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Why ‘Dependence’ On Foreign Oil Is A Bogus Worry

* October 1946: Saudi Arabia’s King Ibn Saud threatened an oil embargo if the U.S. supported the establishment of a Jewish state. He warned President Harry Truman that Arabs “will lay siege to it until it dies.” Yet the Anti-Semitic king refrained from doing anything that might disrupt the flow of oil royalties needed for Saudi Arabia to become “a stronger and more powerful nation,” as he put it.

* June 5, 1967: After Egypt, Syria and Jordan massed military forces for an invasion of Israel, the Israelis launched a devastating pre-emptive strike in what became the Six-Day War. The Organization of Petroleum Exporting Countries (OPEC) announced it would use its “oil weapon” and begin an embargo against the U.S. as well as other countries that supported Israel. Mideast oil operations substantially shut down, and the Suez Canal and key pipelines were closed. Despite all this, U.S. oil imports were off only about 7 percent in 1967. U.S. oil imports were up 14 percent in 1968 and 9 percent in 1969.

* October 6, 1973: Egypt and Syria attacked Israel in the Yom Kippur War. OPEC declared a bigger embargo against the U.S., because Washington had re-supplied Israel’s military. Yet U.S. oil imports were actually up 45.8 percent from 811.1 million barrels in 1972 to 1.1 billion barrels in 1973. Oil imports were up another 7.2 percent in 1974, then 18 percent in 1975, 29.1 percent in 1976 and 24.7 percent in 1977. Imports fell 3.9 percent in 1978 but rose 2.5 percent in 1979, the year Ayatollah Khomeini’s revolution disrupted oil production in Iran. At 2.3 billion barrels, 1979 oil imports were 193 percent higher than before the 1973 embargo.

Why was that embargo associated with significantly higher oil imports? From a practical standpoint, there’s really no such thing as a U.S. oil market. There’s a global oil market, and oil shipments tend to go where the best prices are offered. Once a tanker leaves a port loaded with oil, the producing country no longer has control over it. In 1973, oil producing countries continued shipping to European countries that weren’t involved with the Yom Kippur War, but much of that oil was re-shipped to the U.S. Some of the OPEC oil shipped to the Caribbean was also re‑shipped to the U.S.

In addition, OPEC has experienced the chronic cheating that generally afflicts cartels: it’s in the interest of each member to have everybody else cut back sales so that prices will be pushed up, while each member sells as much as possible “under the table” at high prices, making it difficult to maintain those prices. Algeria, Gabon, Indonesia, Iraq, Kuwait, Nigeria, Qatar, the United Arab Emirates and Venezuela reportedly have been among the most notorious OPEC cheaters, selling as much as 40 percent more oil than their assigned quotas.

So, the much-feared oil weapon had little if anything to do with U.S. economic problems and specifically nothing to do with the 1970s gas station lines, because America had plenty of oil. Saudi Arabia’s oil minister Sheik Ahmed Zaki Yamani remarked that the embargo “did not imply we could reduce imports to the United States…The world is really just one market. The embargo was more symbolic than anything else.” President Richard Nixon’s Secretary of State Henry Kissinger agreed: “the Arab embargo was a symbolic gesture of limited practical importance…The true impact of the embargo was psychological.”

U.S. economic problems were brought on primarily by Nixon’s policies of inflation and price controls that became ever more complex, corrupt and disruptive. By holding prices below market levels, price controls simultaneously encouraged consumers to demand more and discouraged suppliers from providing more. The result was chronic shortages that made it difficult for businesses to function, destroying jobs.

Nixon’s comprehensive price controls were a fiasco, abandoned in 1974, but price controls on oil and gas were retained all through the 1970s. They discouraged U.S. producers from refining more gasoline, while encouraging consumers to line up at gas stations for whatever might be available at below-market prices. In 1981, President Ronald Reagan abolished oil and gas price controls. Prices soared, sending powerful signals that suppliers could profit by delivering more gasoline. Gas lines vanished, and prices came down.

Meanwhile, despite the fact that the embargos were non-events as far as oil supplies were concerned, Nixon proposed “Project Independence.” The idea was to promote energy conservation and alternative energy sources, so that America could fill most if not all of its energy needs in the event of an embargo that might disrupt the flow of imported oil.

This idea has been embraced by every president since Nixon. Mainly it has meant (1) federal subsidies for “green” companies that go bankrupt and (2) higher energy costs for American taxpayers. In recent decades, the federal government has spent tens of billions of dollars on energy projects that accomplished nothing. If “independence” ever included protectionist measures to block foreign oil – imported because it’s a lower-cost option — American consumers would be socked to pay higher energy prices.

It makes as little sense to worry about our “dependence” on foreign oil as it does to worry about our “dependence” on private enterprise, computers and other wonders. We would be worse off doing things that cost more or don’t work as well. We should make the most of our comparative advantages.

Keep in mind that major oil producers have strong incentives to sell their oil. In most cases, it dominates their economies and generates a substantial percentage of government revenues. Moreover, many of these countries live beyond their means. They have spent huge sums on weapons, wars, palaces, religious police and money‑losing nationalized industries. Generally the major oil producers have failed to diversify their revenue sources by providing an attractive business climate where different industries could develop.

Saudi Arabia’s oil revenues, for instance, are almost 40 percent of their GDP. Their expenditures are about 15 percent more than their total revenues. Kuwait’s oil revenues are 75 percent of their GDP. About 48 percent of Qatar’s government revenue comes from oil exports. Oil is 84 percent of Oman’s government revenue and 37 percent of Norway’s.

Oil reportedly accounts for about 80 percent of Iran’s export earnings and 50 percent of government revenues. Nigeria’s government budget is usually in the red, and in recent years its oil revenues have been running between 63 percent and 81 percent of total revenues. Oil represents 57 percent of Kazakhstan’s exports and 46 percent of government revenue. Oil generates about two-thirds of Russia’s revenue from exports.

With a growing global market, people who want to buy oil can be confident of finding sellers who need cash. Deals are done when the price is right. Although Israel, which imports about 99 percent of its oil, doesn’t seem to have done much business lately with its hostile neighbors, over the years Israel reportedly has bought oil from Angola, Colombia, Egypt, Mexico and Norway, among other producers. These days, Israel is said to be obtaining oil from Russia and former Soviet republics in central Asia. Now come reports that Israel might be able to extract huge amounts of oil from its own oil shale deposits – a Texas oilman is working on the project.

Energy markets thrive when they aren’t throttled by excessive taxes and regulation. Higher prices lead to more exploration and production. Now the U.S. has the largest fossil fuel reserves. The U.S. has emerged as the world’s largest producer of natural gas, because improved techniques of fracking and horizontal drilling have made it possible to extract tremendous quantities of natural gas from shale deposits. Similar technology is helping to boost oil production, too.

In light of growing global energy markets, it’s harder to justify U.S. intervention in the Mideast – especially since federal and state governments have thrown so many obstacles in the way of drilling here at home, onshore as well as offshore.

Intervention involves backing rulers who welcome our support when it’s in their interests and who act against our interests when it suits them. Moreover, many of these rulers are corrupt tyrants, and allying ourselves with them has made enemies who cause us trouble when they gain power. It’s no wonder that intervention has contributed to political turmoil and military conflicts. […]

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