Nine former White House cabinet and senior national security officials convened to advise an American president as the nation grapples with an oil crisis over a seven-month period.
June 23, 2005. Robert M. Gates, former director of CIA, R. James Woolse, former director of CIA, Carol Browner, former Administrator of EPA, et al.
THE BOTTOM LINE. High concentrations of oil in unstable and undemocratic regions, rapidly growing global demand, low spare production capacity, and a significant likelihood of future supply disruptions due to terrorism, political unrest, or other factors, all but guarantee continued price volatility and pose a growing threat to the U.S. and world economy and to our national security. Addressing this vulnerability constitutes one of the preeminent energy, economic, and national security challenges of our time. We must act now.
- A change in supply or demand of oil anywhere will affect prices everywhere.
- Given today’s precarious balance between oil supply and demand, taking even a small amount of oil off the market could cause prices to rise dramatically. In Oil ShockWave, a roughly 4 percent global shortfall in daily supply results in a 177 percent increase in the price of oil (from $58 to $161 per barrel).
- Oil price shocks of this magnitude could do significant damage to the U.S. economy. In Oil ShockWave, the economy goes into recession and there are millions of fewer jobs as a result of sustained higher oil prices.
- U.S. foreign and military policy is influenced and often constrained by our oil dependence. Military options offer little recourse in the event of a supply crisis. Oil ShockWave participants repeatedly found that military intervention was not only unfeasible given existing U.S. commitments, but unlikely to be effective in responding to the scenarios they confronted, even when requested by a host government.
- The U.S. is vulnerable to attacks on key energy infrastructure both at home and abroad. Because this energy infrastructure is simply too vast to protect, we must reduce demand, develop petroleum alternatives, and promote fuel diversity.
- Political unrest and the associated risky investment conditions in key oil producing countries may pose a greater threat to the long-term stability of world oil markets than terrorism.
- America’s Strategic Petroleum Reserve (SPR) offers some protection against a major supply disruption, but that protection is limited in both scope and duration. Emergency reserves cannot sustain the U.S. through a prolonged crisis. In addition, Oil ShockWave revealed that it is extremely difficult to reach consensus on when it is appropriate to use the SPR.
- Global oil markets are currently dependent on Saudi Arabia’s ability to serve as supplier of last resort to offset demand increases or supply shortfalls elsewhere. Given existing terrorist threats and political tensions in Saudi Arabia, this situation creates significant and potentially damaging global vulnerabilities
- Once oil supply disruptions occur, short-term options for protecting the U.S. economy—like tapping the SPR and implementing emergency demand measures—are limited. In addition, these options are generally not sustainable for more than a few months to a year.
- The challenge is to act now to develop long-term policies and to create more effective options for managing the medium-term impacts—years 2 through 10—of a major oil crisis.
Where we Stand Today
The transport sector alone relies on oil for 97% of its energy needs and accounts for 68% of overall U.S. oil demand. Because the transport sector remains nearly wholly dependent on oil, consumers cannot quickly reduce consumption in response to higher prices.
The U.S. is the world’s largest consumer of oil. It accounts for 25% of global daily consumption1, but holds less than 3% of the world’s proved oil reserves. The Middle East, by contrast, holds between 57 and 65 percent of the world’s proved oil reserves.
Oil production in the U.S. has been in gradual decline since 1970 and this decline is projected to continue. At the same time, oil imports have increased steadily and now account for 58 percent of total U.S. consumption. This trend is also expected to continue.
U.S. and world demand for oil are expected to increase substantially over the next 10 to 20 years. Demand in the U.S. is expected to grow by 40 percent—from 20 million barrels per day [mbd] to 28 mbd—between 2002 and 2025. World demand is projected to increase even more substantially, by more than 50 percent—from 78 mbd to 120 mbd—over the same period.
The world will increasingly rely on opec nations, particularly Saudi Arabia, to supply the oil needed to meet future demand. The federal Energy Information Administration (eia) projects Middle East opec production to increase from 21 mbd in 2003 to 38 mbd by 2025 (an 81 percent increase)
Demand growth is likely to be especially strong in developing countries, notably China and India. This growth is already having an effect on world oil markets, where the price per barrel has more than doubled between 2003 and 2005.