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Why Is The US So Dependent On Foreign Oil

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

Since Richard Nixon, every president of the United States has tried to create and implement a comprehensive energy policy. Thus, beginning in the early 1970s, the country had to rely substantially on oil imports from other countries. The first supply crisis was in 1973–1974, during the Arab Oil Embargo, which Henry Kissinger described as the “biggest crisis to the free world since World War II” in his memoirs.

Oil imports are a major factor in U.S. foreign policy and how we interact with other nations. Maintaining a military presence in the Middle East is necessary to defend our interest in the oil resources due to our dependence on Middle Eastern regimes that are often unpopular in their own country.

This has led to several costly and lethal police responses. And yet, our efforts to democratize these nations have failed, maybe because the locals continue to distrust our true intentions.

Further, our daily expenditure of around $1 billion on imported oil in January 2012 is slowing our economy and wreaking havoc on our balance of payments. Simply put, it is no longer sustainable for the United States to continue to spend billions of dollars annually to buy oil, especially from countries that have historically been antagonistic to American interests.

The Persistence of Foreign Oil Dependence

We’ll be susceptible to the following so long as we rely on foreign oil:

  • Frequent supply disruptions have negative effects on the economy and the lives of all Americans.
  • Amid rising costs, governments resort to unpopular wars and repressive measures to maintain energy supplies.
  • Shortages that threaten our military’s ability to maintain order at home and abroad
  • Over-dependence on the economies of the Middle East and other developing nations
  • Constant clashes with the locals in overseas production nations
  • As both China and India strive to build their economies, their foreign exchange outflows will only continue to rise.

Nothing positive can or will come from our prolonged dependency on other countries, to put it bluntly. But expanding domestic oil output won’t end our energy woes by itself.

Developing an All-Inclusive Energy Policy

There is a way out, but we need a long-term strategy to wean ourselves off of oil by increasing our usage of non-petroleum carbon fuels, and that strategy requires solving the immediate problems we’re facing right now.

Increasing domestic production, continuing research and development of alternative fuels, increasing imports from North American neighbors, decreasing consumption, and developing policies to use other domestic energy sources are all necessary to ensure a sufficient supply of petroleum to meet current needs.

There will be less possibility for environmental damage, a more enlightened foreign policy, and a reduction in the national debt as a result of this. But we need to know where we are and where we’re going before we can make this a top priority.

The Current Imbalance in Sources and Uses

The popular American refrain of “Drill, baby, drill!” stems from the widespread but mistaken belief that the United States can influence the global oil market by increasing its output. Regrettably, they are completely wrong.

Since oil is traded globally, its price per barrel is determined by supply and demand on a global scale. Americans should not expect lower gas prices as a result of oil independence: In a nutshell, the United States of America uses nearly twice as much oil as it produces, making it a major consumer of the world’s oil supply. The much-heralded increase in domestic reserves as a result of the higher global price is not enough to close the gap between production and consumption here at home.

On top of that, countries like China and India, who have strong economies, expanding populations, and improving standards of living, compete head-on with the United States for the same resource, effectively increasing demand beyond supply. It is not expected that these conditions will change very soon.

While the current demand/supply gap is problematic, it might be mitigated through the implementation of a comprehensive energy policy that makes use of many domestic energy sources such as oil, coal, natural gas, renewable resources, and biofuels.

The Details

  • While it only produces around 9.7 million barrels of oil per day, the United States consumes about 19.1 million bbls/d. In 2010, the U.S. produced just around 51% of what it needed and had to rely on imports to make up the difference.
  • About 9.4 million barrels a day are brought into the country, with 3.8 million coming from the Persian Gulf and Africa. The United States currently sends about $1 billion abroad daily at the price of $100 per barrel. According to estimates, the US will transfer almost $140 billion to countries with unstable governments in 2012.
  • Reserves at home have dropped by about half that amount since 1970. Each year’s new discoveries have historically fallen just short of meeting the country’s annual consumption. The reserve estimates include recoverable oil from the Baaken Shale Formation in North Dakota and the Eagle Ford Formation in Texas, both of which have benefited from the use of innovative “fracking” technology and horizontal drilling techniques. Experts estimate recoverable reserves of between 5.5 and 7.5 million barrels over both formations, which is roughly nine months of U.S. demand. It is believed that Saudi Arabia has 260 billion barrels of proven reserves, while Canada has 175.2 billion barrels.
  • Even with rapid approval, it will be years before the Green River Formation in the Western U.S., where huge new quantities of “near” oil (kerogen) are found, can be put to use. The existence of these oil reserves has been known for decades, but they have not been commercially viable due to high costs. Due to economic and environmental factors, oil shale is not produced commercially in the United States at this time.
  • In the United States, cars and trucks account for the bulk of oil consumption. About 70% of every barrel of oil is used for this purpose. The wholesale price of gasoline in the United States is governed mostly by the demand for oil on the global market, which accounts for around 72% of the retail price.

Oil Forecasts for the Future

Politicians love to repeat the phrase, “There is no magic bullet,” but it’s not true. Therefore, the coming decade is unlikely to bring about any major shifts from the current state of affairs. 

Although we should aim to boost home production, it is unlikely that we will be able to do so to the point where we can rely completely on domestic supply.

With the help of alternative energy sources, however, we can reduce our reliance on oil from the Middle East and the attendant difficulties and political tensions.

  • The need for petroleum around the globe will only grow. Nearly three gallons of oil are used per day per person in the United States and Canada, most of which is pumped into vehicles. When combined, India and China use less than half a barrel per day per capita, compared to the global average of 1.4 gallons (for affluent countries). The average daily usage in developing countries is.2 gallons. Although domestic consumption in the United States is expected to fall as a result of rising costs and the ripple impact of conservation efforts, gains in consumption in India and China will more than make up for the reduction in domestic demand. In addition, global industrial production is predicted to expand by 2% to 4% annually, barring a second recession in the world’s economy.
  • The price of oil will most likely rise from its current level. The price of a barrel of crude oil was relatively constant at about $3 from 1958 to 1973. The price of a barrel of oil more than tripled to $12.50 by the end of 1974. Over the past four decades, the price of gasoline has steadily risen, with spikes occurring in response to each new political crisis, until it presently exceeds $100 per barrel, or $4 U.S. per gallon.
  • The Middle East will continue to be home to the world’s largest reserves. The rise of Islamic extremists and Iran’s nuclear goals make it highly unlikely that regional political tensions would dramatically decrease over the next decade, and may even cause an escalation. In the near future, supply problems are likely.
  • U.S. reserves will be increased in light of current global prices. There is more oil to be extracted from areas that were previously assumed to be depleted in the United States, as well as from previously unproductive formations (such as tight shales and deep offshore prospects) and fresh supplies from oil sands, thanks to technological advancements. Moreover, when oil costs $100 a barrel or more, it becomes more appealing to use alternatives.
  • The new hydrofracking methods employed in American refineries will increase oil output by between 4 and 8 percent per barrel. In addition, the United States has enough refinery capacity to supply projected demand at least through 2020.
  • Neither the Arctic National Wildlife Refuge nor the Green River Oil Sands will see a rise in production. The two potential avenues are likely to be snarled in the courts for a long time by environmental groups. On top of that, each area will need major funding and infrastructural improvements before it can go live.
  • We can expect some success from our efforts to boost oil output while simultaneously decreasing consumption. By 2020, domestic oil output will reach 10.8 million bbl/d, while consumption will drop from 19.1 million bbl/d to 14 million bbl/d. Increased refinery efficiency (2.6 million bbls/d), decreased driving mileage (1.1 million bbls/d), and improved auto mileage economy (1.5 million bbls/d) would all contribute to the 2020 decrease in consumption.
  • Even if the United States manages to boost output and decrease consumption, it will still need to import 3.2 million barrels per day in 2020 to make up the difference. We would need to double our present rate of production to replace 9.4 million bbls/d of oil within the continental United States, which is highly improbable given our current oil stocks and future petroleum prospects. Even if a huge new reserve field were discovered in 2012, it still wouldn’t bring much production online until beyond the turn of the decade.
  • To make up for our oil shortage, the United States is going to spend over a trillion dollars between 2012 and 2020. The United States’ competitiveness and international trade balances are weakened as a result of the outflow of dollars.
  • Canada and Mexico can supply almost all of the United States’ imports. Canada already exports the most crude oil to the United States and is increasing its output by spending substantially in Alberta’s Athabasca Oil Sands. Even though the United States would still run a trade deficit, its oil supply will be safe since it will come only from “friendly allies” in the Western Hemisphere.

Bottom Line

The need for oil is rising rapidly as more people raise their standard of living. More oil produced in nations that have traditionally exported it will be consumed domestically to meet domestic demand, leaving less resources to meet the needs of countries that must import oil.

Oil is likely to remain a highly effective tool for political gain, especially as fewer developed countries can afford to risk supply disruptions to their economy.

Despite the fact that the United States has cut its oil consumption and its reliance on foreign suppliers, as long as China and India’s economies depend on petroleum, the possibility of conflict between them and the developed world will increase.

To meet rising energy demands, the United States should make it a top priority to create and implement an all-encompassing energy policy that makes use of the country’s coal, natural gas, renewables, biofuels, and oil.

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