To: The Weatherization Department
Given that the most recent war America fought was in the Persian Gulf,
let's start by examining the likelihood that an oil crisis will occur in
the coming decade. Forecasting is always risky, especially where oil is
concerned, but consider what a variety of experienced energy hands from
every point on the political spectrum have said in the past year alone.
Donald Hodel, who was a Secretary of Energy under Ronald Reagan,
has said that we are "sleepwalking into a disaster," and predicts
a major oil crisis within a few years. Irwin Stelzer, of the American
Enterprise Institute, says that the next oil shock "will make those
of the 1970s seem trivial by comparison." Daniel Yergin says,
"People seem to have forgotten that oil prices, like those of all commodities,
are cyclical and will go up again."
James Schlesinger, who was the Secretary of Energy under Jimmy Carter,
has said, "By the end of this decade we are likely to see substantial
price increases." In March of last year Robert Dole, the Senate
majority leader, said in a speech at the Nixon Center for Peace and Freedom,
"The second inescapable reality of the post-twentieth-century world
is that the security of the world's oil and gas supplies will remain a vital
national interest of the United States and of the other industrial powers.
The Persian Gulf. . . is still a region of many uncertainties. . . . In
this 'new
energy order' many of the most important geopolitical decisions--ones on
which a nation's sovereignty can depend--will deal with the location and
routes for oil and gas pipelines.
Inresponse, our strategy, our diplomacy, and our forward military presence
need readjusting."
The chairman of the Federal Reserve, Alan Greenspan, not known for
being an alarmist, in testimony before Congress last July raised concerns
that a rising trade deficit in oil "tends to create questions about
the security of our oil resources."
Concerns about a coming oil crisis have surfaced in the financial markets
as well. Last October, in an article titled "Your Last Big Play in
Oil," Fortune magazine listed several billionaires and big mutual fund
managers" who were betting heavily that oil prices would rise significantly.
The magazine went on to suggest an investment portfolio of "companies
that are best positioned to profit from the coming boom."
Fundamental trends in oil demand and supply underlie this emerging consensus.
First, the world will probably need another 20 million barrels of oil a
day by the year 2010, according to the Energy Information Administration
(EIA).The International Energy Agency projects an even greater growth in
demand, following the inexorable tide of population growth, urbanization,
an industrialization.
Second, the world's population is expected to increase by 50 percent by
2020, with more than half those additional people born in Asia and Latin
America. And as farm workers move to the city, much more energy and oil
will be needed. The fundamentals of urbanization--commuting, transporting
raw materials, constructing infrastructure, powering commercial buildings--all
consume large amounts of oil and electricity. At the same time, fewer farms
will have to feed more people, and so the use of mechanization, transportation,
and fertilizer will increase, entailing the consumption of still more energy
and oil. An analysis by one of the Department of Energy's national laboratories
found that a doubling of the proportion of China's and India's populations
that lives in cities could increase per capita energy consumption by 45
percent--even if industrialization and income per capita remained unchanged.
Finally, industrialization has an even greater impact on energy use. As
countries develop industries, they use more energy per unit of gross national
product and per worker. Crucial industries for development are also the
most energy-intensive: primary metals; stone, clay, and glass; pulp and
paper; petroleum refining; and chemicals. In the United States these industries
account for more than 80 percent of manufacturing energy consumption (and
more than 80 percent of industrial waste).
As Fortune has noted, if the per capita energy consumption of China and
India rises to that of South Korea, and the Chinese and Indian populations
increase at currently projected rates, "these two countries alone will
need a total of 119 million barrels of oil a day. That's almost double the
world's entire demand today."
Barring a major and long-lasting worldwide economic depression, global energy
demand will be rising inexorably for the foreseeable future. The Persian
Gulf, with two thirds of the world's oil reserves, is expected to supply
the vast majority of that increased demand--as much as 80 percent, according
to the EIA.
Within ten to fifteen years the Persian Gulf's share of the world export
market may surpass its highest level to date, 67 percent, which was attained
in 1974. The EIA predicts that in the face of increased demand, oil prices
will rise slowly to $24 a barrel (1994 dollars) in 2010. If, instead, they
remain low, the Gulf's share of the world export market may rise as high
as 75 percent in 2010.
Although non-OPEC nations did increase production by almost 15 percent from
1980 to 1990, they increased proven reserves of oil by only 10 percent.
The net result is that the remaining years of production for non-OPEC reserves
has actually fallen from eighteen years to seventeen years. On the other
hand, while OPEC increased production by 20 percent in the 1980s, it increased
its proven reserves by 75 percent. As a result, OPEC's reserves-to-production
ratio doubled to ninety years.
The growing dependence on imported oil in general and Persian Gulf oil in
particular has several potentially serious implications for the nation's
economic and national security. First, the United States is expected to
be importing nearly 60 percent of its oil by ten years from now, with roughly
a third of that oil coming from the Persian Gulf. Our trade deficit in oil
is expected to double, to $100 billion a year, by that time--a large and
continual drag on our economic health. To the extent that the Gulf's recapture
o the dominant share of the global oil market will make price increases
more likely, the U.S. economy is at risk.
Although oil imports as a percent of gross domestic product have decreased
significantly in the past decade, our economic vulnerability to rapid increases
in the price of oil persists. Since 1970 sharp increases in the price of
oil have always been followed by economic recessions in the United States.
Second, the Persian Gulf nations' oil revenues are likely to almost triple,
from $90 billion a year today to $250 billion a year in 2010--a huge geopolitical
power shift of great concern, especially since some analysts predict increasing
internal and regional pressure on Saudi Arabia to alter its pro-Western
stance.
This represents a $1.5 trillion increase in wealth for Persian Gulf producers
over the next decade and a half. That money coul buy a tremendous amount
of weaponry, influence, and mischief in a chronically unstable region. And
the breakup of the Soviet Union, coupled with Russia's difficulty in earning
hard currency, means that for the next decade and beyond, pressure will
build to make Russia's most advanced military hardware and technical expertise
available to well-heeled buyers.
The final piece in the geopolitical puzzle is that during the oil crisis
of the 1970s the countries competing with us for oil were our NATO allies,
but during the next oil crisis a new, important complication will arise:
the competition for oil will increasingly come from the rapidly growing
countries of Asia. Indeed, in the early 1970s East Asia consumed well under
half as much oil as the United States, but by the time of the next crisis
East Asian nations will probably be consuming more oil than we do.
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