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					Geopolitics and Oil Independence
      in the New Decade

          Hillard Huntington
        Energy Modeling Forum
          Stanford University

         Minot State University
       Energy Impact Symposium
               Minot, ND
            March 15, 2010
              Twin Energy Challenges


• Insure against climate change vulnerability
    Reduce energy consumption
    Replace fossil fuels with nuclear and renewable energy
• Insure against oil disruption vulnerability
    Reduce oil consumption and imports
    Do we want oil independence?




                                                              2
           Three Oil Security Themes



• Why should the US Government intervene

• What/where are the risks of another oil disruption

• What US policy options should be adopted




                                                       3
   Why Intervene in the World Market?


• Oil dependence strains international cooperation (Foreign
  Policy)
    Middle East peace, nuclear proliferation (Iran), terrorism
    Excess military expenditures in the Middle East
• Cartel keeps oil prices too high (Market Power)
• Oil supplies can be disrupted (Oil Security)




                                                                  4
             How Much Intervention?


• Pay an oil security premium to avoid ‘hidden’ damages.
    How much should you spend?
• Avoid policies that cost more than premium.
• Used as a benchmark for comparing costs of a policy.
• Premium says nothing about which policy to use.




                                                           5
          Estimates of the Oil Premium

Avoid
• Foreign Policy Damages        ?*
• Market Power Damages $9 per barrel
• Security Damages       $5 per barrel

   * Are all military expenditures oil related?
    If you limit oil use by 1 MMBD, can you reduce military expenditures?




                                                                            6
   Oil Import Independence Very Costly


• Very large subsidies for domestic energy supplies, combined
  with
• Very large taxes or efficiency standards on oil consumption
• Prices ≥ $140 per barrel would be required to eliminate all
  imports by 2030.
    US average unleaded gasoline price $2.70 to $4.40 per gallon.




                                                                     7
           Three Oil Security Themes



• Why should the US Government intervene

• What/where are the risks of another oil disruption

• What US policy options should be adopted




                                                       8
 Decomposing the Oil Security Premium



• Oil security premium equals
    (disruption risk) x
    (economic impacts).
• Economic impacts: 9 of the last 10 recessions followed oil
  price shocks.
• Disruption risks: likelihood of geopolitical events.




                                                               9
An Expert Poll on Oil Security Risks


          • Panel of oil market & geopolitical experts

          • Offered their opinions on risks of
          disruptions of different sizes

          • >75% that at least one disruption at some
          point in the next ten years




                                                     10
        Most Disruptions < 10 MMBD

               Decadel Disruption Risk by Net Size (MMBD)
35%


30%                                                Percent that one or more disruptions
                                                   of this size will happen in the next
                                                   ten years.
25%
                                                   Net disruptions are gross disruptions
                                                   after offsets (e.g., stockpile releases,
20%                                                extra producer capacity, etc.


15%


10%


5%


0%
      stable      0-2         2-5          5-10          10-15                  +15

                                                                                              11
United States Oil Market



          •US produces 44% of its total
          consumption (almost 20 MMBD)

          •Which regions provide the most
          US imports?




                                        12
We Buy Oil from our Neighbors




                                13
North American Neighbors



           • Canada will become a major
           oil producer (tar sands)

           • Mexican supplies unlikely to
           grow under current policy that
           restricts foreign investment




   17.6%                                    14
Our Southern Neighbors



          • Big new finds in Brazil

          • Most Latin American supplies
          are relatively secure

          • Chavez government in
          Venezuela is an insecure supplier




  8.7%                                    15
Russia and Caspian States



           • Rebirth of Russian hegemony?

           • Russia has cut gas supplies

           • Important ethnic conflicts in
           the Caspian states




   14.7%                                     16
An Awakening African Continent


              • Muslim North African
              countries have traditionally
              opposed the West
              • Recent overtures by Qaddafi
              Government in Libya
              • Tunisia cut off Italy from LNG
              supplies in the 1970s
              • Nigeria borders on being a
              failed state with intense
              regional/ethnic conflicts
              • Angola recovering from 27-
              year civil war
      12.6%                                  17
The Persian Gulf Hub

         • International conflicts: Iran-
         Iraq, Iraq-Kuwait, Arab-Israel

         • Terrorism: newest uprisings in
         Yemen

         • Abqaiq facilities process 75%
         of Saudi oil

         • Saudi importance:
         12.6% world production +
         surplus capacity for offsets
 30.3%                                      18
           Three Oil Security Themes



• Why should the US Government intervene

• What/where are the risks of another oil disruption

• What US policy options should be adopted




                                                       19
No ‘One Size Fits All’ Options




                                 20
Unfortunately, Prices Do Work




                                21
            General Policy Directions


• Do you limit oil consumption or imports?
• Disruptions increase both domestic and imported oil prices.
• Replacing imported with domestic prices does not protect
  against disruptions.
• Reduce consumption rather than imports.




                                                                22
     The Strategic Petroleum Reserve

• The Strategic Petroleum Reserve (SPR) is an emergency
  petroleum store maintained by the US Department of
  Energy. It is the largest emergency supply in the world
  with current capacity to hold 700 million barrels of
  crude oil.
• The Reserve contains 62
  cylindrical underground salt
  caverns near the Gulf of
  Mexico with typical
  dimensions of 200 ft in
  diameter by 2000 ft deep
  holding 10 million barrels
  each.
                                                            23
    Policies: Responding After the Fact


• Release strategic petroleum reserve
• Monetary rules and government fiscal policies
• Ease environmental rules for processing gasoline and other
  oil products
• Oil price controls may distort the economy




                                                               24
Policies: Preparing for a Future Disruption


• Change rules (trigger mechanisms) for releasing oil
  stockpiles
• Tax gasoline to discourage consumption
• Pay-as-you-drive insurance rates
• Subsidize domestic oil supplies
• Tax oil imports: inconsistent with general trade policy




                                                            25
                       Conclusions


•   Some oil supplies remain risky
•   Oil import independence is too costly, and
•   May not protect against oil disruptions
•   As with any insurance policy, do not pay more than required




                                                              26

				
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