Why Energy Security Matters Despite Falling Oil Prices
By Daveed Gartenstein-Ross
FDD Policy Briefing
January 13, 2009
Americans watched helplessly as oil reached an all-time high of over $145 a barrel in July 2008. The climb in prices was relentless: after oil broke $100 a barrel for the first time in January 2008, it seemed that each day of commodities trading brought it to a new high. Likewise, each day brought more political attention to high energy prices (too often in the form of meaningless posturing, but with some genuinely innovative ideas as well), and a brighter outlook for alternative energy. But as the economy collapsed late in the year, oil prices went into free fall. Although prices have risen slightly in recent days based on concerns about the fighting in Gaza, Americans now feel very little “pain at the pump.” It would be all too easy to forget about energy security as a major issue.
However, ignoring energy security until the price of oil rises again would be an extraordinary mistake. Even as we try to use the availability of cheap oil to spark our economy back to life, we should guard against oil price volatility, inevitable price spikes, and the possibility of major supply disruptions.
Plus ?a Change…
If the road we are now traveling seems all too familiar, that’s because we may have been on it before. The world saw oil prices soar beginning in 1978: a historical analysis by WTRG Economics notes that the Shah’s overthrow in Iran “resulted in the loss of 2 to 2.5 million barrels per day of oil production between November, 1978 and June, 1979.” Iraq invaded Iran shortly thereafter, and by November 1980 the two countries were producing 6.5 million bpd less than they had a year before. As WTRG’s analysis states, worldwide oil production was at that time “10 percent lower than in 1979.”
As oil prices surged (reaching a high of $103/barrel in today’s dollars in April 1980), President Carter established the Synthetic Fuels Corporation. The program was designed to spur public-private partnership in the development of alternative fuels, with the stated goal of producing 2 million bpd equivalent from shale and coal. However, as the Christian Science Monitor has noted, plummeting oil prices in the mid-1980s undermined the market for synthetic fuels:
Tumbling gas-pump prices make motorists smile, but not Peter Vanderzee. They remind him how falling oil costs sank his effort to unshackle the United States from Middle East oil two decades ago. As project manager for two large alternative-energy projects under President Carter’s US Synthetic Fuels program launched in 1980, Mr. Vanderzee was pushing his team to make methanol from coal for auto fuel. But in 1985, just as his technology was starting to produce results, oil plummeted. In today’s inflation-adjusted dollars, oil went from $53 a barrel to $28, with pump prices falling from $2.20 a gallon to $1.60. The next year, President Reagan pulled the plug on the US Synfuels program. “It was a huge letdown,” Vanderzee recalls. “We had the technology ready to go. But Mideast crude oil suppliers decided the US was serious about our program and just didn’t want the US making alternatives to oil. So they pumped more oil and lowered the price.”
Other firms that undertook alternative energy projects in the 1980s similarly saw their efforts collapse with the dramatic plunge in oil prices. In the 1990s, car manufacturers began to sell larger and larger vehicles, with progressively poorer fuel efficiency.
The question is, are we going to see the same thing happen now? Will alternative energy projects that seemed bound for commercial success six months ago fail because oil prices have again plummeted unexpectedly? Lower oil prices make it difficult for ethanol to compete. As cellulosic ethanol producer Coskata has noted, “no new biofuel can compete against $1-a-gallon gasoline.” VeraSun Energy, one of the country’s top ethanol producers, was recently forced to file for bankruptcy. However, some observers are not particularly concerned about this. Rocky Mountain Institute co-founder Amory Lovins told the Christian Science Monitor, “I worry much less today than I did back then [during the 1980s] because what’s different today is that our concerns about energy security and climate change are much broader and more intense.”
But today’s alternative energy pioneers see their businesses threatened not just by the drop in oil prices, but also by the credit crisis. Ventures that are feeling the economic pinch include “corn-based ethanol, advanced cellulosic ethanol, and coal- and oil-shale-to-fuel,” as well as fuel efficiency technology. The Christian Science Monitor reports that General Motors recently “announced it was suspending new product development efforts, including several hybrid models.” (It did not, however, cancel the Volt plug-in hybrid electric vehicle, which was recently showcased at a major auto show.)
Oil Prices Will Rise Again
One reason energy security should be a top political concern despite falling oil prices is that these prices will not stay low forever. The fall in prices has been driven by worldwide economic collapse: as the economy recovers, so too will the world’s thirst for oil. There are already some danger signs that the future price rise could be similarly precipitous to what happened in 2008. As the New York Times reported last month, “dozens of major oil and gas projects have been suspended or canceled” due to falling prices. The Times notes that these project delays “are likely to reduce future energy supplies,” which could “set the stage for another surge in oil prices once the global economy recovers.” Moreover, recent events show how geopolitics can force the price of oil back up in a hurry. Oil prices experienced a short spike (jumping about 45% in the course of two weeks) as Israel’s Operation Cast Lead in Gaza intensified.
But there are also indications that the lessons of 2008 are not sticking. Michelle Krebs, senior editor of AutoObserver.com, said in December: “Despite all the public discussion of fuel efficiency, SUVs and trucks are the industry’s biggest sellers right now as a remarkable number of buyers seem to be compelled by three factors: great deals, low gas prices and winter weather.”
Sadly, much of the world’s economic growth and investment over the past half-century has been predicated on the idea that transportation would remain cheap ad infinitum. Thus, the toll exacted by the high oil prices of 2008 was particularly steep. FDD energy security research analyst Shlok Vaidya published a policy briefing in October showing how the high oil prices of 2008 had a ripple effect throughout the global economy. He first noted the toll that skyrocketing energy prices had on “just-in-time” supply chains:
Today’s economy relies on the constant transport of inventory between processing and delivery points across the globe. Relying on traditionally low transportation costs, companies were able to avoid maintaining storage facilities by keeping inventory moving and having it arrive “just-in-time.” The resulting high-profit margins for producers and cheaper prices for consumers propelled globalization. Unfortunately, this “just-in-time” production approach has not scaled with oil prices. Rapid and volatile movements in the price of oil have placed a significant amount of stress on the world’s superinfrastructure, shrinking those large profits and increasing the cost for consumers.
High oil prices, Vaidya noted, also had a dramatically negative impact on the airline industry, in which an unprecedented number of airlines went out of business; on micro-states (typically developing nations with very small populations), which saw high oil prices threaten their critical tourism industries while causing “a budgetary shock that stands to destroy many of these economies”; and on rural America, where a general lack of public transportation forced people “to spend record amounts of their income on energy.”
When energy prices rise again, will all these problems-and more-simply recur?
Security Concerns Undiminished
While energy prices will inevitably rise again, there are very real national security implications to our continued oil dependence even while prices remain low. The cheap oil that the world uses today still originates from the same unstable region that it did when gasoline was close to $5 per gallon.
As former CIA director R. James Woolsey and Institute for the Analysis of Global Security co-director Anne Korin have noted, our oil dependence means that we are essentially “paying for both sides in the War on Terror.” In a previous policy briefing, I explained how this is true: Saudi Arabia’s oil revenue has been used to tilt the practice of Islam in a more violent and anti-social direction in many places (including the Balkans, the former Soviet republics, Southeast Asia, parts of sub-Saharan Africa, and even Europe and the U.S.), while Iran generates 85% of its government revenue from its oil industry. Iran in turn provides as much as $200 million a year to Hizballah, as well as tens of millions of dollars and militant training to Palestinian terrorist groups. This is in addition to its continued pursuit of nuclear weapons. Even though oil prices are low, we continue to fund both sides of the war on terror-and we continue to do so to the tune of billions of dollars every year.
Another basic national security fact that has not changed is that, from the terrorists’ perspective, America’s oil dependence is its Achilles’ heel. Osama bin Laden has encouraged his followers to attack the oil supply since December 2004, when he released an audiotape stating that focusing terrorist operations on oil production, “especially in Iraq and the Gulf area,” would cause the U.S. “to die off.” His deputy Ayman al-Zawahiri has similarly called for al-Qaeda fighters to “concentrate their campaigns on the stolen oil of the Muslims.”
Saudi Arabia’s oil production is particularly vulnerable to attack because it depends on a limited number of hubs. Two-thirds of Saudi Arabia’s oil is processed at the Abqaiq facility, and there are two main export terminals: Ras Tanura and Ras al-Ju’aymah. Terrorists have in fact directed their efforts toward attacks against these hubs, the closest call being a February 2006 attack on the Abqaiq refinery. A catastrophic attack against Saudi production could be executed using tactics that al-Qaeda has successfully employed in the past. For example, former CIA case officer Robert Baer has noted that it would be difficult to safeguard facilities against an airplane used as a guided missile, à la 9/11. Such an attack against Ras Tanura, for example, could do immeasurable damage to an already fragile global economy. This strategic challenge has not changed, even as oil prices have plunged.
It would obviously be foolish to think that the current low oil prices will continue indefinitely. It would be doubly foolish, then, for U.S. investments and public policy to proceed as though this were the operating assumption. Thus, despite plummeting oil prices, president-elect Obama remarked in December: “In the 21st century, we know that the future of our economy and national security is inextricably linked with one challenge: energy.” He is right to continue to push alternative energy in his speeches despite the low price of oil, and any policies proposed by the new administration that can substantially improve our energy security will deserve our support.
Daveed Gartenstein-Ross is the vice president of research at the Foundation for Defense of Democracies, and directs its Center for Terrorism Research. He is co-editor of the book From Energy Crisis to Energy Security: A Reader, and a Ph.D. candidate in world politics at the Catholic University of America.
See the original article here.