Alleviating U.S. Dependence on OPEC Jason Ahdoot Charity Morsey David Vela April 2001 Pepperdine University School of Public Policy iii Table of Contents Executive Summary.................................................................................................v Chapter One—How should the U.S. lessen dependence on foreign oil, specifically from OPEC countries?.................................................................7 The Dilemma.....................................................................................................8 Overview of critical countries involved in U.S.-OPEC Relations............11 United States................................................................................................11 Venezuela.....................................................................................................12 Saudi Arabia................................................................................................12 Mexico...........................................................................................................13 Iran................................................................................................................13 The American view of OPEC........................................................................14 Chapter Two—Economic Analysis.......................................................................17 The Effect of OPEC Pricing Upon the U.S. Economy................................17 Chapter Three—Policy Options............................................................................21 Option One: Continued reliance upon OPEC (and the SPR)....................21 Option Two: Conservation............................................................................24 Option Three: Alternative Sources of Petroleum.......................................27 Domestic.......................................................................................................27 International.................................................................................................30 Chapter Four—Recommendations & Implementation......................................35 Key Attributes of a Successful Approach....................................................35 Foreign Relations.........................................................................................35 Economic Stability and Political Feasibility.............................................36 National Security.........................................................................................36 Environmental Concerns............................................................................36 Recommendations..........................................................................................36 Conservation: Using HEVs........................................................................37 Increasing Production: Alaskan Oil..........................................................40 Importing Regionally: Mexican Oil..........................................................42 Conclusion.......................................................................................................44 References and Bibliography.................................................................................45 v Executive Summary The U.S. should place a priority on promoting domestic and regional oil and gas production, rather than increasing reliance on foreign sources. According to the International Energy Agency, each day, the world oil market produces 77.1 million barrels and consumes 75.6 million barrels. “The United States consumes 20 million barrels per day, of this amount two-thirds of oil consumed (62.1 percent) is imported.”1 The Organization of Petroleum Exporting Countries (OPEC) is a significant, unpredictable variable influencing both the supply and price of oil. The failure of the United States to establish a long-term strategy that will guarantee America’s independence is largely to blame for inflated energy prices. Policymakers must address the nation’s dependence on foreign oil. Without attention to this matter, we continue to leave both national security and the economy at risk. This paper will provide an overview of the current status of U.S. –OPEC relations, followed by an analysis of options and alternatives. In formulating a successful policy, we have taken into consideration the various criteria and obstacles that are inherent in the dilemma. We recommend a three-pronged approach, including conservation incentives, increasing domestic oil production, and increasing petroleum imports from Mexico. ________________ 1 Makin, John. “Oil’s Effects,” American Enterprise Institute for Public Policy Research. October 2000. 7 Chapter One—How should the U.S. lessen dependence on foreign oil, specifically from OPEC countries? Energy drives the economy. “With the rapid growth of energy needs in the advanced industrialized states throughout the 1960’s and early 1970’s provided OPEC with the basis for extracting ever-increasing oil prices.” Clearly, OPEC is aware of these facts, as it has efficiently capitalized upon the global demand for petroleum. History tells us that those who possess oil possess the keys to their country and to leadership of the future. For instance, in 1942 Josef Stalin portrays one such ruler who understood that oil translates to power when he commanded his foreign minister at the time to: "…go to the Caucasus and destroy the oil industry. If you leave Hitler even one ton of oil, we shall shoot you."2 Indeed, oil is power. In order for the U.S. to secure its future role as a superpower, to guard our natural security and stabilize our markets, we must lessen our dependence on foreign oil. ________________ 2 Economides, Michael and Ronald Oligney. The Color of Oil. Texas: Round Oak Publishing Company, p. 75. 8 U.S. Crude Oil Imports By Source3 The Dilemma Five leading exporters established the Organization of Petroleum Exporting Countries (OPEC) in 1960 after a long tussle with the international oil companies over the issues of price, revenue and control of the rate at which oil reserves were depleted.4 The purpose of OPEC is to coordinate and unify petroleum policies of member countries; to devise ways to ensure stabilization of international oil prices in order to eliminate ‘harmful and unnecessary’ price and supply fluctuations.”5 The main objective of OPEC has been to exercise a determining influence over price through the control of production levels to generate high revenues for budgets to meet their development needs.6 Since 1999, OPEC has succeeded in reining in production and boosting prices. In previous years President Eisenhower signed a “protectionist Mandatory Oil Import Program (MOIP) over objections of Big Oil-separation of interest between ________________ 3 Source: U.S. Department of Energy 4 Philips, Jeff. “OPEC: The oil cartel.” June 20, 2000 BBC World News http://news.bbc.co.uk./hi/english/world/newsud_689000/689609.stm 5 Britanica Encyclopedia, p.1208 6 http://www.bbc.co.uk 9 major and independent producers, this began the antagonist era of industry- government relations.”7 MOIP limited imports of crude to nine percent of domestic demand and created import limits for crude products. National security was the apparent justification for the MOIP. A direct and ominous effect of MOIP was the formation of the Organization of Petroleum Exporting Countries (OPEC) in 1960. OPEC was created expressly to counter protectionist legislation in the United States. The implementation of MOIP was the turning point in the political balance of power in the industry. Major producers could not counter the political clout of the independents.8 An American oil dilemma emerged in the 1970’s. Two significant events contributed to the rise of OPEC’s power. First, the threat of the Arab Oil embargo caused an energy crisis of the 1970’s. Shortages of commodities and manufactured goods were endemic thought the U.S. economy and caused widespread panic. Secondly, the Carter Administration implemented an increase in gas prices in order to promote conservation. The effect was that import crude oil prices exploded after the 1973 Arab Oil Embargo and were the justification for leaving oil-price controls in effect. The resulting price squeeze sent domestic oil production into a free fall: “Price controls had the effect of suppressing supply just as national demand was being stimulated. The combination was a godsend for OPEC.”9 Domestic production continued to slide, and the door opened for OPEC imports to flood the market. In a nutshell, the United States had embargoed its own petroleum resources. ________________ 7 Economides, Michael and Ronald Oligney. The Color of Oil: The History, the Money and the Politics of the World’s Biggest Business. Round Oak Publishing Company: Texas, 2000, p. 102. 8 Economides, Michael and Ronald Oligney. The Color of Oil: The History, the Money and the Politics of the World’s Biggest Business. Round Oak Publishing Company: Texas, 2000, p. 126. 9 Economides, Michael and Ronald Oligney. The Color of Oil: The History, the Money and the Politics of the World’s Biggest Business. Round Oak Publishing Company: Texas, 2000, p129. 10 World Excess Oil Production Capacity, 1970-2001 Currently, the United States imports 56 percent of its oil.10 Purchasing oil from volatile OPEC countries has resulted to substantial consequences. For example, Americans are unintentionally funding wars, adding to the wealth of dictators, and threatening U.S. national security. Some OPEC countries routinely violate human rights and are beginning to develop nuclear weaponry. OPEC countries situated in the Middle East often engage in war with other countries that disrupts the production of oil or incites embargoes for political reasons. The Energy Information Agency (EIA) estimates that the members of OPEC produced 39.6 percent of the total world oil supply (including crude oil, natural gas liquids, refinery gain, etc.) in 1999. Following OPEC's decisions to increase their crude oil production quotas on October 1 and October 31, OPEC's share of the world oil market reached about 41 percent by the end of 2000. While the supply of petroleum is indeterminate, U.S. demand for energy is constantly growing. ________________ 10 Alavarez, Lizette. “Senate Republicans Propose Big Overhaul of Energy Policy.” The New York Times. February 26, 2001, p. 1.