A bipartisan group of former U.S. ambassadors joined forces today to officially launch the Diplomatic Council on Energy Security (DCES)—a project of Securing America’s Future Energy (SAFE).  The members of the DCES aim to call attention to the diplomatic and foreign policy constraints posed by America’s dependence on oil.  Led by co-chairs Ambassador Alfred Hoffman Jr. and Ambassador Elizabeth Frawley Bagley, members of the group participated in a press conference and moderated roundtable discussion, and took questions from a public audience in Washington, DC.

The DCES also released its inaugural report, Oil and the Trade Deficit.  This report highlights petroleum as a crucial component in the growth of the U.S. trade deficit over the past decade to a potentially unsustainable and damaging level.  It provides yet another important argument for taking critical steps to end American dependence on oil.

Report Summary

Oil is traded globally, and its price is affected by events in oil-producing and oil-consuming nations around the world, in addition to international waterways and events in nations that host important shipping channels or infrastructure.  Much of the world’s oil is produced in unstable regions and nations hostile to the United States, and its price is increasingly high and volatile.  At approximately 19 million barrels per day (mbd), the United States is responsible for more than one-fifth of total global oil consumption, and is thus both greatly exposed and vulnerable to global market volatility.  This poses a serious threat to U.S. national and economic security.

Although the United States is also a major oil producer and prospects for continued growth in domestic production are positive, the nation remains reliant on imports for a large portion of its total oil use.  At an annual cost below $100 billion as recently as 2002, the nation has run an aggregate trade deficit in petroleum of more than $1.5 trillion since 2007—an average yearly deficit in excess of $300 billion.  In fact, progressively higher oil prices have increased the total cost of the U.S. oil import burden in recent years, even as imported volumes have declined.  For example, net petroleum imports declined by approximately 1 mbd between 2010 and 2011 and yet the petroleum-related deficit increased by more than $60 billion.  Despite even lower anticipated import volumes this year, further elevated prices are forecast to increase this deficit further in 2012.

The nation has sustained a trade deficit with the rest of the world for more than a quarter of a century.  However, over the past decade, the size of this deficit has grown significantly. The current size of the trade deficit, totaling more than half a trillion dollars in 2011, cannot be sustained indefinitely.  It creates significant risks and vulnerabilities for the U.S. economy, including an increased dependence on consistent capital inflows from foreigners.  This compounds America’s international debt burden while lowering the prospects for long-term U.S. economic health.  A readjustment of the U.S. trade balance is almost certain to be necessary.  Whether gradual or more sudden, this process is likely to involve higher levels of saving and lower levels of consumption, higher interest rates and prices for imports, and lower prices for exports.  These factors will moderate the trade deficit, but also reduce living standards below what they would be if borrowing continued unabated.  A sudden adjustment would occur if increasing import demands are not matched by foreign willingness to purchase U.S. assets, thereby causing abrupt pressure to lower spending.  If the nation could not reduce its reliance on foreign oil, imports of other goods and services would have to decline, and if capital inflows fell low enough, it is possible that the nation would be unable to afford its oil imports.  This kind of adjustment could be orders of magnitude worse than a more gradual process.

By taking action to decrease its trade deficit sooner rather than later, the United States can reduce the painfulness of an adjustment.  Petroleum represents a crucial component of the U.S. trade deficit on which changes in policy can have a clear, direct, and significant impact.  Any approach must focus on increasing domestic oil production and decreasing oil consumption.  New investments to aid the return of strong and sustained economic growth must also address structural limitations of the economy with respect to oil, most notably in the transportation sector.

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The WSJ puts it this way:

North Dakota has passed Alaska to become the No. 2 oil-producing state in the country, reflecting how the embrace of new drilling technology is redrawing the U.S. energy map.

North Dakota’s daily production of oil rose 3.1% to 575,490 barrels in March, according to preliminary state data, 1.4% more than Alaska’s daily production of 567,480 barrels for the month.

Texas, which pumped 1.7 million barrels a day in February, holds a firm grip on first place.

This is of course good news, especially for North Dakota.  It’s also good news for US energy security.  While it’s true that domestic production in a globally-linked market doesn’t shield us from price increases and even from volatility caused by sudden market disruptions, more domestic production does help our balance of payments and trade deficit.  Dollars flow to American workers and American shareholders rather than hostile petro-states.

What’s surprising is how sudden this North Dakota boom is:

The leap past Alaska came “substantially earlier than we thought. We had graphed this out [to happen] early next year,” said Ron Ness, president of the North Dakota Petroleum Council, which represents more than 350 companies in the state’s oil fields. “I don’t foresee us giving Texas a run right now, but certainly we’ve moved up in the batting lineup.”

In four years, oil output has quadrupled in North Dakota. In March 2008, the state was the No. 8 oil-producing state at 144,000 barrels a day.

 And of course it’s all about hydraulic fracturing and horizontal drilling.  Most of the controversy about fracking has come from the new natural gas plays, where production is happening in areas where it hadn’t before.  For tight oil, however, production is resuming in areas thought to be tapped out.  The fact that there’s no controversy over fracking in ND is a clear indication that it’s not the process but the critics that cause the criticism.  Policy-makers should keep that in mind as they weigh the benefits of our domestic oil and natural gas boom.

Between 2009 and 2011, the United States experienced three consecutive years of crude oil production increases for the first time since the early 1980s, as well as the largest surge in output within a three year period since the late 1960s. This marks a sharp reversal from conventional wisdom of only a few years ago, suggesting U.S. crude oil production was in a decades-long state of decline. This shift has far-reaching implications for the United States, with positive benefits including substantive reduction of the trade deficit, and potential employment gains driven by petroleum industry growth. The role of policymakers is to ensure these benefits are maximized by making promising tracts of federal land available for development in environmentally responsible ways.

However, while encouraging pursuit of these advantages, the report emphasizes the importance of long-term strategies to reduce our petroleum dependence and the heavy costs associated with it. While current projections show that extractable resources could drive net liquid imports down by 21 percent by 2020, this boon to our energy supply must not be conflated with energy independence. Notably, even oil exporting nations which produce more than they consume (such as Canada and Norway) are part of the global oil market, and remain subject to the same high and volatile oil prices. Rising domestic production will not achieve a long-term domestic price advantage in oil, and a nation’s level of oil production does not necessarily improve its energy security—a goal which can be achieved through significant cuts in consumption. Furthermore, even with rising domestic production, U.S. oil dependence constrains foreign policy and military options due to our commitment to stability in oil-producing regions of the world.

Consequently, policy prescriptions must also focus on long-term abatement of our petroleum consumption. Towards this end, SAFE recommends aggressive pursuit of fuel economy standards to reduce the oil intensity of the economy, and transitions towards alternative fuel sources, such as natural gas for heavy-duty trucks, and electrification of light-duty vehicles. Only by diversifying the transportation sector can real energy security be achieved.

Click here to access The New American Oil Boom.

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In the Washington Post’s coverage of the Social Security Administration’s Trustee’s Report, the first three words by journalist N.C. Aizenman say it all:

“Surging energy prices and a slower-than-expected economic recovery have worsened the financial outlook for Social Security compared with last year, while the picture for Medicare remains grim but essentially unchanged, according to annual forecasts released by the government Monday.”

Unfortunately, the impact higher energy costs will have long-term effects. The piece continues (bolded added for emphasis):

“They also pointed to two unforeseen economic factors: Rising energy prices necessitated a larger cost-of-living increase to benefits, and worker earnings — and the resulting payroll taxes used to pay for Social Security — were lower than than expected. In both cases, the impact will resound for years.”

Readers of this blog know the dangers that oil dependence has on our national and economic security. Now, the fiscal threats are creeping to hurt entitlements.

“Oil and foreign policy wonks should be celebrating their success in cutting oil exports. Instead, I hear consternation. The goal in Washington and Brussels was always to cut Iran oil exports to the minimum, “but”, as a senior US diplomat told a recent gathering, “not too fast” to avoid unsettling the market. So far, the cut is too fast and too wide.

Iran oil exports dropped last month by around 300,000 barrels per day, with production falling to a 10-year low. The country’s oil production falls seasonally in the spring as refiners undertake maintenance, but the drop in 2012 is much larger than usual. JPMorgan believes that by the summer Tehran’s oil exports will have fallen another 700,000 barrels per day. Oil traders and Gulf-based oil officials talk in private about similar export losses.”

The poor execution of sanctions, combined with Iran spitefully cutting off supplies to many EU nations in January, has helped drive up the price of crude in recent months, to the detriment of our economic recovery.

The Islamic Republic’s President, Mahmoud Ahmadinejad, has remained defiant against sanctions, stating “We have as much hard currency as we need and the country will manage well, even if we don’t sell a single barrel of oil for two or three years.” Iran’s recent actions don’t reflect this reality. Blas reported on Wednesday that the nation is attempting to tempt its customers to continue buying oil by offering “discounts” through easy credit. Numerous EU nations as well as Turkey, Japan, South Korea, and China, have all announced sharp cutbacks in their purchases of Iranian crude, (with the exception of Greece, whose sovereign debt crisis has left it suffering a shortage of willing oil suppliers, and has dramatically increased its purchases—the topic of which was the subject of a recent SAFE intelligence report). The fact that Iran is now offering discounts on its oil through relaxed credit terms is a testament to its current desperation. NPR reports that Iran will officially enter into talks about its nuclear program with member nations of the U.N. Security Council in Istanbul this weekend.

It is unclear how productive these talks will be. It is possible that, as has been observed in the past, Iran will simply complain about how the West is treating it. Needless to say, although the sanctions are clearly having the desired effect, there’s virtually no way to cut off a major oil supplier without threatening the global economy. This is not a matter of enacting sanctions in the perfect way (probably an impossible task) but a matter of taking real steps to sever our oil dependence once and for all.

Due to Greece’s ongoing debt crisis, many of its former suppliers of crude oil—particularly Russia—are no longer willing to risk trading with a country struggling to pay its bills. Consequently, Greece has grown increasingly desperate to secure its energy needs. Iran, increasingly desperate for customers to buy its crude oil as it faces sanctions from the European Union and United States, has increased its share of Greek petroleum supplies from 14 percent in 2010 to 53 percent in Q3 2011. Additionally, Greece has been depleting its strategic petroleum reserves—a move which violates the conditions of its membership in the International Energy Agency and the European Union. Both organizations stipulate member states must maintain strategic oil stocks to compensate for up to 90 days of imports or consumption in the event of emergency supply disruptions.

The situation severely complicates international efforts to deter Iran’s nuclear program. Greece’s desperation undermines transatlantic solidarity on Iranian sanctions, and weakens the case for other nations such as Spain and Italy, which import substantial quantities of Iranian oil (16 percent and 13 percent respectively in Q3 2011), to continue pursuing alternative petroleum supplies. These three nations could initiate a concerted lobbying effort to weaken the EU’s sanctions. Furthermore, the combination of Greece’s fragile economic state and heavy dependence on Iranian oil leaves it an open point of vulnerability. On February 25, it was reported by Iran’s Fars news agency that Iran had refused to load a Greek oil tanker, sending it back empty. Although this report is unsubstantiated, it underscores Iran’s ability to exploit Greece’s position and retaliate against Western sanctions on Iran.

The complete analysis of the situation, as well as SAFE’s recommendations to mitigate the situation, can be found here in the latest intelligence report, “Greece’s Debt Woes: Deepening their Reliance on Iranian Oil.”

It’s not necessarily easy to get support to the right level. . . . .Governments aren’t always good at knowing how to profile their subsidies against market conditions.

Too true.  Indeed, as Birnbaum and Faiola report it, the levels set in Europe were clearly not in — or even near — the sweet spot.  What’s the sweet spot for clean energy subsidies?  Something that internalizes the externalities that fossil fuel consumption imposes on the market, whether they be environmental, public health, or national defense.  That should, but may not always, bring renewable costs closer to fossil fuel rates without turning the market upside down.  Europe’s levels weren’t anywhere near that, judging by these statements:

In December alone, Germany installed nearly as much solar capacity as the United States has in total, fueled by the subsidies that solar companies admit sometimes made it possible not to worry whether there was sufficient demand in a given area for the power they would produce. (Emphasis added)

 Though solar energy supplied 3.1 percent of Germany’s electricity needs in 2011 — hampered in part by the country’s famously dreary weather — the industry consumed closer to half of the overall renewable subsidies, which also support other energy sources such as wind and biomass.

The company had entered a lucrative niche in which it installed solar panels on British homes free, and simply collected the government subsidies in return.

It would seem that those levels of subsidy simply caused overinvestment in otherwise unwise solar power.  Now, it may be difficult to determine the precise level of a subsidy – the first step would be a rigorous analysis of what externalities the market-distorting subsidy is designed to address.   And economists would argue that valuing externalities is not rocket-science.

What is clear, with the benefit of 20/20 hindisight, is that a subsidy regime that completely removed market forces from the equation — no worries about demand, no customer payment required to make a project profitable — is and should be unsustainable.

Yes, national average gasoline prices have increased for the past 20 days in a row.  Today, they reached $3.70 for Regular—the “cheapest” option (accessed February 27, 2012).

This is not new—prices have been trending steadily upward in general since they collapsed at the end of 2008 (see; Regular Gasoline Prices, January 2008-Present).

But it is a potentially worrying sign for the U.S. economy.  Total U.S. gasoline consumption is already down significantly as drivers have attempted to reduce their expenditures (see; U.S. Motor Gasoline Demand).  Rising prices will force consumers to cut back even further, including on other non-oil items, and could undermine economic growth.

Reduced gasoline demand is of benefit to the nation.  However, reductions that result from weak economic performance are far from ideal.  This is demand destruction.

The transportation sector accounts for 70 percent of total U.S. oil consumption, and improvements in fuel efficiency and a transition to alternative technologies do have a small effect on reducing oil use on a year-to-year basis.  But there are 230 million vehicles on U.S. roads.  Fleet turnover takes time to reduce gasoline demand.  That demand has been falling so rapidly likely means that people are simply traveling less (particularly as a result of persistent unemployment/under-employment), making fewer discretionary/non-essential trips, and using more transit, carpools and other options where and when available (see; Annual Vehicle Distance Traveled).

U.S. energy policy and gasoline prices in particular, have become an increasingly hot topic in the political sphere.  However, it is not simple, it is very complex, and it cannot be reduced to sound bites.  Exacerbated by the intense politicking of a presidential-election year, there is a lot of rhetoric.  From renewable energy to speculators to domestic production to vehicle technologies to withdrawing oil from the Strategic Petroleum Reserve.

“Domestic oil production is the solution.”  Wrong.  “Domestic oil production is not the solution.”  Also wrong.  Increased domestic oil production must be part of a broad strategy to help strengthen supply security, grow industry, reduce the trade deficit, and create jobs, as other efforts focus on transitioning the nation’s vehicle fleet to viable alternatives.

Last year, the average household spent more than $4,000 on gasoline—more than in 2008 when oil prices reached an all-time high.  The American people are hurting.  What is required is not rhetoric or sound bites.  What is required is a real solution.  What is required is a coherent and comprehensive vision for U.S. energy policy based on facts.  What is required is the courage and determination to see such a vision enacted.  What is required is action and it is needed now.

Reporters Ben Casselman and Conor Dougherty report that:  “Oil prices have climbed sharply in recent weeks as mounting tension with Iran has raised the threat of a disruption in global supplies. On Wednesday, oil futures on the New York Mercantile Exchange rose $1.06 to $101.80 a barrel on reports that Iran had cut off sales to six European countries in response to the European Union’s newly stepped-up sanctions. Iran’s oil ministry later denied the report.”

Whether the minister’s denials are true or not, the market will as the market wills — and in this case we are in for a rocky road ahead.  As this page discussed earlier in the week, gasoline prices are stuck on high weeks before the annual bump in prices caused by refineries switching over to summer blends in many areas.  It is not unlikely that $4 or $5 gasoline will be common by late spring.  Imagine a black swan event on top of that and we will be in a world of hurt.

As it stands, Casselman and Dougherty sound an ominous (and oft-heard warning):

“Pricier oil comes at a delicate time. The job market has begun showing signs of life, and other economic indicators are pointing toward stronger growth. But the recovery remains too halting to easily absorb the shock of sharply costlier oil. . . . Some economists fear a repeat of last year, when the economy appeared to be gaining strength only to stall when oil prices spiked because of turmoil in Libya.”

What’s it going to take for serious congressional action on energy security?

The growth is thanks to the usual culprit: petroleum imports. Prices have risen and remained above $100 a barrel due to tensions in the Middle East. Average imported oil prices were the highest on record last year, and they are anticipated to increase further in 2012. Consequently, the deficit in crude and product is a staggering $326.5 billion—59 percent of the total trade deficit. This is the highest percent of the total gap in history, and a 4 percent increase from 2008’s 55 percent.

The trade deficit for the last month of 2011 was $48.80 billion, a 3.7% increase from $47.06 billion last November. This deficit would have been far higher if not for soaring diesel exports from the Gulf Coast.

Oil import spending is a major threat to the economic recovery. The gap’s continued expansion is especially disconcerting in light of increased exports to the Euro zone; although exports rose at an impressive 14.5% pace, the deficit is increasing rapidly enough to eclipse this progress. Importantly, deficit increases (although fueled by economic growth) also constrain it: the Wall Street Journal reports that the trade gap’s weight on the economy subtracted 0.1% of gross domestic product in the fourth quarter. This is made only more severe by the threat of an oil price spike, which Federal Reserve Chairman Ben Bernanke warned could “stop the recovery.” However, the Chairman also expressed optimism due to increased fossil fuel production, stating “So for the first time in some time, I think there’s a chance that we can move in the right direction in terms of reducing our exposure to foreign supply disruptions,” he said. It is in our best interests to make the most of this crucial opportunity.