Energy security

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Monstrously complicated energy legislation, three years in the making, just died in the Senate -- at least until 2004. Disappointment in many quarters and jubilation elsewhere, with shouts: Ding-dong, the wicked bill is dead. Should we now be concerned about energy security and the supply of oil? I don't think so; the bill never addressed some of the basic issues. Senate minority leader Tom Daschle of South Dakota, while supporting its obscene subsidies to ethanol producers, admitted that the bill would do "almost nothing to increase energy security." He's right.

U.S. oil imports are rising well beyond 50 percent and domestic production is steadily declining. So concerns keep surfacing: Will we have enough oil to meet growing demand? Will the world run out of oil in the near future? Will instabilities in the Middle East endanger the supply? Will oil prices skyrocket? Many policies, including defense and foreign policy, are based on faulty understanding; much money is wasted on non-existent problems. Yet an analysis based on commonsense and basic economic reasoning can help us in fighting myths about oil.

All such analysis rests on one undisputed fact: Oil is a fungible commodity. We can think of the oil market, in an oversimplified way, as a giant bathtub into which oil pours from many sources, where it sells at single world price, and from which users purchase oil without regard for its origin. Once this picture is accepted, simple arguments yield all kinds of counterintuitive consequences:

Targeted oil embargoes are essentially impossible. For example, the 1973 embargo announced by Arab states (against the United States, the Netherlands and Israel) created panic and temporary dislocations, but did not keep oil from being available on the world market. Tankers carrying Arab oil to the U.S. unloaded their cargoes elsewhere to supply foreign consumers, with U.S. buyers simply purchasing the oil thus freed. Such swaps would frustrate any attempt at embargoes -- unless Arabs physically blockaded Atlantic, Gulf and Pacific ports.

The turbulent consequences in the U.S. generally associated with the 1973 embargo were due to President Nixon's domestic price controls and bureaucratic misallocations of oil products. There were no such problems in the Netherlands and Israel. The spectacular price rise, from $3 to $12 a barrel, had actually started well before October 1973, as OPEC nations gradually gained control over oil decisions and revenues from multinational companies. The Arab threat to cut production speeded up the inevitable rise -- to a price dictated by what consumers were willing to pay.

Many specifics follow from the fungibility of oil. It is immaterial how much oil the U.S. imports from an unstable source. It is immaterial if our imports from Saudi Arabia rise: If they do not sell oil to us, they will sell to someone else.

The best demonstration of this is the "reverse embargo" on Iranian oil declared by Jimmy Carter during the 1979 hostage crisis. It had no effect whatever on Iranian exports or U.S. imports. We simply imported oil from other producers. But if instead Iran had declared an embargo on exports to the U.S., we might have seen another 1973 panic.

By the same argument, it may not make much sense to protect Middle East oil production. A takeover of Saudi wells by groups unfriendly to the U.S. can lead only to two possibilities: They will either keep producing and sell to the world market in order to make money -- with no consequence to the world price. Or they will cut production or even destroy oil facilities -- irrational acts that would cut their revenues but raise the world price to oil consumers everywhere.

If all Saudi exports were cut off, a 10 percent reduction in the world supply of about 80 million barrels per day, the price would jump from its present $28 to about $70 a barrel -- for at least a few months while demand and supply readjust to an intermediate price. How would the U.S. fare? The price of gasoline would rise by exactly $1 a gallon, air travel would cost more, prices of goods would rise somewhat because of higher transport costs. But electric power costs would be unaffected -- only about 1 percent of U.S. power plants use oil.

Around the world, however, the impact would be severe for poor, less-developed nations. China, which this year will displace Japan as the second-largest oil consumer (after the U.S.), would suffer economically. Russia would gain windfall profits from the higher price.

In the light of these arguments, we might as well reduce our long-term military commitments in the Middle East, including eventually in Iraq, and concentrate on giving its citizens a direct financial stake in the oil revenues -- an annual royalty payment or other form of participation. That's probably the best way to keep oil flowing and stem irrational attempts to sabotage exports.

A few more surprising conclusions:

The release of oil from the U.S. Strategic Petroleum Reserve (SPR), paid for by taxpayers, simply moderates a jump in the world price of oil and benefits oil consumers around the world.

Japan's insistence on financing oil development in Iran, against U.S. opposition, will do nothing to improve its oil security. But neither will development of oil in the Arctic National Wildlife Reserve. It makes economic sense and has negligible environmental impact, but the argument that its oil will replace 30 years of Saudi imports is not persuasive. In fact, it makes good economic sense to export Alaskan oil to Japan -- as we currently do.

So please, no more talk about "unsheathing the oil weapon" when the sheath is empty and the weapon does not exist. Over time, inevitably, we will see a larger fraction of world oil production concentrated in the Middle East. No energy bill can change these geological fundamentals. But by then lifting costs will have gone up and profits will be more modest.

Our biggest security problem is still the unreasonable fear of embargoes that distorts our defense and foreign policies at great cost to our economy.

S. Fred Singer is professor emeritus of environmental sciences at the University of Virginia and president of the Science & Environmental Policy Project. He is a former deputy assistant secretary of the interior.