Iran has a vested interest in maintaining high production levels. Not only is there substantial potential for an incident when stopping and re-starting wells, which can permanently damage its already outdated equipment, but it is still seeking willing buyers. With much of the international community heeding the sanctions, and increasing pressure from the Obama administration on India, China, and Southeast Asia, Iran has resorted to storing the excess product in the National Iranian Tanker Company’s ships. With a current fleet of 39, up to 80 million barrels of oil can be stored, and it is estimated that approximately 40 percent of this capacity is currently taken. That said, Iran is also expanding this capacity, expecting to receive 12 new supertankers from China this month.

Storing the oil in tankers has the additional benefit of making it more accessible to hawk once a willing buyer is found. The Washington Post reported earlier this week that Iranian tankers have been switching off their satellite tracking systems in an attempt to circumvent Western governments. The International Energy Agency (IEA) reports that for at least a month, about a quarter of the tanker fleet has been sailing incognito, seeking open ports and potential transactions. Naturally, it takes more than turning off a GPS to hide a 1,000 foot tanker, but the move is still a violation of maritime law and yet another sign of the country’s increasing desperation.

Producing some 3 million barrels per day, Iran is the second largest OPEC producer after Saudi Arabia, and oil is the backbone of its economy.  There will be talks next week between Iran and U.S. and E.U. officials to discuss the future of sanctions and Iran’s nuclear program.

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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CONGRESS IS BATTLING over whether to approve the Keystone XL oil pipeline, proposed for the heart of the country.  The project has clear value to the United States. Yet, with all the amped-up rhetoric, it is important to remember what the project would not do. It would not endow the United States with “energy security” in the sense that most Americans understand the phrase and that many pipeline advocates wield it. It would not significantly lower oil prices. In fact, when it comes to oil, America will be affected by global events for decades, and that’s assuming the right policies are in place.

All true, and well put.  The pipeline does have clear value for the US:  more access to a secure product, continued good relations with our stable ally to the north, good jobs, etc.  And yes, the pipeline will not lead to 100% energy security — nor is it the threat to the environment that opponents fear (or fear-monger about).

The Post has some good prescriptions for reducing our dependence on foreign oil — and thus our exposure to world-wide economy-constraining high prices and economically damaging price volatility:

There are sensible policies to promote this long-range goal. An economy-wide, anti-carbon policy, such as a carbon tax, would fit the bill. Short of that, the best policy would be a higher gasoline tax, which could also fund transportation needs. President Obama’s auto efficiency standards will also help. In contrast, direct subsidies for electric cars are extremely expensive for meager benefits.

Unfortunately, after making those mostly solid points, the WaPo takes a gratuitous shot at incentives for electric vehicle and infrastructure deployment.  They are wrong on that.  Vehicle electrification has long been viewed as the logical next step in reducing our economy’s oil intensity.  As key executives at Shell (hardly an entity one would expect to be pro-electrification) said nearly a decade ago:  use electrons for transportation and reserve molecules (of petroleum) for higher-valued applications.  That’s still the right answer for our economy and our energy security.

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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Naim notes that “during a period in which oil prices are booming” and private sector multinationals are setting profitability records, “these three companies are declining.”

 ”Their production, reserves and potential are lower than they used to be and their performance is far poorer than it could be, given the rich geology of the areas over which they enjoy a virtual monopoly.”

Why is this?  Naim points to underinvestment, ”mismanagement, limited access to new technologies and the mistreatment of foreign partners” as factors common to all three.  And those factors are generally derivative of politicization, as well as “cronyism and patronage.”

Naim contrasts the three in decline with ”the rapid ascent of Brazil and Colombia as oil-producing countries.”

 ”Brazil’s Petrobras, while state-controlled, has a governance structure designed to protect its management from political interference. The company has become a global player in the same period that its less fortunate Latin competitors were falling. Petrobras’ discovery of large Brazilian offshore reserves may well propel it to the top of the industry leagues once production there starts. Colombia, a nation that until recently had no significant presence in the oil industry, is also growing very rapidly.”

Naim then gives some context to the announcement that the Kirchner government in Argentina will be taking over YPF, which was privatized a few years ago and acquired by Repsol, a Spanish company.  He cites cronyism, “rifts between rival oligarchs, political expediency, populism and the wish to please a public resentful of the privatisations of the 1990s” as elements in the take over.  Yet another lesson, as if we needed one, in the lack of freedom in the global oil market.

“Regarding electrification, the beauty of plug-in hybrids and pure electric vehicles like the Chevy Volt and the Nissan Leaf is that they are powered by electricity, which can be generated from many sources: nuclear, coal, natural gas, and renewables. Best yet, these are all domestic energy sources, meaning OPEC won’t be able to corner the market. And the retail price of electricity is far less volatile that the price of oil.

Unfortunately, the recent battles over environmental policy have defined electric vehicles as a climate change project driven by hostility to conventional energy production. In fact, displacing oil through alternatives offers the most significant and pressing means to protect America’s private-sector growth engine and global leadership. The environmental advantages of transitioning the transportation sector away from oil should not prevent skeptics of the environmental movement from embracing such a goal. The enormous costs of oil dependence, combined with the absence of a viable free-market remedy, support a policy that leverages diverse, affordable, stable, and domestic energy. Electrification of transportation at scale would accomplish exactly this objective.

Events outside the control of the United States are making oil prices increasingly volatile, damaging household budgets and eroding consumer and business confidence. It’s time to act to protect our national interests and get serious about a real oil security strategy.”

The same panel of business and military leaders also spoke today at the Hudson Institute in Washington D.C. defending energy security as a means to national and economic security, and electrification as a primary means to achieve it. Watch the video on CSPAN here and check out the event details here on the Hudson Institute’s website.

The clear answer is yes, unless leakage rates from natural gas production are significantly higher than current estimates.  The WaPo gets a few things right:

America’s abundant supplies of unconventional gas have the potential to be a rich economic and environmental blessing. New extraction techniques — hydraulic fracturing, or “fracking” — make the country’s vast reserves accessible at low cost. The fact that burning natural gas produces about half the carbon emissions as coal means the fuel could be an attractive, affordable alternative, giving lower-carbon energy options more time to become less expensive.

And it then raises the current issue in the radical enviro community:

They wrote:  “Few areas of American governance have been as incoherent in recent decades as energy policy, which is saying something. But lately, we keep seeing reasons for optimism.

Almost miraculously, the U.S. is both reducing its greenhouse-gas emissions and becoming increasingly energy independent. As Bloomberg News recently reported, the share of U.S. energy demand met by domestic sources increased to 81 percent through the first 10 months of 2011 — the highest level in 20 years — and emissions are expected to decline 12 percent by 2020.”

Bloomberg correctly identifies one of the main drivers in this, along with overall reduced demand and higher efficiency:

A major factor in both trends is increased use of natural gas, a cleaner-burning fossil fuel now being extracted in abundance across the country. Hydraulic fracturing, a new production technology also known as fracking, has helped push prices for the fuel to a decade low, and has created plenty of jobs in the process.

Then Bloomberg points to an end-use incentive program that holds promise of easing our transition to electrified vehicles — that will be increasingly powered by electricity generation fueled by natural gas:

President Barack Obama’s small-scale National Community Deployment Challenge – which would help a dozen or so communities become “real-world laboratories” by funding infrastructure for a variety of alternative-fuel vehicles — is on the right track. The government could conduct similar limited experiments using parts of its own fleet of vehicles.

Some misguided opponents of vehicle electrification decry “cars running on coal.”  The fact is that our natural gas bonanza is reshaping the electricity sector.  The EIA recently reported that coal’s share of monthly power generation in the United States dropped below 40% for the first time since 1978, with the lion’s share of the 60% coming from natural gas and nuclear.  Electricity is increasingly cleaner and shifting our transportation sector to it will transform transportation-related energy into something both clean and secure as well.

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.”