March 19, 2012

Much Ado About Foreign Policy

The price of gasoline is a hot-button issue on the campaign trail as Americans across the country face more pain at the pump. Whether or not gasoline prices influence presidential politics is a matter of debate. But if they do, those who argue that the election won’t be shaped by foreign policy and national security should think again. While idle and closing U.S. oil refineries are contributing to higher gasoline prices in some parts of the country, growing global oil consumption and geopolitical crises – from the Persian Gulf to Nigeria – are having the most impact on the price at the pump.

First, some facts about U.S. oil consumption and production are in order. U.S oil consumption has declined in recent years, from an all-time-high of more than 20.9 million barrels a day in 2005 to just over 19 million barrels a day in 2010. At the same time, production from U.S. reserves has steadily increased, from about 5.18 million barrels a day in 2005 to 5.4 million barrels a day in 2010, helping reduce the demand for oil imports. The United States, for example, imported only about 49 percent of its oil in 2010, and 45 percent in 2011. As a result, the United States has been a net exporter of oil since 2010.

Yet while increasing oil production from domestic reserves may help improve our trade deficit and further decrease our reliance on imported oil, it will have little effect on the price of oil due to the ever-increasing demand abroad. As the global economy rebounds, economic growth will continue to drive up consumption for oil, especially in Asia. The International Energy Agency recently reported that global oil consumption is expected to rise 800,000 barrels a day to 89.9 million barrels a day in 2012, with Asia consuming about 700,000 more barrels of oil. And the increased demand isn’t just from China and other developing economies; Japan is projected to burn 135.5 percent more oil this year for electricity generation, in large part due to widespread nuclear plant closures as the country continues to manage the devastating effects of the March 2011 Fukushima-Daiichi accident.

Worsening tensions in the Persian Gulf over Iran’s nuclear program are also driving up oil prices. Iran has threatened to close the Strait of Hormuz in response to the West’s oil embargo, which could choke off approximately 20 percent of the world’s oil. The prospects of a closure have contributed to higher oil prices and may encourage countries to hoard oil if tensions in the region continue to worsen. In the near term, the U.S. Navy is taking steps to increase its presence in the Persian Gulf by deploying additional mine sweeping vessels and other capabilities needed to counter an Iranian anti-access/area denial campaign in the strait. The announcement from U.S. Chief of Naval Operations Admiral Jonathan Greenert may alter Iran’s strategic calculus and could help calm the oil market.

But Iran may also be seeding uncertainty in the global market in an effort to drive up oil prices and assuage the strategic effects of the sanctions targeted against Tehran. Take for example the recent report from Iran’s semi-official Fars News Agency that alleged that Tehran had suspended a 500,000-barrel oil shipment to a Greek refinery. The report was news to the Greek refiner, which said that it had received the shipment without delay. Such false reports may be intended to stir up anxiety in the global oil market, driving up prices, which could help the Islamic republic manage the impact of the oil sanctions.

But it is not just about Iran. Instability in Nigeria could have significant implications for oil prices. Recent political turmoil over national fuel subsidies and attacks by the Islamic terror group Boko Haram have rocked the country, raising concerns about stability in Africa’s largest oil producer. The country supplies more than 2 million barrels a day to the global oil market, including 11 percent of U.S. imports. Although political unrest has subsided some since the government partially reinstated fuel subsidies and the attacks by Boko Haram have been away from the country’s major oil operations, prices have ticked up slightly and investors are keeping a watchful eye on how events unfold.

Gasoline and oil prices will remain high as uncertainty looms abroad. To manage these higher prices, Americans need to consume less and look for alternative liquid fuels. The transportation sector accounts for nearly 70 percent of all U.S. oil consumption. There is no quick fix to this dilemma. Reducing our consumption will help manage gasoline prices in the near term. But over the long term, the United States must diversify its transportation fleet with new liquid fuel sources, such as algae, and investments in high performing electric vehicles. Moving away from a single-energy-source transportation sector must be part of our national energy strategy. It is the best way to hedge against so much uncertainty in the global security environment.