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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.
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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.
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