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Document created: 1 December 05
Air & Space Power Journal - Winter 2005
Col Richard Fullerton, USAF*
*Colonel Fullerton is professor and head of the US Air Force Academy’s Department of Economics and Geography. The author thanks Duane Chapman of Cornell University for his insightful comments.
Oil played a leading role in conflicts of the twentieth century, and it will continue as a source of global tension in this century. Contrary to public perceptions about oil shortages, embargoes, and fuel cells, energy’s future in the Air Force will look much like its recent past.
The headlines are frightening, but doomsayers have predicted the end of oil for more than a century. Geologist Kenneth Deffeyes has even put a date on his forecast, announcing that “world oil production will reach its ultimate peak on Thanksgiving Day 2005.”1 Presumably, worldwide economic chaos will ensue shortly thereafter. Such statements will persist, but we should not allow them to demoralize us. The world still has a lot of oil. The most recent US Geological Survey report places the mean estimate of the world’s recoverable oil at three trillion barrels—more than three times the amount the world consumed in the entire twentieth century.2 The US Energy Information Administration’s best guess about the date of peak oil production is 2037.3 Even if it peaks sooner, that does not imply economic disaster. Furthermore, several years may elapse before we can confirm it has occurred, as production levels off and then starts a long, slow decline. Eventually, oil prices will rise significantly, and other, currently unprofitable, fuel sources will begin to fill a growing share of our energy needs.4 For the foreseeable future, oil will continue to be a primary energy source.
Although only about 3 percent of the world’s proved oil reserves are in the United States,5 the amount of oil we extract domestically is fundamentally unrelated to our nation’s economic vulnerability to oil shocks. Even if the United States were completely self-sufficient in domestic oil production, it would not remain insulated from oil-supply disruptions in the Middle East or anywhere else. The world market determines the price of oil, a fungible commodity, regardless of its origin or destination. Consider the experience of Britain, for example. In September 2000, truckers blockaded British refineries, and consumers participated in widespread protests over fuel taxes and the rising price of British gasoline. At the time, Britain’s North Sea fields produced far more oil than the country needed domestically, but when the price of oil rose, it did so worldwide. British consumers felt the same pinch in their pocketbooks that we felt in America and that the Japanese felt in Asia. Oil prices move together regardless of production location, which is irrelevant to price shocks (see fig.).6 We can remove our economic vulnerability to those international shocks only by eliminating our consumption of petroleum products. As long as we use oil as a fuel, we will remain inextricably tied to the global oil market.7
Since the Middle East has two-thirds of the world’s remaining proved oil reserves, Americans fret constantly about another oil embargo. Those worries are misplaced. Just as the global market for oil prevents us from achieving oil independence, so does it ensure that no country has a practical way of embargoing the United States, beyond a merely symbolic gesture. Once a tanker leaves port, the seller cannot control where the oil ends up—oil ultimately flows to whoever will pay for it.
Figure. Crude oil prices, 1998–2002. (Data from “International Petroleum Price Information,” Energy Information Administration, http://www.eia.doe.gov/emeu/international/petroleu.html#IntlPrices.)
Most Americans believe that the Arab oil embargo of 1973 validates our vulnerability. But most of them don’t have a working understanding of international trade and economics. Primarily, bad domestic economic policies (price ceilings) rather than shortages in the availability of imports caused the long gas lines that the public associates with this embargo. As Jerry Taylor and Peter Van Doren of the Cato Institute have pointed out,
price controls imposed in 1971 by the Nixon administration prevented major oil companies from passing on the full cost of imported crude to consumers at the pump. “Big Oil” did the only sensible thing: it cut back on imports and stopped selling oil to independent service stations in order to keep its own franchises supplied. By the summer of 1973, gasoline prices were exploding, pumps were running dry, and long lines were commonplace. And that was before the Arab oil embargo or production cutbacks were announced.8
Saudi oil minister Sheik Ahmed Zaki Yamani even admitted that “[the embargo] ‘did not imply that we could reduce imports to the United States. . . . The world is really just one market. So the embargo was more symbolic than anything else.’ ”9
An oil exporter can hurt the US economy only by cutting back production and the sale of oil to everyone. But most petroleum exporters are far more dependent on selling oil than we are on buying it. Petroleum accounts for more than 85 percent of export revenues for Saudi Arabia, Kuwait, Iran, and Iraq. Only a tiny fraction of their land is arable, so they depend on oil to feed their people.10 Despite the often-heated rhetoric, global politics remain essentially irrelevant in the actual decisions exporters make about whether to sell oil. The two largest exporters in the Middle East—Saudi Arabia and Iran—have quite divergent views about the United States and the West. Whoever controls the oil in the Middle East will be eager to sell it.
Let’s review. Oil will remain a primary energy source for the foreseeable future, and two-thirds of the world’s proved reserves are located in the Middle East. Energy independence is a myth as long as we consume oil, and our fuel prices will remain inextricably tied to the global oil market. Whoever controls the oil in the Middle East will be eager to sell it. The problem is, whoever controls oil controls a truly staggering amount of wealth.
At $50 per barrel, the estimated value of recoverable oil in the Middle East comes to roughly $77 trillion—more than five times the US gross domestic product.11 With that much wealth in the ground, it is hardly surprising that the Middle East has become a center of conflict—and a major war could significantly disrupt the global oil market and our economy.12 Therefore, US military involvement in the Persian Gulf seeks to maintain security and stability for that market. A peaceful Middle East benefits everyone—importers and exporters alike. But the demand for oil grows fastest in developing countries like China and India. Although oil consumption in the United States is expected to increase over the next decade at an annual rate of about 1.5 percent, oil consumption in China is forecast to grow almost 6 percent per year.13 As the demand for oil increases in populous Asian nations, global prices will rise, and the potential for geopolitical tension and competition for petroleum resources will increase. Since oil will remain a primary energy source for decades to come and since the Persian Gulf region contains most of the world’s petroleum reserves, Middle Eastern oil will continue to be a catalyst for conflict. So if you wear a uniform, consider learning some Arabic.
In the future, as oil prices rise and supply volatility increases, research and development in alternative energy sources and technologies will proliferate. Although some government entities, such as state and municipality auto fleets, may adopt a few of these new technologies early as a show of confidence and progressive thinking, the public will not flock to them until they become economical. As a result, the transition to new energy sources will take an evolutionary rather than a revolutionary path. Consumers will first gravitate towards more efficient diesel engines and hybrid gas/electric autos, and utilities will move away from oil for electricity generation. Industry will explore and develop previously unprofitable oil fields and bitumen deposits; moreover, it will begin producing escalating quantities of synthetic liquid fuels from natural gas and coal. Improvements in battery technology will spur the commercial development and marketing of plug-in hybrid electric vehicles assisted by gasoline or coal-based methanol engines to give them passing power and long range.14 Contrary to popular belief, however, hydrogen fuel cells will not become a leading energy source for private autos before the second half of the century—if ever.15
As the cost of petroleum eventually rises, we will increasingly direct it towards its most valuable uses in chemicals, plastics, fertilizers, and jet fuel. Yes, jet fuel.16 USAF aircraft in the twenty-first century will burn jet fuel, just as they did in the last half of the twentieth century. Even if new technologies enable hydrogen- or nuclear-powered aircraft, they will remain small in number because our inventory of B-1s, B-2s, C-17s, C-130s, F-15s, F-16s, F‑22s, F-35s, KC-10s, RQ-1s, RQ-4s, T-1s, T-6s, T-38s, and other aircraft is simply too large and expensive for the taxpayer to replace. Fifty years from now, the Air Force will probably do many things very differently, but if flying is still part of our mission, we will certainly notice the prominent smell of jet fuel around our hangars and runways.
Colorado Springs, Colorado
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1. Jane Bryant Quinn, “Gas Guzzlers’ Shock Therapy,” Newsweek, 16 August 2004, http://www.msnbc.msn.com/id/5636037/site/newsweek/print/1/displaymode/1098.
2. US Geological Survey, “World Petroleum Assessment 2000, World Assessment Summary,” http://energy.cr.usgs.gov/WEcont/world/woutsum.pdf.
3. John H. Wood, Gary R. Long, and David F. Morehouse, “Long-Term World Oil Supply Scenarios: The Future Is Neither as Bleak Nor Rosy as Some Assert,” US Energy Information Administration, 18 August 2004, http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2004/worldoilsupply/oilsupply04.html.
4. For example, Canadian oil-sands (bitumen) production already exceeds a million barrels per day (MMBD) and is projected to rise to almost three MMBD in the next decade. Other fuels nearing profitability include synthetic liquids (diesel or methanol) made from natural gas and coal, both of which can be produced for under $40 per barrel.
5. British Petroleum, BP 2004 Statistical Review of World Energy, http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/publications/energy_reviews/STAGING/local_assets/downloads/pdf/table_of_proved_oil_reserves_2004.pdf.
6. Chemical compositions (light versus heavy oil) drive the differences in prices. After one accounts for chemical composition and shipping costs, the price of oil is virtually identical worldwide.
7. Although the following fact detracts from the key point, for the benefit of the curious reader, the United States produces about 8.5 MMBD of oil—enough to satisfy about 40 percent of our current demand and vastly more than the military needs. In addition, we have huge coal reserves, representing the energy equivalent of about one trillion barrels of oil, which we could convert to high-grade synthetic liquids for the military at less than $40 per barrel.
8. Jerry Taylor and Peter Van Doren, “An Oil Embargo Won’t Work,” Wall Street Journal, 10 April 2002, http://www.cato.org/dailys/04-24-02.html.
10. Less than 2 percent of the land in Saudi Arabia, Kuwait, and the United Arab Emirates and about 10 percent of the land in Iran and Iraq is arable. Oil revenues account for almost all of the export earnings of these nations. Central Intelligence Agency, The World Factbook, http://www.odci.gov/cia/publications/factbook/index.html.
11. Duane Chapman and Neha Khanna, The Fourth Gulf War: Persian Gulf Oil and Global Security, Working Paper 2004-16 (Ithaca, NY: Cornell University, December 2004), http://www.comm.cornell.edu/als481/4thGulfWar.pdf.
12. The Institute for the Analysis of Global Security reports 240 attacks on Iraqi oil pipelines, installations, and personnel between June 2003 and June 2004. See “Iraqi Pipeline Watch,” http://www.iags.org/iraqpipelinewatch.htm. Including the 2001/2002 recession, oil-price shocks have preceded nine of 10 US postwar recessions. Stephen P. A. Brown, “Oil and the U.S. Macroeconomy” (paper presented at the Western Economic Association International annual meeting, Vancouver, British Columbia, 2 July 2004).
13. International Energy Outlook 2005 (Washington, DC: Energy Information Administration, Office of Integrated Analysis and Forecasting, US Department of Energy, July 2005), http://www.eia.doe.gov/oiaf/ieo/pdf/0484(2005).pdf.
14. David B. Barber, “Nuclear Energy and the Future: The Hydrogen Economy or the Electricity Economy?” Opinion/White Paper, Institute for the Analysis of Global Security, 24 March 2005, http://www.iags.org/barber.pdf.
15. Enormous infrastructure costs as well as technological and cost barriers to the production, transportation, and storage of hydrogen suggest that hydrogen fuel cells will likely remain prohibitively expensive for private autos. After decades of research, fuel cells still cost about $3,000 per kilowatt of capacity. If fuel cells are to become economically competitive in private transportation, that cost needs to decrease by a factor of more than 50.
16. Jet fuel contains about 130,000 BTUs of energy per gallon. Although coal-based methanol may someday gain popularity as an auto fuel, at 55,000 BTUs per gallon, methanol does not pack enough energy for military aviation.
The conclusions and opinions expressed in this document are those of the author cultivated in the freedom of expression, academic environment of Air University. They do not reflect the official position of the U.S. Government, Department of Defense, the United States Air Force or the Air University
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