The Magazine

Can We Do Without Saudi Oil?

Alas, no.

Nov 19, 2001, Vol. 7, No. 10 • By IRWIN M. STELZER
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By the end of the 1980s, we were more dependent on imported oil than ever before. So George Bush the elder decided to meet the threat to our oil supplies created by Saddam Hussein's march into Kuwait en route to Saudi Arabia in a more direct fashion. He sent half a million troops and several aircraft carriers to the Gulf to defend a corrupt, despotic regime in which we would have no interest were it not sitting atop a large pool of oil (100 million barrels already found, much more awaiting exploration), and athwart the road to Saudi Arabia.

And there things have stood, with only trivial changes in U.S. policy in the decade since. The new Bush administration's attempt to develop an energy policy turns out to be, like many before it, a stew concocted to please pressure groups from the nuclear, oil, and coal industries, with side dishes to delight supporters of energy from renewable if not terribly reliable sources such as the wind and the sun. It is perhaps best described by the line attributed to that great philosopher Yogi Berra: "I came to a fork in the road, and I took it."

The best that can be said for this latest grand scheme for America's energy future is that it was developed before the terror attack on America made business as usual in oil markets more risky even than before. Now we know that it would be imprudent in the extreme to assume that the Saudi royal family will remain in Riyadh, rather than pulling up stakes and moving to the South of France and to London's Dorchester Hotel on a permanent, year-round basis. This introduces a further degree of uncertainty into an energy supply situation in which we are already in perpetual danger of a sudden cut-off of crucial oil. The unfortunate fact is that God saw fit to put the oil in places run by a lot of people who just don't like us.

In the post-September 11 world, we can forget about all of the subsidies the administration's plan would provide to increase electricity production. The market reaction to the short-term California shortage last summer--enough new capacity to produce a glut of electricity and a price collapse--shows that this is an area the government had best leave to the market. Besides, few generating plants any longer rely on oil as a fuel. The supply of natural gas can also be left to market forces: It is extraordinarily responsive to price changes, as the spurt in drilling when prices rose clearly demonstrates.

Oil is where the rubber hits the road in terms of national security. As far ahead as we can see, it is oil, refined into gasoline, that will keep the wheels of the economy turning. Nuclear can substitute for coal, and natural gas for both and for oil in stationary uses--like power generators--but it's safe to assume that engines that run on something other than gasoline will not be significant for a good long while. And this irreplaceable gasoline accounts for about 45 percent of all our oil consumption.

Those who think that we can reduce our dependence on the Saudi royals should think again. Sure, it is a good idea to increase the pace at which we develop our own reserves. But consider the possible contribution of the much-contested Arctic National Wildlife Refuge (ANWR). The best guess is that there are some 10.3 billion barrels of reserves to be had there and in abutting state and native lands, of which the pessimists guess about 4 billion are recoverable at today's prices, a figure that optimists would double. Applying a variety of rule-of-thumb estimates about how much can be produced and shipped in any year from a field that size, Howard Gruenspecht, resident scholar at Resources for the Future, estimates that at prices of around $20 per barrel we would get maybe one million barrels per day from ANWR. And that won't be until somewhere between 2010 and 2020, even if Congress acts promptly to open the area to drilling. By then, our consumption of oil, now running at about 19 million barrels daily, will have increased by a good bit more than what we will be getting from ANWR.

That doesn't mean that we shouldn't do all that we can, consistent with a market-based environmental policy, to increase domestic production. And we should of course diversify our supply sources, especially if we can persuade neighboring Mexico to allow us to invest in its oil industry, which is now a state-run morass so short of capital that it has allowed its known reserves to fall in half in the past decade.

But in the end, there is almost nothing that we can do on the supply side that will enable us not to care about the future of Saudi Arabia. Nor is there much relief in prospect on the demand side. Gruenspecht, who has more data about the oil demand and supply situation at his fingertips than any other expert, has run through some interesting calculations about the savings to be had by mandating tighter fuel efficiency standards, one of the centerpieces of any conservation program.

There are some 200 million cars and light trucks (the latter include SUVs, minivans, and pick-ups) on America's roads, with an average life of roughly 15 years. Vehicles seven years old or newer account for about half of all the vehicle miles traveled in any year. This means that eight years down the road, any tightening of standards now will still be affecting only half of the miles being driven. Only new vehicles, of which there are some 16 million produced in any year, would be subject to tighter efficiency standards, and not immediately, since those new standards would have to be phased in to give manufacturers time to adjust. Do some quick arithmetic and it turns out that a 25 percent increase in efficiency standards phased in over five years, now set at 27.5 miles for cars and 20.7 miles for light trucks, would, in a little over a decade, reduce consumption by a bit more than one million barrels per day. The full effect, which would not be felt until two decades from now, would be twice as large.

Throw into the policy mix Gruenspecht's pet program--auto insurance rates that reflect miles driven rather than being set without reference to how often you expose yourself and your vehicle to insured risk--and a 50 cent per gallon tax on gasoline, and you will reduce consumption immediately, but not by enough to change the hard fact of our dependence on Saudi oil. "It is hard to imagine that the world would be in good shape without Saudi Arabia," concludes Gruenspecht.

This leaves us with very few options. We can continue to ignore the Saudis' support of terrorists, and remain guarantors of the regime's survival, not abandoning it as we did the shah in Iran when the mullahs took over. We can, of course, throw in a bit of exhortation about democratic reforms, to which the response will undoubtedly be that such a path was what led the shah to his hasty exit. Asked some years ago what our energy policy is, I replied "aircraft carriers." That is as good a description as any of our present predicament. And it is about all we have to rely on at the moment.

It also leaves us with one overriding strategic imperative: We must make clear that in the event of an upheaval in Saudi Arabia, we will take control of, protect, and run the kingdom's oil fields, which American oil companies originally developed after paying substantial sums for the right to do so. This may be a difficult policy to defend in the post-imperialist era, but that doesn't make planning for this contingency any less necessary. Our State Department is creative; surely, if called upon, it would be able to figure out an arrangement for operating the oilfields that would safeguard our supply and win the blessing of a revenue-hungry regime with a stake in the continued flow of oil. And surely such a regime, if it did not exist, could be invented.

Before dismissing this as fantasy, consider that it is not very different from what we did in Kuwait, when we seized the oil fields from Saddam Hussein and put them in the hands of a friendly regime, one that remains dependent on us for its survival. In the end, we need the oil, they need the money, and, most of all, whoever is in power in these countries needs America to protect it from the Saddams and bin Ladens who are breathing down their necks.

We can do all the good things: increase domestic production, diversify sources of supply, finally learn how to set up an adequate Strategic Petroleum Reserve that does not discourage private companies from carrying inventories, and decrease our reliance on oil by conserving and pushing technologies that use fuels other than oil. Programs once deemed too costly to pursue might well make sense in this new era of heightened threats to our oil supplies.

But do all of these things, and we still end up with our future tied to Saudi oil. Unless, of course, we are willing, really willing, to pay the price of independence by raising and re-raising the price of oil, taxing imports and taxing them some more, until they are so expensive that we just don't import much oil, and are therefore free to set our foreign policy independent of coalitions that undermine our war on terrorism and seek to force us to abandon Israel to the tender mercies of Arafat and his Arab allies. Something around $5 per gallon should do the trick.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of regulatory studies at the Hudson Institute, and a columnist for the Sunday Times (London).

November 19, 2001 - Volume 7, Number 10