Over a Barrel: What the Iraqi Conflict Means to Oil
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ELIZABETH FARNSWORTH: Now for our discussion we turn to John Lichtblau, chairman of the Petroleum Industry Research Foundation, an industry-funded group that attracts domestic and international petroleum economics. Jessica Mathews is senior fellow at the Council on Foreign Relations, and Chris Flavin, senior vice president of Research at the World Watch Institute and Environmental Research Group. Thank you all for being with us. And starting with you, Mr. Lichtblau, just how dependent are we on Middle East oil?
JOHN LICHTBLAU, Petroleum Research Foundation: (New York) Well, not very dependent. About less than 20 percent of our imports come from the Middle East. And since only about half of our oil is imported, our dependency on Middle East oil, overall, is about 8 or 9 percent, which is not very high, but it’s quite irrelevant how high our dependence is on Middle East oil.
It’s the total oil import dependency that counts because there’s only one world oil market, and whether we buy oil from the Middle East or from South America or from Africa, if there’s any problem in any of these supply areas, it affects the price everywhere. So if we were to shift our oil imports more even than we’ve done from the Middle East to other areas, it would in no way make our oil supplies more secure.
ELIZABETH FARNSWORTH: Mr. Flavin, are we countering, as some people say, Saddam Hussein because of oil?
CHRIS FLAVIN, Worldwatch Institute: Saddam Hussein has us over a barrel in the Middle East, and he knows it, and we know it, and that’s why we have such an extraordinary military commitment to that region.
I mean, as John indicated, it’s really the world oil market as a whole we need to be concerned about. Japan gets about 2/3 of its oil from the Middle East. Our allies in Europe get a much larger share of their oil from the Middle East. And so we as a group of industrialized countries, the whole global economy really now is terribly dependent on the Middle East. And now–
ELIZABETH FARNSWORTH: Let me just interrupt you here one minute. So the fact that we get less than 20 percent from the Middle East does not mean that we’re not dependent?
MR. FLAVIN: The key figure is that 2/3 of the world’s proven oil reserves are in the Middle East. We’re all dependent there, and because we have now a rapidly growing oil demand in China and other Asian countries, we’re really looking at a rather dangerous situation as the next decade unfolds.
ELIZABETH FARNSWORTH: So you do think oil was the primary reason behind what happened this week in Iraq?
MR. FLAVIN: It is.
ELIZABETH FARNSWORTH: What do you think?
JESSICA MATHEWS, Council on Foreign Relations: Well–
ELIZABETH FARNSWORTH Or, let’s put it this way. Does oil explain U.S. policy in the Middle East in your view?
MS. MATHEWS: No. I mean, you know, if the Middle East grew bananas, then it would be a different thing, and we wouldn’t have the strategic interest that we have there, but over the years we’ve acquired a set of strategic interests that are much broader. And we have a history now of Saddam Hussein that has now–that is about more than oil. It’s about our position in the world, and it’s about our values versus his, and our word versus his.
We have a relationship with Israel. We have long-term concerns about Iran. Now they’re related to oil in that that’s where the wealth comes from. But they are–if you reverse it and say if we only needed to import 2 percent of our oil or 0 percent almost, could we leave? The answer is no.
ELIZABETH FARNSWORTH: What do you think, Mr. Lichtblau?
MR. LICHTBLAU: I think this is correct. It’s not our import of oil that matters. It’s the fact that, as has been said many times, 2/3 of the world’s oil reserves are located there, and that is irreversible and permanent. About 50 percent of world oil exports come from the Middle East to, to all these companies, Europe, Latin–South Asia, the U.S. and so on, and we just have to defend this area because it contains for whatever reason this kind of volume of oil.
And the reserves are just totally outside of the scope of any other reserve, but, you know, this is a two-way street. The Middle East must sell oil. There’s no way they can earn any money except by exporting their oil, and they’re very eager to export oil. Some of these companies have a substantial spare capacity. It is not that, that they are dominating and telling us what to do. In fact, for quite a few years now, the market has been relatively soft.
And if there’s been any use of oil as a political weapon, it has been by the consuming countries, primarily by the United States. We have imposed sanctions on some major oil exporters like Libya and Iran, and are now trying to get other countries, other importing countries, to follow this policy by not investing in these countries.
So the oil policy has been turned around in that the consumers are, particularly United States, are taking certain actions which may not be very wise, because it lowers the diversification of supply sources perhaps. Certainly all of the European countries are not very happy about our policy.
ELIZABETH FARNSWORTH: Let me ask you, Jessica Mathews, something about going back to this relationship between U.S. policy and oil. If the U.S. were less dependent on foreign sources of oil, which is what some argue, would we, in your view, change Mid East policies?
MS. MATHEWS: I doubt it very much.
ELIZABETH FARNSWORTH: So even if we got a much smaller percentage of our oil?
MS. MATHEWS: All right. I mean, we are constrained by not just our dependence but as Sec. Perry really emphasized in the piece that you led with, it’s not–it’s not our dependence; it’s our friends, our allies, the rest of the world’s dependence, that we are there in our role as global superpower, protecting. And so–and it’s really important to keep in mind this figure about global reserves.
There is this giant pool of oil that is a geological reality about which we can do nothing. So we–we have to adjust our world view to live with that. I think we’re still living with a very unfortunate hangover from this phrase of President Nixon’s, Project Independence. You know, it was a great phrase. It clearly had lasting memories.
ELIZABETH FARNSWORTH: Talking about making the U.S. independent and not dependent on foreign sources.
MS. MATHEWS: But, you know, it didn’t ever make sense. Why should we be independent? It didn’t make sense at the beginning.
ELIZABETH FARNSWORTH: Why shouldn’t we, just briefly? And then I’ll go to you, Mr. Flavin.
MS. MATHEWS: We have an inter-dependent world economy, and we don’t need to be independent. In fact, it would be crazy for us to dependent on very expensive oil and, and not using any of the Middle East extremely cheap oil because not only is it the biggest reserve, as John said, it’s also by far the cheapest, so–
ELIZABETH FARNSWORTH: Okay. Mr. Flavin.
MR. FLAVIN: I certainly agree that full energy independence is not a feasible goal at this point, but I think the level of dependence makes a big difference. If you look at the projections that are now being made by various international energy authorities and the U.S. Government, it’s that the Middle Eastern oil production will have to roughly double in the next 20 years to meet the exploding demand largely on the part of Asian countries.
It seems to me that that would be a very dangerous situation. The Saudis may want to help us. The Saudis may not always be in control of their own system, their own country. And there’s a lot of instability in all of those Gulf Kingdoms, and it seems to me that the world as a whole would be far better off if we were able to, to stop this great growth in oil consumption that’s now projected by developing natural gas more effectively in many countries of the world by using oil more efficiently by developing more efficient automobiles.
ELIZABETH FARNSWORTH: That has happened in this country, hasn’t it?
MR. FLAVIN: It has. It happened–
ELIZABETH FARNSWORTH: Our oil use has gone up very little in the past. I was surprised at how little.
MR. FLAVIN: Unfortunately, it’s begun to increase quite rapidly in the last five years, because of low prices, because our automobiles are getting less efficient actually. So there’s a lot that we can and I think need to do to wean the whole world off of this very high level oil dependence, or we’re going to be back in the kind of dangerous situation we were in, in the late 1970′s in the next decade or so.
MR. LICHTBLAU: This was a very brief situation, and as I said before, this was a one-time thing, and this is not likely to repeat itself for many reasons.
ELIZABETH FARNSWORTH: What are you referring to here?
MR. LICHTBLAU: The situation of the 1970′s when OPEC sort of controlled the world briefly. They have learned a lesson, that when you raise prices that much, demand starts declining. We had a very, very rapid decline. Our dependency on imports dropped from about–nearly 50 percent in 1977 to about 25 percent in 1985 because prices were in the 28, 30 dollar range. And a lot of oil came on from other areas, and oil demand started to decline. So I think these countries have learned that they cannot ask any price they want to because the economy does work. Supply and demand–prices work.
MR. FLAVIN: Here’s the question. What happens if the Saudi regime suddenly collapses for political reasons? The leaders may want to produce a lot of oil but you could have the same thing happen that happened in Iran in the late 70′s. This is not a stable, democratic part of the world.
MR. LICHTBLAU: But in Iran in the late 70′s, uh, oil production continued.
ELIZABETH FARNSWORTH: All right.
MR. LICHTBLAU: Except for a very brief period.
MS. MATHEWS: I think it’s very important to remember that despite their oil wealth, these countries are really suffering economically already. Their per capita incomes–
MR. FLAVIN: Yes.
MS. MATHEWS: –have been declining for more than a decade, and we think of them as being so rich but they’re not. And in fact, oil wealth, except for very few countries, has been so poorly used that it’s really been almost a curse.
MR. LICHTBLAU: So they need the money.
MS. MATHEWS: These governments need to–and these people need the money and they need to pump that oil.
ELIZABETH FARNSWORTH: But what about Mr. Flavin’s argument that the world must become less dependent on petroleum?
MS. MATHEWS: I think there are half a dozen powerful, powerful reasons in economic and environmental to increase global energy efficiency. But getting out of the Middle East is not one of them, I think, or getting us out of the Middle East.
MR. FLAVIN: Right.
MS. MATHEWS: I mean, if you improve energy efficiency, you–first of all you lower pollution. That means you lower clean-up costs, you lower health care costs, you raise worker productivity because you have fewer sick days.
You improve profitability if you lower energy needs for industry, for households, for government, that means you are–again, you’re improving productivity; you’re improving profitability, you’re creating jobs, you’re boosting growth, you’re lowering the oil trade deficit, uh, you are–if the U.S. in particular does it, over time you are positioning us to capture a larger share of what is inevitably a growing global market for energy services, and finally and importantly, I think, you begin to be able to lower greenhouse gas emissions. So you know, there is a very large number of reasons to do this and why we are–we are really horribly behind.
MR. LICHTBLAU: But this should go–
ELIZABETH FARNSWORTH: I’m sorry, Mr. Lichtblau, we’re out of time, and we have to end it there. But thank you all very much for being with us.