All of the hoopla over eliminating our dependence on oil from the Middle East thereby giving the United States genuine is just another diversionary tactic by political hacks to avoid looking at and dealing with the real issues.

In an effort to separate fact from fiction The Lang Report has borrowed a very simple primer on the global economics of oil from David Fiderer who has been a banker covering the energy industry for several global banks in New York and is also a contributor to the Huffington Post.

1. The U.S. imports 2/3 of the oil it consumes. That fraction will not dramatically change any time soon.

The United States has been a net importer of oil since the 1960s. In 1965, it produced 9 million barrels of oil a day, and consumed 11.5 million barrels daily. Then as now, we relied heavily on imports from other producers in the western hemisphere, notably Canada, Mexico and Venezuela. Back in 1965, the western hemisphere was more or less in balance, with 14.6 million barrels a day being produced, and 14.6 million barrels a day being consumed. But those days are long gone. Today the western hemisphere produces about 21 million barrels a day, but it consumes 30 million barrels daily.

Here’s what global consumption looks like in 2006:

Oil Consumption
[millions of barrels a day]
US 21
Rest of Western Hemisphere 9
Middle East 6
Africa 3
Asia 25
Former Soviet Union 4
Rest of Europe16
Total 84

And here’s what global production looks like in 2006:

Oil Production
[millions of barrels a day]
US 7
Rest of West. Hemisphere 14
Middle East 26
Africa 10
Asia Pacific 8
Former Soviet Union 12
Rest of Europe 5
Total 82

In other words, if the U.S. reduced its consumption of oil down to 11.5 million barrels a day, to the levels of 1965, when we had a lot fewer people and fewer cars, we would still be importing 40% of our oil needs. Most politicians talk about reducing our dependence on foreign oil. The only way to eliminate our dependence on foreign oil is to drastically transform our car culture, or use a totally different technology for transportation. Unquestionably, we must reduce our consumption of oil. But the primary reasons for doing so are the global warming crisis and the need to improve our balance of payments position.

2. Oil is sold in a global market. When U.S. consumption or production changes, the global market adjusts.

For reasons that may seem obvious from the numbers above, oil is traded in a global market. When production is shut down in, say, Nigeria, tankers all over the world are diverted, so that the remaining supply is distributed as efficiently as possible. So the rising demand from China affects the price of oil in Texas. Similarly, oil produced by the Sudan, and purchased by China, adds to the global supply and indirectly contributes toward the overall lowering of market prices. In other words, the market does not care if the source of the supply or the source of the demand is a from good government or a bad government.

Suppose we did reduce our consumption of oil by 10 million barrels a day. What would happen? Would Middle East production suddenly become less important in world oil markets? No, because the region would not lose its competitive advantage. Oil is like every commodity-based business. The key to success is being a low-cost producer, and the Middle East remains the part of the world where oil can be extracted at the lowest cost per barrel.

So even if the United States imported less oil from the Middle East, the global economy would still be highly dependent on Middle East production. As a result, how important is it, from the perspective of energy security, that governments in the region be friendly to the United States?

3. Oil production generates huge amounts of cash flow in all price environments. And all governments, good and evil, want to maximize the current financial value of their oil production.

Once an oil well is drilled, the ongoing operating cost of lifting the oil is generally quite small, whether oil sells for $20 a barrel or $120 a barrel. Private oil companies almost never shut in production because they think the current price is too low. But again, most of the world’s oil production is not controlled by private companies, like Exxon or Chevron, but by national governments, like Saudi Arabia and Mexico. And because there is so much money to be made from current production, a government makes absolutely sure that the oil remains flowing. Throughout all the turmoil of a 27-year civil war, Angola’s oil production was never seriously disrupted.

Historically, the global swing producer has been Saudi Arabia, which dramatically ratcheted its production down and up during the 1970s and 1980s to meet its strategic goals of managing the price and supply. Since the late 1990s, Saudi production has been relatively stable, though trending upward.

Saudi Arabian Oil Production
[millions of barrels a day]
1970 4
1974 9
1980 10
1983 5
1985 4
1990 7
1996 9
2001 10
2006 11

These days, it doesn’t look like any government is purposefully holding back on production, though some disruptions may be caused by civil unrest in places like Nigeria or Iraq.

4. There are two rationales for U.S. military action based on oil.

So if a government, of any stripe, wants to keep the oil flowing for the cash flow, and the oil production affects the global market, whether or not it’s sold to the U.S., what is our strategic interest in maintaining governments in oil producing countries that are friendly to the United States? There are two possibilities:

a. We want governments that favor western oil companies and respect western investments.

Once the massive capital expenditure needed to bring an oil well into production is completed, the asset is a huge cash cow, and a foreign oil company remains at risk that the host government will expropriate the investment. Recently, we’ve seen variations on this theme in Venezuela and in Russia. Historically, the U.S. has supported highly repressive governments — Saudi Arabia and Equatorial Guinea come to mind — that have favored U.S. oil company investments. However, there is not much precedent in recent times about the U.S. going to war because of a government nationalized U.S. investments.

b. Massive oil wealth in the wrong hands can accumulate power used for extortion against the rest of the world, or used against U.S. interests.

We have a clear-cut precedent that continues to shape U.S. policy: The use of oil as a weapon against Israel during the 1973 Yom Kippur War. Saudi Arabia and other Arab countries imposed an embargo against oil deliveries the U.S. and the Netherlands after they extended support to Israel, causing supply disruptions and, through OPEC, causing the price of oil to quadruple within a period of months.

According to Alan Greenspan and other neocons, the invasion of Iraq was justified because Saddam Hussein had the wealth and power that came from his oil resources. The absence of WMD was not particularly relevant

Our thanks, once again, to David Fiderer and the Huffington Post for such a comprehensive explanation of the very complex issue of “oil dependence.”

HERE ARE MORE RELEVENT ARTICLES:

• Freedom From Oil by David Sandalow
• Our dependence on oil
• Barack Obama on Global Warming and Oil Dependence (jackson leferedy)
• McCain: Remarks on oil not about Iraq war