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Oil - Concern About Oil Dependency

united opec foreign demand

In the 1970s the United States and its leaders were very concerned that so much of the U.S. economic structure, based heavily on oil, was dependent upon the decisions of OPEC countries. Oil resources became an issue of national

FIGURE 2.8

security, and OPEC countries, especially the Arab members, were often portrayed as potentially strangling the U.S. economy. The decisions of the Ronald Reagan and George H. W. Bush administrations in the 1980s and early 1990s to permit the energy issue to be handled by the marketplace was consistent with their economic philosophy but indicated that they saw oil supply as an economic, not a political, issue. This downplayed the political side of the energy problem in the international arena. The Clinton administration was unable to do much about America's dependence on foreign oil, as low prices throughout most of the 1990s set back energy conservation measures and public concern. In the United States efficiency gains in automobiles have been offset by the preference for large vehicles, such as SUVs. Such preferences imply lack of public interest in reducing the consumption of foreign oil. By 2003 about 63% of the nation's crude oil supply came from outside the country, as shown in Figure 2.5, and 42.2% of that came from OPEC nations, as reported in the Annual Energy Review 2003.

The decline in public concern about America's dependence on foreign oil is the result of factors other than low prices and the desire for large vehicles. One factor is a "comfort level" with oil that has been achieved through oil reserves, non-OPEC suppliers, and decreased demand. The United States and European nations have developed substantial reserves to withstand oil supply fluctuations. These reserves include the Strategic Petroleum Reserve (SPR) in the United States and government-required reserves in Europe. Furthermore, in emergencies, non-OPEC oil producers such as the United Kingdom and Norway can increase their output. Although demand for oil had stabilized in the 1990s because of the conservation efforts of many industrialized nations, particularly European countries, the demand increased in the early 2000s as China, Japan, and the United States consumed more energy.

The increased use of pipelines across Saudi Arabia and Turkey has made the job of picking up oil from these countries safer. A growing number of tankers pick up their oil in either the Red Sea or the Mediterranean Sea before delivering it to Europe or the United States. These ships do not have to go through the potentially dangerous Persian Gulf. In addition, since many American strategists are wary of navigation in the Straits of Hormuz, where a future enemy might be able to stop the flow of oil to the West, shipment through pipelines lessens the importance of the waterway. On the other hand, such pipelines could be destroyed relatively easily in a war.

Based on these factors, if the oil shortages that developed in 1973 and 1979 occurred again, the result would likely not be the same. Despite the U.S. role as protector of Kuwait's oil in the Persian Gulf, there seemed to be little serious concern that America's dependence on foreign oil, especially OPEC oil, represented a threat to national security or national stability. This position changed somewhat after the terrorist attacks of September 11, 2001, and their aftermath—the "War on Terrorism," which included the war with Iraq and the consequent unrest in Middle Eastern nations. These events resulted in a sense that the United States should be less dependent on foreign oil, yet demand for the product persisted. In 2002 experts suggested that if the United States attacked Iraq, as it ultimately did in March 2003, the result might be a stabilization of the supply and price of oil (Michael E. Kanell, "War in Iraq: Is It about Oil?" The [Montreal] Gazette, October 26, 2002). Nevertheless, in late 2004 oil prices had not stabilized. In fact, oil prices increased dramatically at that time as concerns about terrorism in Iraq and elsewhere rose, the value of the dollar declined, demand for oil remained high, and oil supplies and reserves were tight.

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