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Many Americans have lost confidence in theircountry’s “energy security” over the past severalyears. Because the United States is a net oilimporter, and a substantial one at that, concernsabout energy security naturally raise foreign policy questions. Some foreign policy analysts fear thatdwindling global oil reserves are increasingly con-centrated in politically unstable regions, and they call for increased U.S. efforts to stabilize—or, alter-natively, democratize—the politically tumultuousoil-producing regions. Others allege that China ispursuing a strategy to “lock up” the world’sremaining oil supplies through long-term pur-chase agreements and aggressive diplomacy, sothey counsel that the United States outmaneuverBeijing in the “geopolitics of oil.” Finally, many analysts suggest that even the “normal” politicaldisruptions that occasionally occur in oil-produc-ing regions (e.g., occasional wars and revolutions)hurt Americans by disrupting supply and creatingprice spikes. U.S. military forces, those analystsclaim, are needed to enhance peace and stability incrucial oil-producing regions, particularly thePersian Gulf.Each of those fears about oil supplies is exag-gerated, and none should be a focus of U.S. foreignor military policy. “Peak oil” predictions about theimpending decline in global rates of oil productionare based on scant evidence and dubious models of how the oil market responds to scarcity. In fact,even though oil supplies will increasingly comefrom unstable regions, investment to reduce thecosts of finding and extracting oil is a betterresponse to that political instability than trying tofix the political problems of faraway countries.Furthermore, Chinese efforts to lock up supplieswith long-term contracts will at worst be econom-ically neutral for the United States and may even beadvantageous. The main danger stemming fromChina’s energy policy is that current U.S. fears may become a self-fulfilling prophecy of Sino-U.S. con-flict. Finally, political instability in the Persian Gulf poses surprisingly few energy security dangers, andU.S. military presence there actually exacerbatesproblems rather than helps to solve them.Our overarching message is simply that marketforces, modified by the cartel behavior of OPEC,determine most of the key factors that affect oilsupply and prices. The United States does not needto be militarily active or confrontational to allow the oil market to function, to allow oil to get toconsumers, or to ensure access in coming decades.
 Energy Alarmism
The Myths That Make Americans Worry about Oil 
by Eugene Gholz and Daryl G. Press
_____________________________________________________________________________________________________
 Eugene Gholz is assistant professor of public affairs at the LBJ School of Public Affairs at the University of Texas at  Austin. Daryl G. Press is associate professor of government at Dartmouth University.
Executive Summary 
No. 589April 5, 2007
 
Introduction
Many Americans have lost confidence intheir country’s “energy security” over the pastseveral years. Oil prices were already high by historic standards in 2005 when HurricaneKatrina ravaged the Gulf Coast and temporar-ily shut down the refineries, pipelines, andoffload terminals at the large Gulf Coast portcomplex, highlighting the apparent vulnera-bility of U.S. oil infrastructure. Furthermore,growing chaos in Iraq reminds Americans of their country’s limited ability to control eventsin the oil-rich Persian Gulf region. Finally, thereliability of even America’s domestic oil sup-plies was called into question last year whenpoor maintenance temporarily closed thepipelines that carry oil from Alaska to the con-tiguous 48 states. That a foreign company (British Petroleum) manages the Alaska pipeline only reinforced the overarching feel-ing that the United States has little controlover the energy supplies it vitally needs.Because the United States is a net oilimporter, and a substantial one at that, con-cerns about energy security naturally raise for-eign policy questions. One set of arguments isbased on fears about dwindling global oilreserves and their increasing concentration inpolitically unstable regions. Those so-calledpeak oil concerns have led some foreign policy analysts to call for increased U.S. efforts to sta-bilize—or, alternatively, democratize—thepolitically tumultuous oil-producing regions. A second concern focuses on the rise of China and Beijing’s alleged strategy for “locking up”the world’s remaining oil supplies throughlong-term purchase agreements and aggres-sive diplomacy. According to some analysts,the United States must respond to China’senergy policy, outmaneuvering Beijing in the“geopolitics of oil,” or else U.S. consumers willfind themselves shut out from global energy markets. Finally, many analysts suggest thateven the “normal” political disruptions thatoccasionally occur in oil-producing regions(e.g., occasional wars and revolutions) hurt Americans by disrupting supply and creatingprice spikes. U.S. military forces, those analystsclaim, are needed to enhance peace and stabil-ity in crucial oil-producing regions, particular-ly the Persian Gulf.Each of those fears about oil supplies isexaggerated. Peak oil predictions about theimpending decline in global rates of oil pro-duction are based on scant evidence and dubi-ous models of how the oil market responds toscarcity. In fact, even though oil supplies willincreasingly come from unstable regions, theongoing investments designed to reduce thecosts of finding and extracting oil are a moreeffective response to that political instability than trying to fix the political problems of far-away countries. Furthermore, fears of China are also overstated. Chinese efforts to lock upsupplies with long-term contracts will at worstbe economically neutral for the United Statesand may even be advantageous. The main dan-ger stemming from China’s energy policy isthat current U.S. fears may create a self-fulfill-ing prophecy of Sino-U.S. conflict. Finally,political instability in the Persian Gulf posessurprisingly few energy security dangers, andthe U.S. military presence there actually exac-erbates problems rather than helps to solvethem.Those arguments do not mean that theUnited States can ignore energy concerns.Global demand for energy is soaring andshows no sign of relenting. Furthermore, oilsupplies, though currently abundant, willeventually begin to run low, and the world willeventually need to develop other energy sources. But neither of those problemsrequires the sort of activist military policiesthat many foreign policy analysts suggest:specifically, U.S. oil interests do not require theUnited States to spread democracy across thePersian Gulf, confront China, or even main-tain a peacetime military presence in thePersian Gulf.The arguments in this paper do not rest onthe (unreasonable) assumption that countriesalways act rationally, or that profit motivesalways determine foreign policy choices.
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Ouroverarching message is simply that marketforces, modified by the cartel behavior of 
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U.S. oil interestsdo not require theUnited States tospread democracy across the PersianGulf, confrontChina, or evenmaintain a peace-time military presence in thePersian Gulf.
 
OPEC, determine most of the key factors thataffect oil supply and prices. The United Statesdoes not need to be militarily active or con-frontational to allow the oil market to func-tion, to allow oil to get to consumers, and toensure access in coming decades.
How Oil Markets Work
Oil markets appear more mysterious thanthey are. The details of the oil business are very complex (e.g., the various grades of oil, thecomplex contracts used to buy oil and hedgeagainst volatility, and the benchmarks that areused to negotiate prices), but few of thosedetails matter for a discussion of the linksbetween oil and foreign policy. Oil companiescare about those details because they are try-ing to earn a profit on each individual con-tract, but national policy depends only on thegeneral availability and overall price of oil.Because of the market’s complexity, media accounts often suggest that oil markets movewithout a clear connection to economic fun-damentals and that irrational fears or theactions of shadowy governments drive priceand product availability. Although con-sumers’ fears and suppliers’ political decisionssurely matter, their effects can be understoodwithin a fairly traditional market framework.Two main processes determine oil prices: (1)the forces of supply and demand and (2) con-straints on those forces created by politicalrisk and cartel behavior.
Market Forces
Geologic features determine the locationand quantity of oil deposits, but they do notdetermine “oil supply” in any meaningfulsense. Supply depends on the difficulty (andhence cost) of oil exploration and productionand on companies’ economic decisions abouthow much money to spend looking for new oil fields, developing pumping capacity fromthe fields they find, and filling pipelines withoil. In any given region, geologic factors, suchas the porosity of the rock, determine whethermeaningful oil deposits exist and how expen-sive they are to discover and tap. But geology merely creates the playing field for oil explo-ration and extraction. The amount of oil thatcan actually be “produced” at any given time,that is, extracted from the ground, transport-ed to refineries, refined, and then transportedin various forms to end users, depends on how much money oil companies have invested in a given field.Prices drive fluctuations in oil supply.High prices encourage producers to pumptheir working fields at a higher rate to maxi-mize profits before prices drop; lower priceslead them to reduce production. And compa-nies with large inventories of oil generally respond to high prices by selling their stocks,unless they expect prices to rise even higherin the future. Price troughs encourage themto hold (or expand) their inventories, reduc-ing supply in the short term.Similarly, expectations about future petro-leum prices shape long-term trends in oil sup-ply. Oil companies, some of which are ownedby the governments of countries with largereserves, decide how much to invest in explo-ration, new extraction technologies, and refin-ing and transportation infrastructure andwhether to pay large up-front costs to tap dif-ficult-to-reach fields (such as those underdeep water). Those major decisions, far morethan geologic constraints, determine how much oil can be produced in the comingdecades.
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 And in the oil industry like all others,investment decisions are driven by expecta-tions about future prices: if the companiesexpect oil prices to be high, they will investmore heavily today since the enormous up-front expenditures will be recouped by highper barrel prices in the future.
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But if they expect prices to be low, they will trim invest-ment, reducing future supplies.
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Oil prices do not merely affect oil supply;they also play a key role in determining globaldemand. In the short term, demand does notchange much in response to price fluctuations.People need to drive to work and heat theirhouses even if oil prices soar, so they tend tocut expenses elsewhere rather than go withoutoil. But higher prices still reduce long-term
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Oil marketsappear moremysterious thanthey are.
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dr_aknagar3049

Quite a new look - angle. I am also working on dynamics of international energy security and position of India into it.

reply01 / 27 / 2010
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