Bruce M. Everett USAF Air Command and Staff College September 20, 2010 American Energy Security:...

Bruce M. EverettUSAF Air Command and Staff College

September 20, 2010

American Energy Security:American Energy Security:Myth and RealityMyth and Reality

• Three observations on the oil market.

• A quick history of US oil supply.

• Why aren’t we energy independent?

• A definition of energy security.

OutlineOutline

Observation #1Observation #1The world is The world is NOTNOT running out of oil running out of oil

Reserves (667 GB)

Source: BP

Production (23 GB)

In 1980, the world had 667 GB or 29 years of proven reserves of conventional oil.

Since then, we have consumed 727 GB.

How much do we have left?

Bill

ion

ba

rre

ls

Ratio = 29

Global Oil ReservesGlobal Oil Reserves

Source: BP

Answer = 1,400 GB 45 years

Bill

ion

ba

rre

ls

Ratio = 45

?

Global Oil ReservesGlobal Oil Reserves

Ratio = 29

World conventional oil resourcesWorld conventional oil resources

1,000

Bill

ion

ba

rre

ls

1,400

Cumulative production

Remaining proved reserves

World conventional oil resourcesWorld conventional oil resourcesB

illio

n b

arr

els USGS new & undiscovered

(95% confidence)775

World hydrocarbon resourcesWorld hydrocarbon resources

1,140

Bill

ion

ba

rre

ls

Proved natural gas reserves

4,300

Bill

ion

ba

rre

ls Heavy oil


4,400

Bill

ion

ba

rre

ls Coal


Bill

ion

ba

rre

ls

Shale2,600


Bill

ion

ba

rre

ls

~15 trillion B or ~500 years at current consumption.

Methane hydrate resources may be a thousand times greater.

These resources include only molecules we have identified.


Hydrocarbon production is constrained by technology and

economics, not by the availability of molecules.

Copper

•In the Bronze Age (1,200 BC), Cu was expensive and recycled.

•Since 1900, world Cu production has grown from 0.5 mt to 15 mt.

•Real prices are 20% lower.

Resource industriesare a race between

depletionAnd

technology.

Technology can win over very long time

periods.

Observation #2: The oil market is NOT an Easter egg

hunt

World Oil Reserves- Year End 2009 World Oil Reserves- Year End 2009 B

illi

on

bar

rels

Sources: Oil & Gas Journal, BP

9%

1,400Western Oil Companies

149 US

23 Canadian

19 EU

5 Australian

2 Other

Booked reserves: 130 GB

Bil

lio

n b

arre

ls


1%

World Oil Reserves- Year End 2009 World Oil Reserves- Year End 2009

Chinese Oil Companies

Sinopec

CNOOC

PetroChina

Booked reserves: 16 GB (mostly in China)

Locking up supplies?9%

1,400

The US and Canada are the The US and Canada are the ONLYONLY countries in the world countries in the world which permit private ownership which permit private ownership of subsoil resources.of subsoil resources.

Ex US/Canada Year 1900 Today

Reserve ownership Company Government

Exploration decisions Company Specified

Development decisions Company Joint

Regulations Little or none Heavy

Government profit share 5-10% 70-95%

Pricing basis Company Market

Technology transfer Little or none Extensive

What do companies get from an oil deal?What do companies get from an oil deal?

Bil

lio

n b

arre

ls


1%

World Oil Reserves- Year End 2009 World Oil Reserves- Year End 2009

9%

1,400

~90% of world oil reserves are directly controlled by national oil companies (NOCs).

Question: How do NOCs Question: How do NOCs allocate oil?allocate oil?

Answer: They sell it to Answer: They sell it to private companies at the private companies at the

market price.market price.

Question: How do countries Question: How do countries acquire oil?acquire oil?

Answer: Private companies Answer: Private companies buy it at the market price.buy it at the market price.

There is a single global oil marketThere is a single global oil market

• Oil can be moved from any coastal location to any other coastal location for <$2 per barrel.

• Hundreds of refineries.

• Considerable flexibility to handle different crudes.

• Active spot, futures and options markets = liquidity.

• Oil trading is a commercial, not political activity.

• Oil is not sold under long-term contracts at set prices.

In 2009, the US imported ~11½ million barrels per day of crude oil and petroleum products

#1: Canada (21%)

#1: Canada (21%)#2: Mexico (10%)

#1: Canada (21%)#2: Mexico (10%)#3: Saudi Arabia (9%)

#1: Canada (21%)#2: Mexico (10%)#3: Saudi Arabia (9%)#4: Venezuela (9%)

#1: Canada (21%)#2: Mexico (10%)#3: Saudi Arabia (9%)#4: Venezuela (9%)#5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%)#3: Saudi Arabia (9%) #4: Venezuela (9%)#5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%) #7: Algeria (4%)#3: Saudi Arabia (9%)#4: Venezuela (9%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%) #7: Algeria (4%)#3: Saudi Arabia (9%) #8: Angola (4%) #4: Venezuela (9%)#5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%) #7: Algeria (4%)#3: Saudi Arabia (9%) #8: Angola (4%) #4: Venezuela (9%) #9: Russia (4%) #5: Nigeria (7%)

#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%) #7: Algeria (4%)#3: Saudi Arabia (9%) #8: Angola (4%) #4: Venezuela (9%) #9: Russia (4%)#5: Nigeria (7%) #10: Brazil (2%)

What would happen if Venezuela cut off oil shipments to the US?

Would we lose 9% of our oil supply?

Answer: No

•Venezuelan oil would go to other buyers.

•Displaced oil would come to the US.

•Costs would be relatively small, and probably higher for Venezuela than for the US.

By law, the US imports no oil from Iran. What would happen if Iran stopped exporting oil?

Answer: The US would suffer with everyone else.

•The price of oil would rise.

•All suppliers would charge the higher price.

•All consumers would compete for remaining oil.

US oil import vulnerability is to PRICE

Not VOLUME.

Observation #3:There are NO economically viable

alternatives to oil in transportation.

Ethanol?

Costs an extra $3 per gallon

Performance issues (range, carbon)

$20-25 B additional cost in 2009 for

2½% of US oil supply

Equivalent to ~$200/B crude oil

Electric cars?

Cheap fuel, but very expensive vehicles

Performance issues (range, carbon, recharge)

Equivalent cost of $25 per gallon

or ~$1,000/B crude oil

Light rail?

Inefficient, underutilized and very expensive

Equivalent cost of $35 per gallon

or ~$1,400/B crude oil

A brief history of US oil supplyA brief history of US oil supply

US oil supply historyUS oil supply history

In the 19th and early 20th centuries, the US was the world’s main oil producer and exporter.


At the end of World War II, the US was self-sufficient in oil.

Mil

lio

n B

arre

ls p

er D

ay

Source: Energy information Administration

Domestic

Imports


Until 1967, the US imported oil, but had spare producing capacity.

Mil

lio

n B

arre

ls p

er D

ay


“…in the year 1980, the United States will not be dependent on any other country for the energy we need….”

First oil crisis 1973-74

In the early 1970s, US oil production peaked, and imports rose.

Domestic

Imports



“I will request legislation to authorize and require tariffs, import quotas, or price floors to protect our energy prices at levels which will achieve energy independence.”

1975-76: Market adjusted,but growth resumed.

US oil supply historyUS oil supply historyM

illi

on

Bar

rels

per

Day

Domestic

Imports


Second oil crisis 1979-80

“The Moral Equivalent of War”


illi

on

Bar

rels

per

Day

Domestic

Imports


Early 1980s: HUGEmarket adjustment, thengrowth resumed.

“The best answer, …is to try to make us independent of outside sources to the greatest extent possible for our energy.”


illi

on

Bar

rels

per

Day

Domestic

Imports


“…three principles guided our policy: reducing our dependence on foreign oil, protecting our environment, and promoting economic growth.”


illi

on

Bar

rels

per

Day

Domestic

Imports



US energy independence would “rock the world.”

Mil

lio

n B

arre

ls p

er D

ay

Domestic

Imports



…we should be doing everything possible to …move our nation toward energy independence.”

Recession

Mil

lio

n B

arre

ls p

er D

ay

Domestic

Imports

“It falls on us to choose whether to risk the peril that comes with our current course or to seize the promise of energy independence.”



Recession

Mil

lio

n B

arre

ls p

er D

ay

Domestic

Imports

Question:Question:

If we all agree we should be If we all agree we should be “energy independent”, “energy independent”,

why aren’t we?why aren’t we?

The US enjoys low energy costs, giving us:

•A competitive edge in the world

and

•Unprecedented physical and social mobility.

“Energy independence” would deprive us of both with severe economic and social consequences.

The indirect effects would outweigh the direct effects.

“Energy independence” would NOT free the US from its strategic responsibilities.

Oil market stability is critical to the global economy, and the global economy is critical to the US.

FDR and Saudi King Ibn Saud

The US established a security relationship with Saudi Arabia before the US became an oil importer.

“If President Bush made energy independence his moon shot, he would dry up revenue for terrorism…..”

Tom Friedman New York Times

December 5, 2004

P

Q

Global liquid fuel supply curveGlobal liquid fuel supply curve

S

Synthetic fuels

Canada tar sands

Deep water GOM

Deep water West Africa

Middle East (Saudi, Iran, Kuwait, Iraq)

Who would suffer from a decline in oil demand?

Terrorism is unfortunatelynot very expensive

North Korea and Cuba, among the poorest countries on Earth and with no natural resources, are major trouble-makers.

But there is But there is some good some good

news.news.

Oil

Co

ns

um

pti

on

,M

ilio

n b

arre

ls p

er

da

y

Source: BP, EIA

In the 1970s, rich countries consumed, In the 1970s, rich countries consumed, while poor countries produced.while poor countries produced.

China

85% Industrial, including USSRand Eastern Europe

Other developing countries

Source: BP, EIA

Industrial

China

Other

85%

15%

55%

45%

Now, everyone needs oil.Now, everyone needs oil.O

il C

on

su

mp

tio

n,

Mili

on

bar

rels

pe

r d

ay

Broad cooperation on oil market Broad cooperation on oil market stability is possible.stability is possible.

A different way of looking A different way of looking at energy securityat energy security

Jefferson’s dilemma

During the Napoleonic wars, both Britain and France impeded US trade. How did President Jefferson respond?


In 1807, he convinced Congress to pass the Trade Embargo Act which prohibited any foreign trade. What was the result?


An economic disaster.

Congress repealed the Embargo Act in 1809.

Wilson’s dilemma

He won re-election in 1916 with the slogan “He kept us out of war”, yet he asked for a declaration of war on Germany 28 days after his second inauguration. What went wrong?

Wilson’s dilemma

Germany refused to respect US neutrality.

Germany

Austria

Great Britain

1914: GDP of the major combatants1914: GDP of the major combatantsB

illio

n $

20

09

Canada/Aust/NZ

France

Italy

Russia

United States

Other

Source: OECD

Germany

Austria-Hungary

Great Britain

1914: Populations of the major combatants1914: Populations of the major combatantsM

illi

on

Canada/Aust/NZ

France

Italy

United States

Russia

Other

Source: OECD

Germany

Italy

Great Britain

1939: GDP of the major combatants1939: GDP of the major combatantsB

illio

n $

20

09

Canada/Aust/NZ

France

USSR

United States

Japan

China

Other

Source: OECD

GermanyItaly

Great Britain

1939: Populations of the major combatants1939: Populations of the major combatantsM

illio

ns

Canada/Aust/NZFrance

USSR

United States

Japan

Other

China

Source: OECD

USSR

Eastern Europe

1970: GDP of the major Cold War Rivals1970: GDP of the major Cold War RivalsB

illio

n $

20

09

Canada/Aust/NZ

United States

China & Other

Western Europe

Source: OECD

Japan

In the 19In the 19thth Century, the United Century, the United States was protected by its oceans.States was protected by its oceans.

In the 20In the 20thth Century, the United Century, the United States was protected by wealth and States was protected by wealth and

industrial might.industrial might.

Global GDP shares 1950 and 2009, %Global GDP shares 1950 and 2009, %

USSR/East Europe

United States

JapanCanada/Aust/NZ

Western Europe

China

All other

Russia

United States

Japan

Canada/Aust/NZ

OECD Europe

China

All other

(OECD) (World Bank)

Global GDP shares 2009 and 2035, %Global GDP shares 2009 and 2035, %

Russia

United States

JapanCanada/Aust/NZ

OECD Europe

China

All other

(EIA)

United States

Japan

Canada/Aust/NZ

OECD Europe

All other

(World Bank)

US economic predominance will be US economic predominance will be tested in the 21tested in the 21stst century. century.

““Energy independence” would hurt, Energy independence” would hurt, not help.not help.

Basic principles of energy securityBasic principles of energy security

•The US cannot be secure without a growing, dynamic economy.

•US economic growth requires international trade.

•International trade requires global stability.

•Oil is a key part of international trade.

•High cost energy would make the US uncompetitive.

•Like Jefferson and Wilson, we cannot eliminate but must cope with our vulnerability.

Bruce M. Everett USAF Air Command and Staff College September 20, 2010 American Energy Security:...

Documents

Transcript of Bruce M. Everett USAF Air Command and Staff College September 20, 2010 American Energy Security:...