Revitalizing U.S. Oil Security Policy

REVITALIZING ILS____ OIL SECURITY POLICY Edward N. Krapels .he United States has never imported more than 46 percent of its petroleum requirements. The high-water mark of dependence was reached in 1977, when strong U.S. demand for foreign oil was one ofseveral factors responsible for the sharp price increases that occurred in combination with a disruption in oil supplies. At the time these disruptions appeared capable of lasting for some time. Later the oil price shock promoted a global recession and financial imbalance whose effects have only recently subsided. In retrospect, it is clear that the increase in world oil prices in 1979-80 was overdone. Prices have dropped back to $15-20 per barrel since then. This five-year transition to lower prices has exacted a high adjustment cost from the supply side (producers) of the world energy industry, just as the abrupt transition from $14 to $30 per barrel exacted a high adjustment cost from the demand side (consumers) of energy resources. In essence, the world oil market has operated in an economically inefficient and politically disruptive fashion. The Reagan administration reaped the immediate benefits of the fall in world oil prices. At the moment, the effect of oil on the overall state of the world is limited, and the policy of benign neglect executed by President Reagan and set to continue under President Bush has had Edward N. Krapels is president of Energy Security Analysis Inc. and an associate of the International Energy Program of theJohns Hopkins Foreign Policy Institute . His publications include "Oil and Security" (London: Adelphi Paper No. 136 of the International Institute of Strategic Studies, 1977), and "Oil Crisis Management" (Baltimore: The Johns Hopkins University Press, 1980). 185 186 SAIS REVIEW few immediate drawbacks. Since 1986, however, the prospects for U.S. oil production, consumption, and imports have become vastly different as a result of the decline in the price of oil. Under a continuation of the benign neglect policy, U.S. import dependence will exceed 50 percent of consumption in the 1990s. U.S. demand for oil imports will be the principal force in tightening the balance between world supply and demand to such an extent that future oil price disruptions, with all its attendant economic and political adversity , are far more likely to occur than if the United States contains its appetite for imported oil. Thus the Bush administration and Congress confront both a challenge and an opportunity. In a nutshell, the issue is what kind of world the United States wants to live in for the rest of the century. It can be a world of high U.S. oil-import dependence and vulnerability, in which the very probability of disruptions is increased by that high dependence. Or it can be a world where U.S. dependence and vulnerability are contained by newly implemented policies, in which the probability of disruptions is also contained by America's restrained need for oil from a volatile and imperfect world. The Silent 80s Since the collapse of oil prices in 1986, there has been a low intensity debate in Washington about the need for a revitalization of the U.S. oil security policy. It has been only a low intensity debate because oil security is not on the top of Washington's policy agenda. While various important studies have been conducted and legislative responses have been introduced, only a few oil-state representatives have expressed a sense of urgency. Even the national security community—in the past an important ally in drafting oil security policies—has expressed little interest in the possible reemergence ofoil import dependence as a strategic issue. There are solid reasons for questioning the need for a policy response to the oil development of the last few years. The most powerful argument for caution is the lesson of the 1970s and early 1980s, when overambitious energy policies did more to harm than help the energy and security interests of the United States. The Reagan administration's benign neglect oil policy was a reaction to the excessive regulation of its predecessors. Another argument for a cautious response to the oil price collapse of 1986 is that the politics of world oil...