Will America be ready when oil supply peaks?
By Steve A. Yetiv
BUDGET DEFICITS explode. Inflation rules. Stock markets plunge. Houses foreclose. Great powers clash. This may be our future if we do not take more serious steps on energy than those offered in the energy bill that President Bush recently signed.
With oil prices hitting all-time highs and war raging in Iraq, serious concerns about "peak oil" slowly have appeared on the public radar screen. Simply put, peak oil refers to a key turning point when global oil production peaks and then begins to decline, signaling a future of dwindling supplies.
Analysts predict that the peak will occur between 2006 and 2011, that global oil reserves are far more limited than believed, partly because leading producers such as Saudi Arabia overestimate or obfuscate their oil reserves, and that we are headed for a massive energy crunch.
Such concerns may be exaggerated, but we still need to plan ahead more zealously. This is because whenever peak oil does arrive, it will likely produce three effects for which we are not prepared.
First, in the absence of serious alternatives to oil, oil prices will spike possibly to more than $100 dollars a barrel in anticipation that demand for oil will slowly outrun supply. That could trigger a global recession or worse. Even if rising prices spur research into affordable alternatives, it will take many years, perhaps decades, for the global economy to shift to them because oil penetrates all walks of life. We can't switch away from it overnight. Even if peak oil comes in 2020 or 2025, we are still behind in the race.
Second, the Middle East will become increasingly important as a supplier, making the world more vulnerable to its vagaries. It now accounts for about one-third of global oil production. Yet it holds two-thirds of the world's oil reserves. They will be the last left as oil dries up around the world.
Third, fears about peak oil may trigger conflicts among great powers. China-controlled CNOOC Ltd. withdrew its bid for the American oil company Unocal, but this case is a harbinger for the future. It underscores China's obsessive concern about energy and Washington's growing concern about China. Imagine how tense Sino-American relations could become against the backdrop of dwindling oil supplies.
Such conflicts will not be limited to great powers. Osama bin Laden repeatedly and mistakenly has claimed that Americans have been stealing Arab oil. Oil is seen as an Arab resource by millions of Muslims who view America's invasion of Iraq as an oil grab. Fears about diminishing supplies could push the United States and other great powers to secure oil supplies in ways that would ignite a broader conflict with the Muslim world.
Studies show that we can take three actions of particular importance to try to avoid this future.
First, we must view the current energy plan as a starting point rather than as a finished product. It makes some advances but fails to address a key fact: 70 percent of oil is used in the transportation sector. To deal with that reality, we will need to increase taxes on oil consumption. A study by the Organization for Economic Cooperation and Development has suggested that doing so would reduce oil use and carbon emissions by more than 10 percent.
We must also pass rigorous fuel standards, which the current energy bill fails to do. A recent report from the Environmental Protection Agency said cars and trucks sold today are much less fuel-efficient than they were in the late 1980s.
The energy bill makes available $14.6 billion in subsidies and tax credits, but $9.2 billion goes toward electricity generation, where only 3 percent of oil is used, and another $2.6 billion goes to oil and gas companies. Very little goes to decreasing oil consumption in transportation or creating and employing alternative energies.
Second, we must publicize the possibility that the United States and the world economy are woefully unprepared for peak oil. This is vital because Americans, in particular, still see oil as an entitlement. America uses 25 percent of the world's energy and has only 5 percent of its population.
Third, we need to establish a set of norms that can help great powers - and civilizations, for that matter - avoid conflicts over oil. Otherwise, we will increasingly see oil as a zero-sum game as we anticipate dwindling supplies. The United States and China do have a bilateral working group on energy at lower governmental levels, but it deserves higher-level attention and needs to be expanded to include other countries.
Technology may still save us from our oil addiction. But just as we buy insurance to protect our lives, we should have an insurance policy to protect the energy security of future generations.
Steve A. Yetiv, professor of political science and international studies at Old Dominion University in Virginia, is the author of Explaining Foreign Policy.