September 09, 2009

Much Ado About Oil

In the pages of Foreign Affairs and Foreign Policy this past month, the country’s leading energy experts have been debating the future of oil, the most important drivers of the market today and what they might be in the future, and what the answers to these questions mean for U.S. foreign policy and national security. Lending many decades of experience to the debate, Edward L. Morse, director of economic research for consulting and brokerage firm LCM, contributed the article “Low and Behold” to the September/October Foreign Affairs (subscription required) and earlier this year penned an LCM Research special report, “Politics, Geopolitics and Financial Flows in a ‘Low’ Oil Price Environment,” which we provide toward the bottom of this page with the author’s permission.

Even with major changes to our energy consumption, as the Obama administration is working to enact, the United States will rely on oil for some years to come. How might it take the opportunity afforded by recent prices to sculpt the oil market in its favor? Morse provides answers to this and other exciting questions, including:

  • How did excess production capacity (or lack thereof) affect the volatility in prices over the past few years?
  • In what ways are low oil prices good for U.S. security (in reducing the leverage of oil producing countries) and bad (in their potential to stir domestic unrest in those countries)? And in what ways are high prices good or bad for the United States? Hint: the answers to these questions cannot be precisely predicted, but different potential scenarios can be mapped out. In Morse’s analysis below, he includes how both scenarios affect producers, other developing countries, and OECD countries – a helpful breakdown of the potential effects.
  • How will demand for oil rebound as the world pulls out of this recession?

Finally, Morse dips here and there into the debate – newly renewed by the FA and FP articles this month – over peak oil. While I have my own views on that, I will withhold them for now as we watch this back-and-forth play out. As we wrote in our first major energy publication at CNAS, however, there are national security reasons (the effects of climate change and the very volatility that Morse and others outline top the list) why the better route is to reduce our use of high carbon-emitting fuels well before we find out what limits may exist to our capacity to pull oil from the ground.

The more interesting debate is how to go about doing this in ways that minimize other environmental impacts, and in ways that also assure a steady supply at costs that won’t create unmanageable budget strains. While Morse’s analysis isn’t focused on that question, it does provide an extensive roadmap of considerations to take into account in debating potential answers. Even more beneficial in thinking about security implications, no matter if Morse’s projections pan out over time, his noting the inaccuracy of past estimates provides a great reminder that all projections and analyses of available statistics should be taken with a grain of salt. In projections that guide how investors make decisions, just as they guide how security strategists decide what future to plan for, it is important to account for what we don’t know, not just what we believe to be certain.

The below publication is republished with special permission from the author.

Politics, Geopolitics and Financial Flows in a ‘Low’ Oil Price Environment