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2006 U.S. ENERGY FLOW: SOURCES & USE
The chart, from the Energy Information Agency, shows at left the percentages of different fuels that provide U.S. energy needs, with imports segregated at lower left; their aggregates in the center; and the percentages of where energy is used at the right.
living on the razor's edge
The Hazards of Energy Dependence

"Let us set as our national goal…that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign energy source”.
     George W. Bush, after saying we are “addicted to oil” in his 2006 State of the Union? Actually, it was Richard Nixon in 1973. The Organization of Arab Petroleum Exporting Countries had announced that, as a consequence of the Yom Kippur War, they would embargo oil shipments to all countries that supported Israel.
     That was the first oil shock that sent prices skyward. Then came another in 1979 when Iranian revolutionaries shut down their oil fields and shortages sent the price of oil to its highest level in history (in current dollars) until surpassed at the end of 2007.
     In 1973 the U.S. was consuming 12.5 million barrels per day, 26% of it imported. The 1979 shock jolted the U.S. to action – conservation and new auto mileage standards – that actually reduced consumption into the early 80s. But a collective amnesia induced by low oil prices led to a long progression of increased consumption, even in the face of steadily declining U.S. output. We now find America burning over 21 million barrels every day, reliant on other countries for a frightening 60% of that amount, and now, suddenly, at prices that flirt with $100 a barrel even without embargoes or supply disruptions.

How did we manage to shrug off two major supply disruptions and drift into a far more precarious state?

The problem will only worsen if we fail to substitute alternatives. Oil consumption is otherwise projected to grow 44% by 2025, while at the same time domestic production declines to meet only 30% of our need.

“Energy independence” will someday come to the rescue. That comforting notion has become commonplace as we picture a future of more efficient autos, wind turbines, and solar collectors. What is not often spoken of is “energy dependence” – the dangerous vulnerability the United States faces right now, a catalog of harrowing threats for which the nation is woefully unprepared. We thought it useful to focus on the scope of our dependence in this series.

 HOSTILE SUPPLIERS AND FRAGILE SUPPLY LINES

If you were to say that about three-quarters of the world’s oil is in the hands of “big oil” -- companies like ExxonMobil, BP, and Chevron – you probably would not get much of an argument. In fact, it is the reverse: 77% of world oil reserves are owned by national companies. Tina Rosenberg in The New York Times Magazine made the point that “there are 13 state-owned oil companies with more reserves than ExxonMobil, the largest multinational company…Nationalized oil is the trend”. A number of those countries are not our friends. One-fourth of all the oil America uses comes from OPEC countries, one-seventh from Arab OPEC countries, and one tenth from our pugnacious neighbor to the south, Venezuela.

 Iran

Its nuclear ambitions make the headlines, but the more immediate danger is its geography. All of the Persian Gulf countries ship their oil – 30% of world supply – through the Strait of Hormuz at the entrance to the Gulf, a waterway as little as 21 miles wide with Iran looming over its northern shore in the shape of an open hand poised to choke.

There have been threats in the past to do just that: to mine the strait or to sink ships to block its channels, which would have devastating consequences for the world’s economies. There were reports in 2006 that Iran's Revolutionary Guard had prepared for a massive assault on U.S. naval forces and international shipping in the Persian Gulf to disrupt trade. This would be triggered should Israel or the U.S. attempt to halt Iran’s nuclear program. The strait is reportedly targeted by Iran with anti-ship missiles.

In early January five speedboats taunted three U.S. warships entering the Gulf in a provocative action that almost drew our fire. Speedboats may seem to be no match for powerful naval ships, until one remembers that an even lesser suicide craft blew a hole in the destroyer USS Cole, when it was docked in Yemen in October 2000, killing 17 sailors. More ominous still, a war game conducted in 2002 showed that warships are disturbingly vulnerable to waterborne guerilla tactics. In that simulation a Navy convoy lost 16 major ships, including an aircraft carrier, in a matter of minutes to a “swarm” of such speedboats.

It is not difficult to imagine that this startling result inspired the recent speedboat probe as a trial run to test our Navy’s reaction. What if we were to retaliate, or attack Iran over the nuclear issue? As a country that provides 4.9% of the world’s oil, Iran has us in something of a bind.

 Saudi Arabia

Saudi Arabia is not directly hostile to the U.S. Indeed, President Bush was in the kingdom shortly before this was written, and is promoting a $20 billion arms deal as a bulwark against rising Iranian aggression. But, as we are so often reminded, the country gave us bin Laden and 15 of the 19 9/11 hijackers; it is founded on the conservative Wahabi branch of Sunni Islam that funds madrassas throughout the Middle East where youths learn little other than to recite the Koran and to hate Great Satan America; its private charities are known to support Al Qaeda; and its mosques have recruited volunteers for the Iraq insurgency. Thanks to our oil addiction, the United States thus finds itself in a deadly embrace with a country that, were it not for oil, would be viewed as posing a threat to stability every bit as great as Iran.

Moreover the monarchy is threatened by what has been called a “slow motion insurgency”, owing to a number of causes ranging from resentment of wealth hoarded by the vast royal family to the presence of American troops protecting its oil fields. Almost half of Saudi oil comes from one field, and two-thirds of its oil passes through a single processing facility and two terminals, one of which was the target of a thwarted attack in mid-2002. A successful attack that closes the spigot of almost 11 million barrels a day from Saudi wells is all it would take to crash economies worldwide.

 Russia

The Russian company, Gazprom, is the world’s biggest provider of natural gas and through acquisition owns the world’s third largest oil reserves after Saudi Arabia and Iran. Once reliant on its military, Russia now wields energy to dominate the neighbors that it formerly controlled, shutting off supplies to Ukraine in an intensely cold winter to force them to accept price increases and threatened to do the same to Belarus. Many former Soviet Union countries are entirely dependent on Russia for their energy, the former satellites rely on Russia for most of their supplies, and the threat extends to Europe, which gets 30% of its gas from Russia.

More relevant to the U.S., Russia is now using environmental complaints and health and safety inspections to stall multinationals developing the rich oil and gas deposits of Sakhalin Island northeast of Japan. The delays are viewed as an attempt to force new terms to replace contracts that were signed with Royal Dutch Shell and ExxonMobil when oil was much cheaper, and possibly appropriate a share of ownership in the hugely costly projects – Shell is spending $20 billion, ExxonMobil $17 billion – possibly without reimbursement.

Russia, producing 11.4% of world oil, runs a close second behind Saudi Arabia’s 12.6% despite ranking eighth in proven reserves. Putin’s steady march to squeeze the multinationals for control of oil and gas, if not its outright nationalization, is seen as how he intends to restore Russia to world power status and challenge the West, this time using its oil weapon rather than the military.

 Venezuela

Venezuela has similarly moved toward nationalization. Brandishing the slogans “The Oil is Ours” and “Down with Imperialism”, Hugo Chavez last April announced that Venezuela would commandeer majority interests in projects underway in the heavy oil fields of the Orinoco Belt in which six companies -- three of them American – were investing upwards of $30 billion. Some threatened to pull out, but relented, ceding operational control rather than foregoing the prospect of 600,000 barrels a day from deposits that could surpass those of Saudi Arabia or the Canadian oil sands.

Chavez calls his biggest customer, “the North American empire…the biggest menace to our planet” and speaks of George W. Bush as “the devil”, but America cannot do without his oil. We get 10% from Venezuela, making it the third largest supplier to the United States after Canada and Mexico. But there may be more to Chavez’ affronts than just name-calling. He is forging alliances with oil companies in China, India, Iran and Brazil and has threatened to sell refineries in the U.S. These are indicators that he may cut off the U.S. and sell his oil elsewhere.

 Mexico

Mexico poses a different sort of threat. The country long ago nationalized oil; all exploration and production is housed in government-owned Petróleos Mexicanos, or Pemex. Mexico’s view is that Pemex exists to fund the government. In 2006, for example, it drained $79 billion of the company’s $97 billion in revenue, a practice that has forced the company to borrow over the last five years. The Mexican congress even approves its budget, and sets export levels, which has brought about an emphasis on pumping more oil to feed the treasury which has short-changed exploration. The company sits on tens of billions of barrels of reserves, but most is in deep water in the Gulf of Mexico, is costly to produce, and the company is left perpetually short of cash. What drilling Pemex has done has yielded little, partly because, facing no competition, the company lags in the latest technical expertise. As a matter of national pride, Mexico refuses partnerships with more savvy international companies.

The hazard is that the U.S. relies on Mexico as its second largest source for oil, sending us 1.6 million barrels daily, but production has begun to decline in the last two years. Output from its principal field, Cantarell, has been dropping rapidly, as much as 15% a year. Meanwhile, demand for oil at home has been rising. The question is, when might the two lines on the graph converge – production versus demands at home – drying up the pipeline to the U.S.

 Nigeria

Nigeria's oil-rich Niger River delta yields a light, sweet crude that needs the least refining. Its 2.4 million barrels a day is 3.9% of world output. It is the U.S.’s fifth largest source.

By constitution, 13% of oil revenue must go to the nine oil-producing states of the delta. That came to $6 billion in 2006, more than ample to improve the lives of the delta’s people. But according to the World Bank, the money paid to the governors’ offices has a tendency to vanish in a country where most of the oil wealth goes to 1% of the population.

The delta’s people live in dreadful conditions. Their communities -- one of them literally built on garbage – have no schools, no medical clinics, no clean water. Oil companies in their midst pump billions of dollars per year and leave behind environmental pollution. This has given rise to bands of marauding militants, the Movement for the Emancipation of the Niger Delta – MEND – being the most menacing. They have robbed banks, killed oil executives, blown up an oil pipeline, a gas pipeline, a tanker loading terminal, even overrun an oil rig 40 miles at sea. On this New Year's Day another group, calling itself the Niger Delta Vigilante, attacked two police stations, a hotel and a restaurant, leaving 10 dead including their own. Masked gangs, showing up suddenly in light plastic speedboats propelled by 75hp engines, invariably have the upper hand.

“We are not communists or even revolutionaries. We're just extremely bitter men,” is how MEND's leader described their motives to Sebastian Junger, writing in Vanity Fair. The oil and gas pipelines -- Shell has a web of 3,720 miles threaded through the “creeks” of the delta – are impossible to protect, even if the Nigerian army were as well-equipped as the bandits. As in the Middle East, here again is a case where a small band can in a single action cause an oil shock felt around the world.

 Oil Wars

Depending on the nature of an oil supply disruption – an overthrow of the Saudi monarchy by Islamic fundamentalists, for example -- a U.S. president could be forced to use the military, not least because our heavily-mechanized ground forces, naval ships, and aircraft all run on oil. Even when we were far less reliant on imports, Nixon contemplated sending airborne troops to seize the oil fields of Saudi Arabia, Kuwait and Abu Dhabi if the Arab embargo did not end. The U.S. “could not tolerate [being]…at the mercy of a small group of unreasonable countries”, he said.

For that matter, one could argue that we have already fought Oil War I. As “Winning the Oil Endgame”, a book from the Rocky Mountain Institute, puts it, “historians will long debate whether the United States would have sent half a million troops to liberate Kuwait in 1991 if Kuwait just grew broccoli and we needed it”. And some maintain that the unspoken agenda behind our toppling Saddam Hussein was to guarantee continued access to Iraq's oil.

The consequence of our perpetual dependence, subject as it is to these multiple vulnerabilities, could lead not only to a crippled economy, it could lead to further wars. This is the dilemma brought about by our years of indulgence and complacency, our lack of foresight, our failure to develop alternative energy sources long ago.
      - Stephen Wilson, PlanetWatch Editor, http://www.planetwatch.org

 

Yet to come in this series: inroads of sovereign wealth funds, competition for oil, the end of "easy oil" and the question of peak oil.