SUMMARY
INTRODUCTION

ENERGY MYTHS

ENVIRONMENTAL MYTHS

OPEN QUESTIONS AND OVERLOOKED REALITIES

POLICY IMPLICATIONS
APPENDIX


 

 

 

 

OPEN QUESTIONS AND OVERLOOKED REALITIES

IS AMERICA “ADDICTED TO OIL”?

In perhaps the most memorable line of his 2006 State of the Union address, President Bush announced that “America is addicted to oil.” The line was as notable for its frankness as for the fact that it was uttered by a former oil-industry executive. The president proposed a host of alternative-energy research programs to deal with this dependency. Eighty-three percent of initial survey respondents agreed with the president’s assessment of the nation’s energy situation. In the wake of the president’s 2007 State of the Union address, in which he repeated several themes from his 2006 speech, the percentage of respondents believing that our nation is addicted to oil was virtually unchanged (84 percent). But is that assessment correct?

As we learned in the first section of this report, oil is a much less dominant player in our energy economy than most people think. It does not even provide the majority of the energy that we use, supplying 40 percent of energy consumption.[26] The rest of the energy economy—60 percent—is accounted for by sources that, for the most part, provide electricity: coal, natural gas, nuclear power, and renewable energies such as hydropower, biomass, wind, and solar. Given the diversity that defines the American energy economy, it is misleading to say that the United States is “addicted” to oil.

Certainly, our use of oil creates problems. The transfer of billions of dollars to foreign suppliers in Saudi Arabia, Iran, and Venezuela troubles many of us. Burning nearly 7 billion barrels of oil per year, mostly to power our cars, trucks, and airplanes, also raises environmental concerns.

But for all the problems associated with our oil use, it is important to note the tremendous benefits that it has provided to the United States: oil has helped to underpin the most dynamic and productive economy that the world has ever known. Moreover, by powering our transportation sector, it has afforded Americans a measure of personal mobility still unknown throughout most of the rest of the world.

Yet if we are not addicted to oil per se, are we not dangerously reliant on foreign oil? In characterizing America as “addicted” to oil, President Bush tapped into widely shared concerns about the suppliers of our energy. We repeatedly hear that America is a net importer of petroleum. Understandably, the vast majority of us believe that the U.S. is overly dependent on foreign oil.

Nearly 88 percent of respondents indicated that they thought that the U.S. was overly dependent on foreign oil in September 2006, at the tail end of a summer in which the price of oil had gone to record highs (in nominal dollars). By February 2007, the price had fallen nearly 20 percent off those 2006 highs; yet the same percentage still indicated a belief that our economy is overly dependent on imported oil.

It is true that we get nearly 60 percent of the petroleum that we use from other nations—but as we saw above, fully two-thirds of the oil that we use comes not from the Middle East but from the Americas. Examining that other 40 percent fills out the picture: the U.S., it turns out, is its own largest individual supplier of petroleum products. About 40 percent of the crude oil and refined products that we use—more than 7 million barrels daily—comes from domestic sources, mostly in Texas, Alaska, California, and Louisiana.

What, one may ask, about the Organization of Petroleum Exporting Countries? We often hear that the OPEC cartel controls world energy markets and, in particular, wields influence over the United States. The OPEC nations, which include not just the major Middle Eastern suppliers but also hot spots Venezuela and Nigeria, provide the United States with more than 5.5 million barrels of oil per day, over a quarter of what we use and over 40 percent of all petroleum imports to the U.S.

While OPEC member countries do wield influence in world energy markets, that influence—both in the United States and around the globe—has waned somewhat in the several decades since the oil shocks of the 1970s. During the late 1970s, OPEC accounted for two-thirds of petroleum imports to the United States. Today, the figure is closer to two-fifths. And while we consume in the aggregate 17 percent more petroleum than we did in the late 1970s, our reliance on OPEC for our oil has lessened: OPEC imports to the United States today are slightly less as a percentage of total U.S. consumption (28.6 percent for 1975–80 vs. 26.9 percent in 2005) and considerably less as a percentage of imports (66.5 percent for 1975–80 vs. 43.5 percent in 2005).

The primary reason for OPEC’s diminished influence is that the rest of the world is producing more oil, even as U.S. oil production has fallen. The United States produces roughly one-fifth less petroleum domestically than it did in the late 1970s. Over that same period, the OPEC nations have increased production by 15 percent. But the main story in world oil markets is greatly increased production elsewhere on the planet. During the late 1970s, non-OPEC countries (excluding the U.S.) accounted for 36 percent of the world’s daily oil supply. Today, those countries’ share has risen to 50 percent. By contrast, OPEC, which supplied about half the world’s oil during the 1970s, now supplies but two-fifths. This diversity of suppliers for the United States, combined with increased production from non-OPEC nations, gives the American economy an extra measure of security that it did not have three decades ago.

None of this is to say that OPEC does not wield considerable influence over world energy markets. The cartel’s member countries obviously have the capability to affect output and world petroleum prices to a degree unparalleled by any other producer. Yet, given the trends of recent decades and considering that oil trades in a world market, regimes such as Saudi Arabia and Venezuela do not have the stranglehold over the U.S. economy that some suggest. For those reasons, attempts by OPEC or its members to employ an “oil weapon” are likely doomed to fail, as the world saw in the 1970s (see box). To cause grave damage to the U.S. and the world economy, OPEC would likely have to withdraw its oil from the market and cease all oil sales, which naturally requires cutting off its members’ chief source of revenue.

 

OPEC’S FAILED 1973 OIL EMBARGO

Contrary to what many noneconomists believe, the 1973 [oil] price increase was not caused by the oil “embargo” (refusal to sell) directed at the United States and the Netherlands that year by the Arab members of OPEC. Instead, OPEC reduced its production of crude oil, thus raising world oil prices substantially. The embargo against the United States and the Netherlands had no effect whatever: both nations were able to obtain oil at the same prices as all other nations. The failure of this selective embargo was predictable. Oil is a fungible commodity that can easily be resold among buyers. Therefore, sellers who try to deny oil to buyer A will find other buyers purchasing more oil, some of which will be resold by them to buyer A.

Nor, as is commonly believed, was OPEC the cause of oil shortages and gasoline lines in the United States. Instead, the shortages were caused by price and allocation controls on crude oil and
refined products, originally imposed in 1971 by President Nixon as part of the Economic Stabilization Program.

—Manhattan Institute Senior Fellow Benjamin Zycher, The Concise Encyclopedia of Economics.

 


 

 

ENERGY AND THE ENVIRONMENT: MYTHS AND FACTS

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