"Quenching our thirst for oil"
Growing global oil demand harms U.S. security and economy
Global oil demand””led by the United States and followed by China, Japan, and India“”will dramatically increase over the next two decades. China has made oil deals around the world over the past few years that can deliver a supply of more than 7.8 billion barrels of oil to the country over the next several years.
The United States must meanwhile prepare for a coming oil price crunch caused by increasing global demand and slowing global production (see Deutsche Bank: Oil to hit $175 a barrel by 2016 and World’s top energy economist warns peak oil threatens recovery: “We have to leave oil before oil leaves us”).
The safest, cheapest, and fastest path to energy security is to implement oil savings measures””outlined below””to reduce dependence on foreign oil and protect our pocketbooks. CAP’s Daniel J. Weiss, Rebecca Lefton, and Susan Lyon lay out the problem — and the solution — in this repost.
The national security risks that stem from the United States’ heavy reliance on foreign oil are well documented. Roughly one in five barrels of U.S. oil come from countries that the State Department considers to be “dangerous or unstable.” And the cost of this oil will rise as global demand increases. These high prices benefit all petro-states regardless of whether the United States is buying from them or not. The United States doesn’t buy Iranian oil, for example, but a $1 increase in oil prices provides an additional $1.5 billion to the Iranian government annually.
The International Energy Agency notes that the United States also remains vulnerable to a Middle East oil disruption: “U.S. dependence on the long-haul Middle East has fallen sharply “¦ [but] since oil is a global market, the relevant measure for that vulnerability is not U.S. dependence, but world dependence on Middle East oil””and that has not shrunk.”
Our allies cannot fill this supply gap. Canada and Mexico are our largest importers. But a majority of Canadian oil comes from tar sands“”a dirty crude oil that can cause as much as five times more greenhouse gas pollution to produce compared to conventional oil. And Mexico’s primary oil sources will be depleted by 2019.
Demand grows, production slows
Forecasts predict that future global oil demand will rise sharply. BP’s 2009 World Energy Review found that oil demand from developing countries outside the Organisation for Economic Co-operation and Development grew in 2008 despite the recession. The International Energy Agency’s newest Oil Market Report forecasts that global oil demand will hit a record high this year and will keep rising as the global economy recovers. And the World Energy Outlook projects that oil demand will grow by almost 25 percent from 85 million barrels per day in 2008 to 105 million barrels per day in 2030.
All this oil demand growth, according to the World Energy Outlook, “comes from non-OECD countries: OECD demand actually falls.” Demand among the developed countries in the OECD already peaked, but non-OECD developing countries want more oil to fuel their burgeoning auto industries caused by a growth in wealth.
More troubling is that a recent New York University study found that official energy agency projections are far too conservative, saying, “Total oil demand will be 138 mbd in 2030″”about 30 mbd greater than what is projected by DOE, IEA, and OPEC.” They noted, “Our projections”¦are higher than projections by those three institutions”¦because we project rest-of-world growth that is consistent with historical patterns, in contrast to the dramatic slowdowns which they project.”
The United States will remain the largest oil consumer in the foreseeable future, followed increasingly closely by China (see figure, “China’s growing import needs”). The average American still consumes about 10 times as much oil as the average Chinese despite persistent growth and rising average income levels in China.
Higher oil production cannot offset demand growth. Non-OPEC oil production has already peaked and world production is estimated to peak in 2014 (see figure, “Projected global oil production through 2100″). A 2008 survey of oil executives found that 48 percent believe the world has or will soon reach “its peak petroleum (liquid hydrocarbon) production rate.”
Growing demand and declining production levels will place upward pressure on future oil prices, increasing U.S. economic vulnerability to price shocks. And high oil prices benefit petro-states such as Iran, even if we buy no oil from them.
China has increased its demand reduction efforts by adopting more efficient fuel economy standards and investments in public transit. But China will remain increasingly reliant on foreign oil imports for years to come as its economy and middle class continue to grow.
China’s growing oil demand
China became a net oil importer in 1993, which means that it now consumes more than it produces. It also became the world’s second-largest petroleum consumer after the United States in 2004. And the IEA projects that Chinese oil consumption will more than double from 7.7 million barrels per day in 2008 to 16.3 million barrels per day by 2030.
China’s exploding demand for autos, fueled by a growing middle class, made it the largest automobile market in the world by the end of 2009. About 16 Chinese families out of 100 owned a vehicle in 2005, but this doubled to 33 out of 100 in 2008. And McKinsey estimates that China’s vehicle fleet will increase tenfold between 2005 and 2030.
Chinese leaders want to secure future oil supplies to meet this anticipated demand. China’s partially government-owned national oil companies are pursuing oil deals abroad. They have made exploration and production deals in Iran, Sudan, and Venezuela, as well as with other “energy-rich problem states,” throughout the last decade. And a survey of China’s most recent overseas oil deals finds that these contracts hold the combined potential to deliver more than 7.8 billion barrels of oil to China.
This heavy investment can funnel money to unstable or dangerous regimes. China has been the largest foreign investor in Sudanese oil fields and indirectly funded governments in Venezuela, Myanmar, and Iran. China also provides economic assistance in exchange for significant oil exploration rights in oil-rich but poor African and Latin American nations. Erica Downs of The Brookings Institution notes that, “in the first half of 2009 alone, Chinese banks extended more than $45 billion in loans to countries including Brazil, Kazakhstan, Russia, and Venezuela, all major energy producers battered by the fall in oil prices.”
Chinese national oil companies are forced to seek oil from impoverished, dangerous nations because the United States and other OECD nations have long-term contracts for oil from “friendlier” nations.
China is also building its own Strategic Petroleum Reserve, or SPR. It can hold 100 million barrels, about enough to supply its oil needs for 20 days. China plans to build eight additional coastal oil reserves by 2011 to increase its total emergency supply to 281 million barrels. Demand for oil to fill China’s SPR will also keep prices up. The U.S. SPR is full with 727 million barrels, or 72 days worth, of oil.
China isn’t the only country eyeing oil abroad. Indian oil companies are aggressively pursuing overseas energy deals. The country just reached an oil exploration deal with Angola and is seeking deals with other unstable developing nations such as Nigeria and Sudan. Saudi Arabia, the world’s largest crude oil supplier, increased its exports to India sevenfold between 2000 and 2008 and announced in February 2010 that it would nearly double its crude exports to India this year, up to 770,000 barrels per day from last year.
China, India, and other growing economies have responded to increased global demand by securing more energy sources in a variety of different ways. Additionally, China has heavily invested in oil demand reduction strategies for vehicles such as fuel economy standards that are more efficient than those in the United States, aggressive electric vehicle plans and plug-in hybrid deployment, and increased efficiency and technology programs. Japan and India have had to aggressively pursue stricter fuel efficiency standards, too.
Worldwide demand means higher prices
Worldwide oil demand growth will cause economic harm to Americans if left unaddressed. Growing foreign demand combined with U.S. demand will produce rising oil prices””something we’re already beginning to see with oil prices recently hitting an 18-month high of $87 per barrel in April 2010.
Yet the U.S. oil industry’s investments in new production have slowed despite rising demand and a record-high oil price of $147 per barrel in 2008. Bloomberg reported that a Goldman Sachs analyst determined that “Investment into new oil capacity is being held up because ‘political impediments on the flow of capital are still very large.'” EIA reports that the number of “U.S. crude oil and natural gas active well service rigs in operation” dropped by nearly one-third between 2008 and 2009. And the number of active rigs in 2010 are still well below pre-recession levels.
A 2007 study found that in recent years the “big five” U.S.-based oil companies have limited their exploration for future oil reserves, and that their oil production has declined since the mid-1990s.The projected oil demand growth among developing countries, coupled with lower investment in exploration, will create a supply-demand gap. The EIA warns that “just at the time when demand is expected to recover, physical limits on production capacity could lead to another wave of price increases, in a cyclical pattern that is not new to the world oil market.”
Goldman Sachs estimates crude oil shortages will begin in 2011 as “supply fails to keep pace with a recovery in demand.” It predicts oil will rise to $110 per barrel in 2011 because of production capacity constraints. And the International Energy Agency’s most recent Oil Market Report warns that rising oil prices may be “stunt[ing] economic recovery.”
Higher oil prices will mean higher prices at the gas pump. The EIA forecasts that average gasoline prices will exceed $3.00 per gallon by this spring. Drivers will pay 17 percent more for gas compared to summer 2009“”$174 million per day, or an average of $602 per household annually. Energy price volatility like this hurts consumer and business investments, causing families to delay buying a car and spend less on buying or upgrading their homes. Businesses also cut investments, while profits surge in the oil and gas industry.
Drill, baby, drill is futile, baby, futile
The United States consumes more than 7 billion barrels of oil annually, but expanding domestic oil production will not solve our supply problem, make us more secure, or ease our wallets. President Barack Obama made it clear that drilling is not the solution to America’s energy challenges, explaining, “We have less than 2 percent of the world’s oil reserves; we consume more than 20 percent of the world’s oil”¦Drilling alone can’t come close to meeting our long-term energy needs.”
The United States does not have enough accessible nationwide reserves to meet our energy demand, and there is also great uncertainty over how much recoverable oil does exist. Supplies of extractable oil are dwindling. The amount of oil in proven U.S. reserves has steadily decreased since the 1970s, from 31.8 billion barrels to 21 billion barrels in 2007.
Drilling for oil in the Arctic National Wildlife Refuge in Alaska and areas formerly off limits in the Outer Continental Shelf will not close the supply gap. The amount of recoverable oil in the Arctic coastal plain is estimated to be between 5.7 billion and 16 billion barrels. This could supply as little as a year’s worth of oil. And it will take 10 years to produce any oil from this supply. The OCS has only slightly more recoverable oil.
The areas that became open for offshore oil production in 2008 have only a small portion of U.S. reserves. EIA determined that “the OCS areas that were until recently under moratoria in the Atlantic, Pacific, and Eastern/Central Gulf of Mexico are estimated to hold roughly 20 percent (18 billion barrels) of the total OCS technically recoverable oil.” As with the Arctic, EIA predicts that “conversion of the newly available OCS resources to production will require considerable time, in addition to financial investment.” And the horrible tragedy at the Gulf Coast oil rig reminds us of the potential human cost of offshore oil production.
Lower oil demand, more security
The United States cannot produce its way out of the supply-demand gap. The most cost-effective, speedy way to reduce our oil dependence is to reduce U.S. oil demand. And efforts to reduce oil use should focus on vehicles since 70 percent of oil use is for transportation and two-thirds of this is for passenger vehicles. There are three primary methods to reduce oil use:
- Make vehicles significantly more fuel efficient while commercializing electric vehicles
- Develop cleaner, alternative non-oil-based fuels
- Invest in public transportation to provide practical, accessible, economical alternatives to driving
The Obama administration has taken important steps in each of these areas. It set new fuel efficiency standards for automobiles and light trucks. The average fuel efficiency of the new cars and light duty trucks will increase by one-third to 35.5 mpg by 2016. This will save nearly 2 billion barrels of oil over the life of these cars.
The Obama administration launched initiatives to build the infrastructure essential to increase the development and production of advanced biofuels. These measures will assist farmers that grow feedstock for advanced biofuels, as well as aid companies that produce advanced biofuels.
The American Recovery and Reinvestment Act will invest $8 billion in public transit and another $8 billion in high-speed rail. Both of these efforts will help save oil.
President Obama and Congress must also take new steps to reduce oil use. We should establish a National Oil Savings Program that cuts consumption by 7 million barrels of oil per day in 2030 with interim goals of 1 million fewer barrels of oil per day by 2015 and 3 million fewer barrels of oil per day by 2023. This is similar to an oil savings proposal made by Sen. Mary Landrieu (D-LA) in 2003.
The tools to make this promise a reality are within our reach and should include strategies aimed at vehicles, fuel, and transportation. Some of these actions can be accomplished via executive action, and the Obama administration has already taken some essential steps in the right direction, though there are still more opportunities.
More efficient vehicles
- Increase fleetwide vehicle efficiency to 40 mpg by 2020 and at least 55 mpg by 2030 to build on the administration’s initial standards. Sen. Richard Lugar (R-IN) plans to propose legislation that will automatically strengthen fuel economy standards.
- Accelerate federal government purchases of alternative-fueled vehicles for its fleets, including natural gas, plug-in hybrid, hybrid, and electric vehicles. These could yield oil savings of up to 3.5 million barrels per day by 2030.
- Challenge state, local, and private fleet operators to increase their purchase of these natural gas, plug-in hybrid, hybrid, and electric vehicles.
- Increase the tax credit for fuel-efficient vehicles, apply it to the most fuel-efficient vehicles regardless of technology, and make it permanent.
- Establish manufacturing incentives for U.S. companies to invest in more efficient vehicle technologies and assembly infrastructure to strengthen the U.S. auto industry and create jobs.
- Create a federal revolving loan fund that provides loans for small business and clean energy projects, with loan repayments used for loans to other businesses.
- Offer economic incentives to purchase heavy- and medium-duty trucks and buses powered by cleaner, domestically produced natural gas. The New Alternative Transportation to Give Americans Solutions Act, or NAT GAS Act (S. 1408, H.R. 1835) would accomplish this goal. These bills would also boost investments in the refueling infrastructure. Additional safeguards for shale gas drilling are essential to ensure that increases in gas production do not create environmental hazards.
- Eliminate existing tax loopholes for big oil companies that would cost U.S. taxpayers $36 billion from 2011 to 2020. This savings is nearly half of what the big five oil companies made in profits in 2009 alone. President George W. Bush even opposed tax breaks for big oil companies in 2005 noting that, “with $55 oil we don’t need incentives to oil and gas companies to explore.”
- Bring advanced, cleaner cellulosic biofuels to commercial scale as soon as possible. These fuels are made from low input feedstocks, including agricultural waste, wood chips, or dedicated energy crops such as switchgrass. We should also ensure a stable long-term market for advanced biofuels by making short-term investments in the current generation of biofuels’ infrastructure needs.
Expanded public transportation
- Double public transportation ridership. Transit ridership has grown over the past few years by up to 15 percent (depending on region) in response to higher gasoline prices. We should continue this trend by establishing a national goal of doubling the ridership for public transportation by 2020, which could save millions of barrels of oil per year.
- Build on the ARRA investments in transit and high-speed rail by establishing a new discretionary state and local government public transit grant program. The federal government would cover 80 percent of the costs of this program, matched by 20 percent from local and state governments. The grant program should provide $1 billion annually over a decade to fund capital investment in rail and fuel-efficient rapid-bus transit, and preventive maintenance of public transportation infrastructure and joint development projects, with recipients prioritized based on oil savings potential.
James Woolsey, director of Central Intelligence under President Bill Clinton, noted: “We can move quickly to strike a major blow at oil and OPEC’s dominance”¦We can get a long way using existing vehicles, existing technology and affordable natural gas. As other improvements become practical””like charging your electric car from solar panels on your roof””they can be adopted.”
The United States needs comprehensive clean energy and climate policies to decrease our dependence on this expensive and unstable commodity. The bipartisan, comprehensive energy and global warming legislation by Sens. John Kerry (D-MA), Lindsey Graham (R-SC), and Joe Lieberman (I-CT) is expected to include provisions that would reduce U.S. oil demand. If we fail to reduce our oil consumption, energy costs will hurt national security and Americans’ pocketbooks. We can take immediate steps to create oil savings that we know work. We must also take the lead in developing and producing oil savings with vehicles of the future, and we can profit by marketing these products to the world.