Oil, Innovation, and National Security

Philip Auerswald School of Public Policy George Mason University [email_address]
Oil, Innovation, and National Security
Tuesday
October 27, 2008

A Lamentable Consensus Rethinking the Arab Oil Embargo The Likelihood of a Repeat 2008 is not 1973 A Costly and Obsolete Legacy of the Cold War An Inconvenient Truth^2

“ For the sake of our economy, our security, and the future of our planet, I will set a clear goal as president: in 10 years, we will finally end our dependence on oil from the Middle East. “
Senator Barack Obama, August 29, 2008
“ Energy independence is the key to this nation's future, to our economic future, and to our national security.”
Governor Sarah Palin, October 3, 2008
Of all of the propositions in American political life, this one stands out as being at the same time the most widely believed and the least scrutinized.
Photos: google.com, www.johnmccain.com, time.com

“ The time has come for decisive action-action that will break the vicious circle of spiraling prices and costs.
“ I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days.1 In addition, I call upon corporations to extend the wage-price freeze to all dividends.”
President Richard Nixon, August 15, 1971
 Photos: barnhartblog.typepad.com, hydrogencommerce.com

“ Substantively, our results suggest that an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se , but from the resulting tightening of monetary policy...”
Ben S. Bernanke, Mark Gertler, Mark Watson, Christopher A. Sims, and Benjamin M. Friedman (1997). “Systematic Monetary Policy and the Effects of Oil Price Shocks.” Brookings Papers on Economic Activity , Vol. 1997, No. 1., pp. 91-157.
Photos: barnhartblog.typepad.com, hydrogencommerce.com

A Lamentable Consensus Rethinking the Arab Oil Embargo The Likelihood of a Repeat 2008 is not 1973 The Myth of Energy Insecurity Why CENTCOM? An Inconvenient Truth^2

U.S. dependence on oil from the middle east
gas expenditures ~5% of consumer spending
production from the middle east 25% of U.S. oil imports

From 2002 through 2006, the price of oil nearly tripled. And what were the observable macroeconomic impacts? What crippling effects did this unprecedented price run-up produce?
None. U.S. economic growth continued apace — despite a war in Iraq, the devastation to oil-infrastructure wrought by hurricanes Katrina and Rita, and 17 straight interest rate increases by the Fed.
Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling, “Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand ”

Saudi Arabia’s dependence on oil exports
90% of export earnings
70% of government receipts
40% of gross domestic product
Figures for Iran are comparable.

Furthermore reserves are only useful strategically in driving prices down.
Only by withholding output can an oil producer increase prices.
If done unilaterally, embargo results only in lost revenue.
In short, result of another Arab oil embargo: Producers suffer, consumers substitute.
Photos: barnhartblog.typepad.com, hydrogencommerce.com

“ Until now, the high-water mark for oil prices has been April 1980. That's when Iran threatened to cut off oil supplies in the wake of a failed military raid aimed at rescuing Americans held hostage in Tehran.
“ The price of West Texas Intermediate crude oil hit $39.50 that month. Adjusting for inflation, that's about $99 in today's dollars. It has taken more than a quarter-century, but oil prices are once again approaching that level. And once again, saber-rattling between the U.S. and Iran is a significant factor.
"The current high prices have a 'back to the future' quality to them," says oil historian Dan Yergin, chairman of Cambridge Energy Research Associates.
“ He figures geopolitical tension in the Middle East adds a $10 or $15 "security premium" to every barrel of oil. "What the security premium reflects is a sense of uncertainty whether geopolitical events will lead to some kind of disruption that shuts off supply," Yergin said. "The security premium really reflects the fear of the unknown."
National Public Radio’s All Things Considered "Iran, Demand and the Dollar Drive Up Oil Prices," November 12, 2007
http:// www.npr.org/templates/story/story.php?storyId =16219677

David L. Greene, Oak Ridge National Laboratory, “Oil Security: An Economic Perspective” July 31, 2007

A Natural Experiment
On December 3, 2007, the National Intelligence Council (formed in 1973) released a new National Intelligence that judged with high confidence that in fall 2003, Tehran halted its nuclear weapons Program.” The report was new information that substantially diminished the likelihood of U.S. military action against Iran.
As a consequence, uncertainty was reduced and spot price have moved... slightly upwards.

oil Natural gas copper lumber

Oil in the strategic petroleum reserve can replace U.S. imports from Saudi Arabia, barrel for barrel, for 466 days

Why?

“ There is, however, a special situation in the Middle East which I feel I should, even now, lay before you…
“ The reason for Russia's interest in the Middle East is solely that of power politics… This region has always been the crossroads of the continents of the Eastern Hemisphere… It contains about two thirds of the presently known oil deposits of the world and it normally supplies the petroleum needs of many nations of Europe, Asia and Africa. The nations of Europe are peculiarly dependent upon this supply, and this dependency relates to transportation as well as to production!
“ The action which I propose would have the following features…It would, in the third place, authorize such assistance and cooperation to include the employment of the armed forces of the United States to secure and protect the territorial integrity and political independence of such nations, requesting such aid, against overt armed aggression from any nation controlled by International Communism.”
— President Dwight Eisenhower, January 5, 1957

“ The region which is now threatened by Soviet troops in Afghanistan is of great strategic importance: It contains more than two-thirds of the world's exportable oil. The Soviet effort to dominate Afghanistan has brought Soviet military forces to within 300 miles of the Indian Ocean and close to the Straits of Hormuz, a waterway through which most of the world's oil must flow. The Soviet Union is now attempting to consolidate a strategic position, therefore, that poses a grave threat to the free movement of Middle East oil.
“ This situation demands careful thought, steady nerves, and resolute action, not only for this year but for many years to come. It demands collective efforts to meet this new threat to security in the Persian Gulf and in Southwest Asia. It demands the participation of all those who rely on oil from the Middle East and who are concerned with global peace and stability.
“ Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”
— President Jimmy Carter , January 23, 1980

Of course, we are told, Iran might be able to take Saudi, Kuwaiti and Iraqi oil off the market, too, by attacking oil tankers as they pass through the Strait of Hormuz, along Iran’s coast…Not likely.
Significantly impeding oil traffic would require a sustained military campaign. Dozens of tankers carry more than 15 million barrels of crude through the strait every day. The water is so deep that the navigable channel for supertankers is 20 miles wide at its narrowest point. There is simply too much traffic across too much space for the waterway to be easily blocked.
Countries have attacked oil infrastructure before, and the results were underwhelming. During the Iran-Iraq war, Baghdad and Tehran struck each other’s oil terminals and tankers repeatedly, but they proved to be very resilient targets…Tankers, which dwarf aircraft carriers, have thick hulls designed to prevent oil spills and, when attacked, proved to have few sensitive parts where a “lucky” hit could cause serious damage. They managed to keep the oil flowing through Persian Gulf waters throughout the Iran-Iraq war.
Eugene Gholz and Daryl Press, “All the Oil We Need,” New York Times, August 21, 2008

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Oil, Innovation, and National Security

by Philip Auerswald

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