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					                               Crude Oil Imports and National Security
                               The Yale Graduates Energy Study Group*

       Robert Ames (Tyson Foods): Phone: 479.290.2926 Email: robert.ames@tyson.com
       Anthony Corridore (Lafarge Corp): Phone: 571-239-1196 Email: anthony.corridore@earthlink.net
       Edward Hirs (DJ Resources, Inc. & University of Houston): Phone: 713-599-4936 Email: edhirs@aol.com
       Paul MacAvoy (Yale Professor Emeritus): Phone: 941-952-1692 Email: paulmacavoy@verizon.net



Overview:
The domestic crude oil market, among the most strategic, is among the most vulnerable to severe
disruption. Since the law of one price for crude oil prevails worldwide, a spike in the crude price in a
Middle Eastern producing country caused by hostile acts there creates the same spike in the Houston spot
crude market and the New York commodity exchange. With 94% of worldwide reserves controlled by
foreign nations, there is no way the U.S. can prevent a shutdown by a sovereign producer or terrorist
initiated outage somewhere from tripling our crude prices and, therefore, disrupting energy and consumer
markets. Such political actions would lead to a spike in excess of $400 per barrel for the domestic market
and cause a loss to American consumers of hundreds of billions of dollars.

An import “limits” policy outlined here would instead disconnect the United States from the world crude
market (and price) and thus reduce the costs of disruption in our markets. If terrorism is to work its
destructive forces upon the U.S., it would have to do so domestically; it would no longer be as effective to
attack Saudi Arabian facilities—unsuccessfully attempted in February 2006—or close the Straits of
Hormuz.

The “limits” policy is straightforward. It calls for, as a matter of Federal policy, the phased withdrawal of
U.S. crude and products imports from the world oil market. In a 10-year period, for example, from 2010
to 2020, imports from all parts of the world except Canada, whose pipelines run crude oil almost
exclusively south into the U.S., would be reduced from present day levels to zero.

The cost benefit analysis of such limits on imports estimates the difference between consumer losses from
higher price and producers gain associated with the higher price and higher production of domestic crude
oil and such substitutes as ethanol, biodiesel, and Canadian crude. We show the “limits” policy alone
provides a net gain to the U.S. if there are no shocks, that is, limiting imports from 2010 to 2020 costs $40
billion in consumer losses but generates $227 billion in producer gains from selling more domestic
products.

Moreover, if there is a significant shock as from a $400 per barrel price that occurred before all imports
are eliminated, the cost would not be as great. In our full paper, using U.S. DOE forecasts, we show that
such a disruption produces a total loss to the economy of $234 billion from a 6 month shock under
business as usual. Over the decade of the “limits” policy, these costs decline to zero for a disruption in
2020 even without including the producers gains during years when the shock does not occur.

This “limits” plan is an alternative to the current set of projects that have been ineffective in expanding
domestic production of crude oil and crude oil substitutes. The U.S. would also avoid spending
additional billions to protect shipping lanes and defend friendly oil producing nations against belligerents.
The gains in U.S. employment, tax receipts for federal and state governments would be a bonus. Nothing
we propose is novel. The U.S. has restricted oil imports before, and has restricted imports of many other
commodities and products (sugar, coffee, aircraft) as a matter of national interest.

Methods:
Supply/Demand Economics & Regression Analysis

Results/Conclusions:
The authors demonstrate that the United States profits handsomely in all circumstances by imposing an
embargo on imports of foreign crude oil. The US removes its exposure to foreign oil supply shocks and
recovers deadweight lost producers surplus. The embargo plan will lead to greater domestic production of
crude oil and alternative fuels without the tax and subsidy schemes heretofore employed.

References:
CAPP – Crude Oil: Forecast Markets & Pipeline Expansions June 2009

“Who’s Afraid of a Big Bad Oil Shock?”, William D. Nordhaus, Brookings Papers on Economic
Activity, 2:2007

Oil Price data was taken from EIA website: http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm

United States Geological Survey, “Reserve Growth Effects on Estimates of Oil and Natural Gas
Resources”, October 2000

BP Statistical Review of World Energy, June 2009,

MMS, “Estimate for Oil and Gas Reserves: Gulf of Mexico, December 31, 2005,”

Sasol: 50 Years of Innovation, 2000. And, see National Center for Policy Analysis. “Turning Coal into
Liquid Fuel”. Brief Analysis no. 656 by Nicholas Ducote and H. Sterling Burnett May 1, 2009

Turning Natural Gas to Liquid”, Oilfield Review, Autumn 2003

OECD/IEA World Energy Outlook 2008, Oil and Gas Production Prospects

World Biofuels Study: Scenario Analysis of Global Biofuels Markets. Thomas Alfstad, Prepared for the
U.S. Department of Energy, Energy Sciences and Technology Department, Brookhaven National
Laboratory. BNL-80238-2008

United States Department of Interior, Bureau of Land Management,
http://www.blm.gov/wo/st/en/prog/energy/oilshale_2.html; and
http://ostseis.anl.gov/documents/docs/OSTS_Overview_slides.pdf

The National Academies Summit on America’s Energy Future: Summary of a Meeting,
National Academies Press, 2008.

				
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