The Global Oil Rush

The Global Oil Rush

Mini Teaser: Given rising demand and dwindling supplies, consuming nations should look south and east.

by Author(s): Robert C. McFarlane

America cannot depend upon a finite supply of hydrocarbons located in unstable regions of the world for its energy needs. And without energy, economies collapse.

Consider the fate of Georgia. At the time of the breakup of the Soviet Union, the republic was considered to have one of the strongest economies of the USSR, with a prosperous agricultural sector, a strong industrial base and an entrepreneurial culture. Civil war and political strife helped to weaken the economy, but successive energy crises caused both by Georgia's inability to pay for energy and periodic cut-offs of supplies delivered painful shocks to Georgia's energy-intensive sectors. By 2003 the country's income was a scant 40 percent of its 1991 level, with some 52 percent of the population living below the poverty line.

Energy independence will not occur overnight. We need at least twenty years to move the United States toward full-scale deployment of alternative sources of energy that can help to ensure true energy security. Brazilian ethanol and Russian gas could help us to buy the time we need and ameliorate the costs of the transition.

Energy security is not just about stemming rising prices at the gas pump, but covers literally all aspects of our economic life, from the fuel that powers our farms, transports crops and puts food on the table, to the petrochemicals needed to craft everything from fertilizers to the latest fashions. Energy is essential to almost every feature that defines our quality of life, and this is why ensuring access to energy at an affordable price is a vital national interest.

Concerns about energy security stem from three trends, each of which has worsened in recent years. First, the demand curve has shifted dramatically, owing primarily to faster-than-expected growth in demand from China and India. This factor alone is likely to keep oil above $50 a barrel for the foreseeable future.

The other two trends are less predictable but in no way less dangerous. Over the last year, Al-Qaeda and its affiliates have begun to focus on disrupting the economies of the industrialized countries. Nothing would achieve that as quickly and dramatically as a disruption of oil flows from the Persian Gulf.

In February an Al-Qaeda affiliate tried to attack the Saudi oil-processing plant at Abqaiq--which processes nearly six million barrels of oil per day (BPD). If it had been successful, it would have taken the terminal off line for weeks if not months and raised the price of oil to more than $150 per barrel for up to a year. It is sobering to consider that the terrorists were only about one hundred meters from the most critical facilities when they detonated their explosives. And further attacks are being contemplated; already some have called for using rockets against the Juaymah storage facilities or the off-shore terminals at Ras Tanura in Saudi Arabia's Eastern province. Saudi security forces are doing their best, but sooner or later an attack will succeed. There are simply too many vulnerabilities in the global oil-supply network--isolated oil and gas fields, vulnerable pipelines and storage tanks, and choke points like the Straits of Hormuz or Malacca. The destruction of the Ras Tanura terminal would remove four million BPD for up to a year. If the Saudi regime were toppled, eight million BPD could be taken offline. We have to be prepared for a host of scenarios that could push the oil price beyond $150 per barrel and spell economic catastrophe.1

Finally, we are running out of oil sooner than we expected. We cannot say with certainty when that day will come, but by 2030 we will be well down the decline curve of global oil reserves. Russia and the Caspian basin do provide us with short-term breathing room; it is quite feasible that by 2010 Russian production could be increased by some three million BPD and the Caspian could add an additional 2.5 million BPD to global markets--but this is not enough to make up for the expected shortfall.

Here is the snapshot of current U.S. usage. Today the world consumes over 82 million BPD of oil, with the United States taking roughly twenty million BPD (about 25 percent). Although the United States possesses four percent of the world's oil reserves, 60 percent of U.S. oil is imported, 28 percent comes from OPEC countries and 13 percent from the Persian Gulf. The United States also consumes some 23 trillion cubic feet per year of natural gas. Twenty-two percent of our natural gas needs are for private residences, and about 55 percent of U.S. households use gas for heating; 25 percent goes for producing clean electricity, but it is important to note that 90 percent of all new power plants are now gas-fired. Because of skyrocketing demand coupled with decreasing domestic production, natural gas prices in the United States have quadrupled in the last three years. And as demand soars, a greater portion of U.S. natural gas needs will have to be met by imports. This means we have to start thinking now about alternatives.

The good news is that rising oil prices have created incentives that did not exist even a few years ago. With oil at its current price levels, investors are developing Canadian tar sands as a source both of crude oil and refined petroleum products; if oil stays at $50 a barrel or more, then extracting petroleum from the oil shale of Wyoming and Utah also becomes cost-effective.

Beyond searching for non-conventional sources of oil, we also need to address what former Energy Secretary James Schlesinger rightly calls the "liquids crisis"--the need for fuel for our transport sector, since two-thirds of our oil consumption is devoted to fueling our fleet of cars, trucks and airplanes. Proven technologies are on the shelf to make alternatives. The United States is blessed with enormous coal reserves, a quarter of the world's total. Methanol can be produced from coal at a cost of less than $1 per gallon of equivalent gasoline; when mixed with conventional gasoline it is an effective fuel substitute. Ethanol is another proven fuel substitute (in a mixture of up to 85 percent ethanol and 15 percent gasoline). As compared to a gasoline-only car, it costs less than $150 extra to manufacture a vehicle that can run on any combination of gasoline, ethanol and methanol. As long as oil prices remained under $30 a barrel, ethanol was not cost effective, but under current conditions there is a major economic incentive for expanding the production and use of ethanol.

Beyond alternative liquid fuels, we can also look to electricity as a transportation fuel. Optionally pluggable hybrid vehicles utilizing both liquid fuel and grid electricity could play a major role in decreasing our dependence on petroleum, since today, unlike in the 1970s, only 2 percent of U.S. electricity is generated from oil. Of the approximately 230 million cars and light trucks on U.S. roads today, about half--48 percent--are driven for distances of twenty miles a day or less. A state-of-the-art battery carries enough charge to take you twenty miles. By replacing over time our automotive fleet with hybrid vehicles--especially vehicles that could be plugged in for a cheap "fill-up" on the equivalent of $0.75 per gallon gasoline--we would, in effect, be taking half of our vehicle fleet off of gasoline.

But we also need time and breathing room to facilitate these changes. The lifetime of a vehicle in the United States is over 16 years; that means that a complete transition to the vehicles described above will take at least that long, as fuel-choice-enabling vehicles replace retiring gasoline-only cars.

We cannot continue to depend on Persian Gulf hydrocarbons in the meantime as a secure source of supply. For the immediate future, therefore, we should be looking at two countries as integral partners in ensuring the energy security of the Western world.

The first is Brazil. In 1975, after the first oil shock, the Brazilian government made the decision to invest heavily in the technology of ethanol production so as to utilize the country's vast potential for growing sugar cane. Today, about 20 percent of the auto fuel in use in Brazil is ethanol. Brazil produces about 4.2 billion gallons of ethanol (and has about 50 percent of the global ethanol export market); indeed, Brazil has the capacity to become the Saudi Arabia of ethanol, and an important partner in ensuring America's energy security if only we would open our market to it. Today, while we do not tax oil imports, we impose what amounts to a $0.57 per gallon tariff on ethanol imports. Other Western Hemispheric countries with a climate suitable for sugar cane cultivation could become ethanol exporters as well. And Latin American ethanol can easily be exported to the United States via tankers.

The second is Russia. Russia possesses some 30 percent of the world's natural gas reserves; natural gas has the demonstrated capacity to generate electric power and fuel transport. Today there is more than 600 trillion cubic feet of gas in the Yamal peninsula. None of this gas is currently being exported, and it would be enormously expensive to link this region into Russia's existing pipeline networks. But the peninsula is well-suited to become a major center for the production of liquefied natural gas (LNG). With temperatures at twenty below zero, it is much cheaper to liquefy gas there than in Qatar, Nigeria or Trinidad. It is a 3,800-mile trip from Yamal to terminals in the Canadian maritime provinces (where the gas can be piped into the North American distribution network), one-third of the distance to ship LNG from Qatar to the Western Hemisphere. Finally, it should be noted that there are very few terrorists in Russia's Arctic Circle--unlike the oil and gas terminals in the Persian Gulf.

Essay Types: Essay