4: Venezuela (9%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%) #2: Mexico (10%) #7: Algeria (4%) #3: Saudi Arabia (9%) #8: Angola (4%) #4: Venezuela (9%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%) #2: Mexico (10%) #7: Algeria (4%) #3: Saudi Arabia (9%) #8: Angola (4%) #4: Venezuela (9%) #9: Russia (4%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%) #2: Mexico (10%) #7: Algeria (4%) #3: Saudi Arabia (9%) #8: Angola (4%) #4: Venezuela (9%) #9: Russia (4%) #5: Nigeria (7%)#10: Brazil (2%)

What would happen if Venezuela cut off oil shipments to the US? Would we lose 9% of our oil supply? Answer: No Venezuelan oil would go to other buyers. Displaced oil would come to the US. Costs would be relatively small, and probably higher for Venezuela than for the US.

By law, the US imports no oil from Iran. What would happen if Iran stopped exporting oil? Answer: The US would suffer with everyone else. The price of oil would rise. All suppliers would charge the higher price. All consumers would compete for remaining oil.

US oil import vulnerability is to PRICE Not VOLUME.

Observation #3: There are NO economically viable alternatives to oil in transportation.

Ethanol? Costs an extra $3 per gallon Performance issues (range, carbon) $20-25 B additional cost in 2009 for 2½% of US oil supply Equivalent to ~$200/B crude oil

Electric cars? Cheap fuel, but very expensive vehicles Performance issues (range, carbon, recharge) Equivalent cost of $25 per gallon or ~$1,000/B crude oil

Light rail? Inefficient, underutilized and very expensive Equivalent cost of $35 per gallon or ~$1,400/B crude oil

A brief history of US oil supply

US oil supply history In the 19 th and early 20 th centuries, the US was the worlds main oil producer and exporter.

US oil supply history At the end of World War II, the US was self-sufficient in oil.

Million Barrels per Day Source: Energy information Administration Domestic Imports US oil supply history Until 1967, the US imported oil, but had spare producing capacity.

Million Barrels per Day Source: Energy information Administration …in the year 1980, the United States will not be dependent on any other country for the energy we need…. First oil crisis In the early 1970s, US oil production peaked, and imports rose. Domestic Imports US oil supply history

Source: Energy information Administration I will request legislation to authorize and require tariffs, import quotas, or price floors to protect our energy prices at levels which will achieve energy independence : Market adjusted, but growth resumed. US oil supply history Million Barrels per Day Domestic Imports

Source: Energy information Administration Second oil crisis The Moral Equivalent of War US oil supply history Million Barrels per Day Domestic Imports

Source: Energy information Administration Early 1980s: HUGE market adjustment, then growth resumed. The best answer, …is to try to make us independent of outside sources to the greatest extent possible for our energy. US oil supply history Million Barrels per Day Domestic Imports

Source: Energy information Administration …three principles guided our policy: reducing our dependence on foreign oil, protecting our environment, and promoting economic growth. US oil supply history Million Barrels per Day Domestic Imports

Source: Energy information Administration US oil supply history US energy independence would rock the world. Million Barrels per Day Domestic Imports

Source: Energy information Administration US oil supply history …we should be doing everything possible to …move our nation toward energy independence. Recession Million Barrels per Day Domestic Imports

It falls on us to choose whether to risk the peril that comes with our current course or to seize the promise of energy independence. Source: Energy information Administration US oil supply history Recession Million Barrels per Day Domestic Imports

Question: If we all agree we should be energy independent, why arent we?

The US enjoys low energy costs, giving us: A competitive edge in the world and Unprecedented physical and social mobility.

Energy independence would deprive us of both with severe economic and social consequences. The indirect effects would outweigh the direct effects.

Energy independence would NOT free the US from its strategic responsibilities. Oil market stability is critical to the global economy, and the global economy is critical to the US.

FDR and Saudi King Ibn Saud The US established a security relationship with Saudi Arabia before the US became an oil importer.

If President Bush made energy independence his moon shot, he would dry up revenue for terrorism….. Tom Friedman New York Times December 5, 2004

P Q Global liquid fuel supply curve S Synthetic fuels Canada tar sands Deep water GOM Deep water West Africa Middle East (Saudi, Iran, Kuwait, Iraq) Who would suffer from a decline in oil demand?

Terrorism is unfortunately not very expensive

North Korea and Cuba, among the poorest countries on Earth and with no natural resources, are major trouble-makers.

But there is some good news.

Oil Consumption, Milion barrels per day Source: BP, EIA In the 1970s, rich countries consumed, while poor countries produced. China 85% Industrial, including USSR and Eastern Europe Other developing countries

Source: BP, EIA Industrial China Other 85% 15% 55% 45% Now, everyone needs oil. Oil Consumption, Milion barrels per day

Broad cooperation on oil market stability is possible.

A different way of looking at energy security

Jeffersons dilemma During the Napoleonic wars, both Britain and France impeded US trade. How did President Jefferson respond?

Jeffersons dilemma In 1807, he convinced Congress to pass the Trade Embargo Act which prohibited any foreign trade. What was the result?

Jeffersons dilemma An economic disaster. Congress repealed the Embargo Act in 1809.

Wilsons dilemma He won re-election in 1916 with the slogan He kept us out of war, yet he asked for a declaration of war on Germany 28 days after his second inauguration. What went wrong?

Wilsons dilemma Germany refused to respect US neutrality.

Germany Austria Great Britain 1914: GDP of the major combatants 1914: GDP of the major combatants Billion $2009 Canada/Aust/NZ France Italy Russia United States Other Source: OECD

Germany Austria-Hungary Great Britain 1914: Populations of the major combatants 1914: Populations of the major combatants Million Canada/Aust/NZ France Italy United States Russia Other Source: OECD

Germany Italy Great Britain 1939: GDP of the major combatants 1939: GDP of the major combatants Billion $2009 Canada/Aust/NZ France USSR United States Japan China Other Source: OECD

Germany Italy Great Britain 1939: Populations of the major combatants 1939: Populations of the major combatants Millions Canada/Aust/NZ France USSR United States Japan Other China Source: OECD

USSR Eastern Europe 1970: GDP of the major Cold War Rivals 1970: GDP of the major Cold War Rivals Billion $2009 Canada/Aust/NZ United States China & Other Western Europe Source: OECD Japan

In the 19 th Century, the United States was protected by its oceans.

In the 20 th Century, the United States was protected by wealth and industrial might.

Global GDP shares 1950 and 2009, % Global GDP shares 1950 and 2009, % USSR/East Europe United States Japan Canada/Aust/NZ Western Europe China All other Russia United States Japan Canada/Aust/NZ OECD Europe China All other (OECD) (World Bank)

Global GDP shares 2009 and 2035, % Global GDP shares 2009 and 2035, % Russia United States Japan Canada/Aust/NZ OECD Europe China All other (EIA) United States Japan Canada/Aust/NZ OECD Europe All other (World Bank)

US economic predominance will be tested in the 21 st century. Energy independence would hurt, not help.

Basic principles of energy security The US cannot be secure without a growing, dynamic economy. US economic growth requires international trade. International trade requires global stability. Oil is a key part of international trade. High cost energy would make the US uncompetitive. Like Jefferson and Wilson, we cannot eliminate but must cope with our vulnerability.