Friday, January 19, 2007

Counsel on Foreign Relations Weighs In

"America is addicted to oil," said President George W. Bush in the State of the Union Address on 31-Jan-2006. You sure wouldn't know it from any actions by either the Executive or Legislative Branch. At least, that is, until the new Congress convened. Since then, both the House and Senate have been busy, but we are a long ways from anything concrete as yet, and the direction isn't necessarily good.

One bright spot is that we seem to be getting past the recognition stage that there is indeed a problem, although there is still some disagreement at exactly what the problem is, but at least the House and Senate are working on the issue.

On the recognition front, an interesting development occurred in October, 2006, before the election, when the Council on Foreign Relations (CFR), a prominent "nonpartisan resource for information and analysis" issued a report entitled National Security Consequences of U.S. Oil Dependency. This report is interesting, I think, primarily because it is not an outside group that is calling attention to the dependency issue. The CFR is an insider organization if ever there was one. What follows is a synopsis of the report. (This is more for my own edification than anything. I highly recommend downloading the pdf (it is free) and reading it yourself.)

Out of the gate, the report states that "The lack of sustained attention to energy issues is undercutting U.S. foreign policy and U.S. national security." Noting that energy supplying states are beginning to flex their muscles, we (the United States) find ourselves less influential because of it. It recommends five types of actions.

  1. It is "unanimous in recommending the adoption of incentives to slow and eventually reverse the growth in consumption of petroleum products, especially transportation fuels such as motor gasoline."
  2. It "recommend[s] that the United States take several initiatives to encourage the efficient, transparent, and fair operation of world oil and gas markets."
  3. "The United States must work more closely with major oil detect and deter attacks on their infrastructure...and...[g]reater efforts are needed to harden the energy infrastructure against both attacks and natural disasters."
  4. "There are too many examples of countries that exploit their oil and natural gas resources while failing to manage the revenues in a way that improves the social and economic prospects of their people...The U.S. should play a more active role...working to convince others, such as the governments in China and India, of the importance of...measures [to improve economically the people in exporting countries]."
  5. "The U.S. government is not well organized to address the threats to national security created by energy dependence. There is a need to a manner that better ensures continuity of attention and integration of the different perspectives needed for energy policy making." However, it says specifically that it "cautions that it would be neither practical nor wise to insist that energy security be the central foreign policy priority of the U.S."
There are two main findings that influence the recommendations for action above. They can be easily summed up as (1) the U.S. is dependent on foreign energy imports, and (2) this influences how we conduct foreign policy. In the recommendations sections, it discusses specific ways to address these two issues. The findings are worth describing in more detail.

Imports of Oil and natural gas supply 63 percent of our energy needs. Coal is abundant domestically, and the remaining sources are nuclear, biomass, hydroelectric, and then the other renewable sources. Oil fuels 96 percent of the transportation needs and is thus critical to the transportation sector. Because of this dependence on a single source, the Task Force believes that the U.S. cannot be energy independent for "at least several decades", barring, that is, any "draconian" measures. It also states that a cut in imports won't help, due to tight production, and the private companies cannot be controlling the price of oil due to their small size relative to the large national companies. Further, there is little hope in lower prices any time soon, for "the world has used [its] low-cost oil."

Natural gas has more end-uses, namely electricity, heating, and industrial feedstock. Presently most imports come from Canada, but 2 percent comes as liquefied natural gas (LNG), and LNG is expected to increase for "there is well-founded concern about the availability of adequate supplies of natural gas to the North American market." In other words, we are past peak production in North America in natural gas as well as oil! This dependence upon imports will cause a fundamental shift and raises the issue of the security of gas supplies going forward.

Turning to the issue of foreign policy, the panel identifies five major reasons why this dependence matters and mentions a sixth, the relationship of the military and oil dependence.

  1. The control over enormous oil revenues gives exporting countries the flexibility to adopt policies that oppose U.S. interests and values.
  2. Oil dependence causes political realignments that constrain the ability of the U.S. to form partnerships to achieve common objectives.
  3. High prices and seemingly scarce supplies create fears that the current system of open markets is unable to ensure secure supply.
  4. Revenues from oil and gas exports can undermine local governance.
  5. A significant interruption in oil supply will have adverse political and economic consequences in the U.S. and in other importing countries.
  6. Some observers see a direct relationship between the dependence of the U.S. on oil and the size of the U.S. defense budget.
Given these set of problems, the Task Force recommends some policy objectives for both domestic and foreign policy. Domestically, the need to reduce oil imports, we should:
  1. Increase efficiency of oil and gas use
  2. Switch from oil-derived products to alternatives
  3. Encourage supply of oil from sources outside the Persian Gulf
  4. Make oil and gas infrastructure more efficient and secure
  5. Increase investment in new energy technologies
Each of these are then elaborated. Policies increasing efficiency are encouraged. In terms of alternatives, co generation (heat and power), biomass and plug-in hybrid vehicles are recommended. However, a switch to electricity could cause a switch from imported oil to imported natural gas, unless other electricity production (wind, nuclear) is also available. The Task Force cautions that increased renewable and nuclear alone will not quickly reduce dependence on oil and gas, although improvements in hybrid and electric cars could change that in the future. Possible measures to increase efficiency include implementing a "substantial federal excise tax on gasoline," tighten the Corporate Average Fuel Economy (CAFE) rules, capping gasoline consumption by adopting a system of tradable vouchers. They also strongly recommend removing the $.54 per gallon tariff on imported ethanol and making greater use of nuclear power.

In terms of supplies from outside the Persian Gulf, they give the specific example of Canadian tar sands. However, they also recommend opening up ANWR in Alaska as well as off-shore areas for drilling. Further on, they recommend increasing the ability to import LNG.

On the security issue, they recommend increasing oil stockpiles to 1 billion barrels (up from 700 million), making the oil and natural gas infrastructure less vulnerable to disruption (natural or terrorist), and in the event of a disruption, stay away from price and allocation controls similar to those imposed in the 1970s. They also recommend streamlining the regulations for the U.S. refinery industry to better upgrade their capacity for heavy crude refining. The Task Force also recommends increasing R&D in a variety of manners with goals of improving automobile mileage, development of hybrids, production of ethanol and synthetic fuels, and advanced research in fission and fusion energy.

Finally, there is the section on foreign policy recommendations. The Task Force states the the U.S. government has failed to pay sufficient attention to energy in its foreign policy conduct and recommends making energy an integral part of policy. It recommends the U.S. seek stability in the Persian Gulf and try to expand sources of oil and gas production. It recommends encouraging efficiency in all markets and in other countries as well as encouraging proper functioning and integrated energy markets. In this latter regard, it recommends U.S. foreign policy "encourage a regulatory process that allows the timely construction of cross-border infrastructures", encourage "accurate historical data and objective projections" of energy data, and recognize that National Oil Companies (NOCs) are now a dominant force in the world oil and gas markets and must find ways to work with these enterprises.

There's more on the foreign policy front. The U.S. should "revitalize international institutions and collective international efforts." To do this it should "work with other countries to prepare the world market for oil to better withstand price shocks...encourage countries to devote greater attention to energy infrastructure protection...and do more to promote better management of oil revenues because good management serves the long-term U.S. interest in encouraging increased oil production." Finally, it gives recommendations on how to integrate energy issues into the foreign policy apparatus.

There is a lot of information in this report, and I've only touched the surface. It is clear from the recent Congressional hearings that Congress is listening. It will be interesting to see what the Executive branch comes up with in this year's State of the Union Address.

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