bruce m. everett usaf air command and staff college september 20, 2010 american energy security:...
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Bruce M. EverettUSAF Air Command and Staff College
September 20, 2010
American Energy Security:American Energy Security:Myth and RealityMyth and Reality
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• 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
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Observation #1Observation #1The world is The world is NOTNOT running out of oil running out of oil
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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
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Source: BP
Answer = 1,400 GB 45 years
Bill
ion
ba
rre
ls
Ratio = 45
?
Global Oil ReservesGlobal Oil Reserves
Ratio = 29
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World conventional oil resourcesWorld conventional oil resources
1,000
Bill
ion
ba
rre
ls
1,400
Cumulative production
Remaining proved reserves
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World conventional oil resourcesWorld conventional oil resourcesB
illio
n b
arr
els USGS new & undiscovered
(95% confidence)775
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World hydrocarbon resourcesWorld hydrocarbon resources
1,140
Bill
ion
ba
rre
ls
Proved natural gas reserves
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4,300
Bill
ion
ba
rre
ls Heavy oil
World hydrocarbon resourcesWorld hydrocarbon resources
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4,400
Bill
ion
ba
rre
ls Coal
World hydrocarbon resourcesWorld hydrocarbon resources
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Bill
ion
ba
rre
ls
Shale2,600
World hydrocarbon resourcesWorld hydrocarbon resources
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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.
World hydrocarbon resourcesWorld hydrocarbon resources
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Hydrocarbon production is constrained by technology and
economics, not by the availability of molecules.
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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.
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Resource industriesare a race between
depletionAnd
technology.
Technology can win over very long time
periods.
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Observation #2: The oil market is NOT an Easter egg
hunt
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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
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Bil
lio
n b
arre
ls
Sources: Oil & Gas Journal, BP
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
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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.
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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?
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Bil
lio
n b
arre
ls
Sources: Oil & Gas Journal, BP
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).
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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.
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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.
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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.
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In 2009, the US imported ~11½ million barrels per day of crude oil and petroleum products
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#1: Canada (21%)
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#1: Canada (21%)#2: Mexico (10%)
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#1: Canada (21%)#2: Mexico (10%)#3: Saudi Arabia (9%)
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#1: Canada (21%)#2: Mexico (10%)#3: Saudi Arabia (9%)#4: Venezuela (9%)
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#1: Canada (21%)#2: Mexico (10%)#3: Saudi Arabia (9%)#4: Venezuela (9%)#5: Nigeria (7%)
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#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%)#3: Saudi Arabia (9%) #4: Venezuela (9%)#5: Nigeria (7%)
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#1: Canada (21%) #6: Iraq (5%)#2: Mexico (10%) #7: Algeria (4%)#3: Saudi Arabia (9%)#4: Venezuela (9%) #5: Nigeria (7%)
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#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%)
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#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%)
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#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%)
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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.
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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.
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US oil import vulnerability is to PRICE
Not VOLUME.
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Observation #3:There are NO economically viable
alternatives to oil in transportation.
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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
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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
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Light rail?
Inefficient, underutilized and very expensive
Equivalent cost of $35 per gallon
or ~$1,400/B crude oil
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A brief history of US oil supplyA brief history of US oil supply
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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.
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US oil supply historyUS oil supply history
At the end of World War II, the US was self-sufficient in oil.
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Mil
lio
n B
arre
ls p
er D
ay
Source: Energy information Administration
Domestic
Imports
US oil supply historyUS oil supply history
Until 1967, the US imported oil, but had spare producing capacity.
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Mil
lio
n B
arre
ls p
er D
ay
Source: Energy information Administration
“…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
US oil supply historyUS oil supply history
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Source: Energy information Administration
“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
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Source: Energy information Administration
Second oil crisis 1979-80
“The Moral Equivalent of War”
US oil supply historyUS oil supply historyM
illi
on
Bar
rels
per
Day
Domestic
Imports
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Source: Energy information Administration
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.”
US oil supply historyUS oil supply historyM
illi
on
Bar
rels
per
Day
Domestic
Imports
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Source: Energy information Administration
“…three principles guided our policy: reducing our dependence on foreign oil, protecting our environment, and promoting economic growth.”
US oil supply historyUS oil supply historyM
illi
on
Bar
rels
per
Day
Domestic
Imports
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Source: Energy information Administration
US oil supply historyUS oil supply history
US energy independence would “rock the world.”
Mil
lio
n B
arre
ls p
er D
ay
Domestic
Imports
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Source: Energy information Administration
US oil supply historyUS oil supply history
…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
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“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.”
Source: Energy information Administration
US oil supply historyUS oil supply history
Recession
Mil
lio
n B
arre
ls p
er D
ay
Domestic
Imports
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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?
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The US enjoys low energy costs, giving us:
•A competitive edge in the world
and
•Unprecedented physical and social mobility.
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“Energy independence” would deprive us of both with severe economic and social consequences.
The indirect effects would outweigh the direct effects.
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“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.
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FDR and Saudi King Ibn Saud
The US established a security relationship with Saudi Arabia before the US became an oil importer.
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“If President Bush made energy independence his moon shot, he would dry up revenue for terrorism…..”
Tom Friedman New York Times
December 5, 2004
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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?
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Terrorism is unfortunatelynot very expensive
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North Korea and Cuba, among the poorest countries on Earth and with no natural resources, are major trouble-makers.
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But there is But there is some good some good
news.news.
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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
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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
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Broad cooperation on oil market Broad cooperation on oil market stability is possible.stability is possible.
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A different way of looking A different way of looking at energy securityat energy security
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Jefferson’s dilemma
During the Napoleonic wars, both Britain and France impeded US trade. How did President Jefferson respond?
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Jefferson’s dilemma
In 1807, he convinced Congress to pass the Trade Embargo Act which prohibited any foreign trade. What was the result?
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Jefferson’s dilemma
An economic disaster.
Congress repealed the Embargo Act in 1809.
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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?
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Wilson’s dilemma
Germany refused to respect US neutrality.
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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
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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
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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
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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
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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
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In the 19In the 19thth Century, the United Century, the United States was protected by its oceans.States was protected by its oceans.
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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.
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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)
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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)
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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.
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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.