### Energy and National Security

Author: Patrick Clawson, Senior
Fellow

Note:

Conclusions:

About the Conference

Is "Energy Security" A Meaningful Concept?

Phil Sharp, long-time chairman of the House Energy
Subcommittee, vigorously argued that the best energy
security policy is to have lots of people producing and lots
of people distributing the energy that the United States
needs.  This minimizes the risk of a disruption at any one
point in the production/distribution chain.  In this context,
he said that the one enduring energy security question that
requires diplomacy, military presence, and the willingness
to use force is the concentration of oil reserves,
production, and surge capacity in the Middle East.

Backing up Sharp, long-time Amoco vice-president
John Lyman argued that U.S. energy security is best
maintained by ensuring that the United States is, and is
perceived to be, fully supportive of free trade and of the
use of market forces on a global scale.

Vito Stagliano of Resources for the Future argued that
energy security is an empty concept used to perpetuate
bad, self-serving public policy.  He recounted the history
of dramatizing energy issues and using energy as a reason
for dubious public policy, in which category he included
expenditures in excess of $100 billion between 1973 and
1992.  The most important contribution to U.S. energy
security during that period came not from any of the
projects financed by this spending but instead by the de
facto death of OPEC.  The death of OPEC, he argued,
came from the 1981 U.S. government decision to end price
controls and reduce regulations on energy output. The
1981 actions  spurred  the  growth  of spot  and futures  
markets that disrupted the ability of any government,
including those of the OPEC countries, to control oil
prices.

John Riggs, Principal Deputy Assistant Secretary of the
Department of Energy, replied that energy security
reminded him of Mark Twain's comment, "The music of
Wagner is better than it sounds."  That is, while the 1973
and 1980 oil shocks led to some inflated rhetoric and while
energy security has been used as a justification for some
pork barrel projects, the fact is that the oil shocks did
inflict significant economic harm on the United States. 
True, much (although certainly not all) of this harm arose
because of the imposition of price controls, but that should
not be used to minimize the effect that the oil shocks had
on the economy and therefore the potential effects that a
future shock could have.

Mr. Riggs also argued that dependence on energy
imports can reduce U.S. foreign policy options.  As an
example, he asked if the United States would have opted to
bomb Libya in 1986 had world oil markets been tight?  He
suggested that the United States might not have taken such
a strong stance against Libyan terrorism had the United
States been concerned it could provoke another oil price
shock.

Supply Disruptions

The participants agreed that the world oil supply
system has changed since the oil crises of the 1970s and
1980s.  The system now has much greater flexibility,
thanks to a much larger role for market forces.  On the
other hand, Mr.  Riggs cautioned against exaggerating the
role of market forces.  Since Saudi Arabia can produce oil
at two to three dollars per barrel and the world price is
seventeen to eighteen dollars, something other than market
forces seems to be at work.

After noting that regulations and price controls that
encumbered oil markets in the past have now been largely
eliminated, Hill Huntington of Stanford University's
Energy Modelling Forum asked, how well and how quickly
would markets work to adjust to a supply shock, and if
they did not work quickly enough, would politicians step
in with price controls or other such measures.  He argued
that macroeconomic models show that a doubling of oil
prices would cut U.S. GDP by about 5 percent after a
period of one and a half years.  He argued that in the face
of such a considerable price, the U.S. government was
likely to adopt offsetting policies.

There was general support for the idea of buffer stocks
to dampen the impact of a sudden supply disruption. 
However, others pointed out that now that energy is
allocated more by market mechanisms, a supply disruption
was likely to be felt as a price spike, and that there would
always be a strong lobby that argued that such a price
spike was the market's way of forcing the economy to
adjust to a supply disruption.  In other words, the devotees
of the free market would oppose use of a buffer stock in
the event of a supply disruption, as seen in the wake of the
Iraqi invasion of Kuwait when there was strong opposition
to use of the SPR.

That led some speakers to argue that the SPR may not
be worth the investment because it is unlikely to be
actually used, while others argued that the SPR should be
used to dampen price spikes.  Whatever the arguments for
or against the SPR, Sharp warned that the firm political
reality was that Congress was unwilling to approve, and
the voters were unwilling to support, any increase in
taxation on energy no matter how minor to fund the SPR.

When the discussion turned to the question of what
might cause a supply disruption sufficiently large to disturb
the U.S. economy, the general sense was that the
disruption would have to be very large (one speaker spoke
about 3 million barrels per day for many months) and that
the only realistic scenario is political turmoil in the Persian
Gulf.

Tautness of World Oil Markets

The participants differed considerably in their
evaluation of whether world oil markets are likely to
become more taut or to remain slack, with ample unused
production capacity. Guy Caruso, the director for non-
member countries (i.e., OPEC) of the International Energy
Agency, reviewed the IEA's forecast that world oil
demand will grow each year in the 1990s by about one
million barrels per day, despite environmental policies and
techno-logical improvements that will shift the fuel mix
away from oil.  The IEA forecasts that the increased oil
demand will be met overwhelmingly by OPEC oil, as
production in the industrial nations declines.  At the same
time, international trade in energy will diversify as more
natural gas and electricity is exported.

The major issue about energy demand considered at
the conference was how rapidly will oil demand increase
in the fast-growing East Asian economies? Milton Russell
argued that Chinese energy demand would rise sharply, but
that most of that demand would be met by domestically
produced coal, with some role for hydro- and nuclear
power.  He presented evidence for his thesis that China
was going to remain dependent on coal, which in 1992
provided 74 percent of China's primary energy production.
The increasing energy demand would be primarily for
electricity, easily produced by coal, and for transport, in
which China is heavily reliant on coal-fired or electric
railroads (which indeed make good sense under Chinese
conditions). He summed up by saying that China would
remain a bit player on international energy markets. 
Indeed, he was much more concerned about the
environmental impact of the massive greenhouse gas
emissions China will be producing.

Fereidoun Fesharaki, director of the resources program
at the East-West Center, took a different tack towards East
Asia's energy future. He explained that the region's energy
demand is rising quickly due to economic growth, and that
oil is a particularly cheap way to satisfy that demand. 
That means rising oil energy imports, especially from the
Middle East.  Today, about 36 percent of the region's oil
comes from the Persian Gulf; in 2000, about 60 percent
will. That will produce a significantly altered landscape in
terms of trade relationships.

With regard to U.S. energy demand, Gary Moore of
the Department of Energy's Office for Conservation and
Renewables argued that energy efficiency is an often
underemphasized part of the energy equation.  Much of the
apparent gain in U.S. energy efficiency since 1973 has
come from a shift away from manufacturing and especially
energy-intensive industry, which suggests that there is still
ample room for future gains.

Turning to oil supply conditions, Vladimir Likhachev,
deputy director of the Russian Academy of Sciences
Energy Research Institute, argued that Russia is not likely
to return to its 1990 oil output until 2010, with production
continuing to fall until at least 1997 if not 2000.

On the other hand, Eliyahu Kanovksy of Bar Ilan and
Yeshiva Universities, argued that the difficult economic
circumstances in which Saudi Arabia finds itself would
lead that country to seek to increase its oil output as much
as it can, in light of market conditions.  But the same
economic difficulties that create the strong need for
revenue could also contribute to political turmoil that
could, in an extreme case, lead to supply disruptions.

Nuclear Power as a National Security Issue

Robert Eynon of the Department of Energy's Energy
Information Administration presented a detailed analysis of
why nuclear power would be a part of the United States
and world energy mix for the foreseeable future.  In the
United States, much of the growth in electricity demand
through 2000 would be met without building baseload
plants, e.g., from renovating existing plants and from non-
utility power producers.  And even after 2000, the bulk of
the new plants built would be fired by hydrocarbons, with
natural gas increasing its share and coal remaining the
main fuel.  So the nuclear share in electricity output would
decline from its present 20 percent, but not disappear. 
Worldwide, the aggressive nuclear programs in Asia and
France would offset retirement of nuclear plants elsewhere
in Western Europe.  Global nuclear power capacity is
forecast to grow from 330 gigawatts now to 340 gigawatts
in 2010.

Thomas Cochran of the Natural Resources Defense
Council discussed the proliferation concerns that nuclear
power presents. The unanimous  opinion of the arms
control and weapons design communities is that the main
constraint on a country's ability to produce nuclear
weapons is the availability of fissile material, that is,
plutonium or highly enriched uranium. Plutonium is a by-
product of nuclear power production. Four countries the
United Kingdom, France, Russia, and Japan have made
heavy commitments to recycling and reprocessing
plutonium from nuclear power reactors, to reuse as reactor
fuel. Unfortunately, even a small amount of plutonium
from a civilian reactor is sufficient to make a nuclear
weapon.  The existing international control regime over
nuclear material is not adequate to monitor plutonium
flows, much less to prevent diversion to weapons use.
Cochran argued for an international agreement to forego
production, separation, and isotropic enrichment of
weapons-usable nuclear material.

Implications for the U.S. Military

There is broad consensus that the United States must
maintain a military readiness to defend oil supplies if
needed. The need for a military component to energy
security is made more manifest by the concentration of oil
resources in the politically volatile Persian Gulf.  The
market forces which the U.S. government  is encouraging
should make the United States and world economy more dependent of
Persian Gulf oil, which is the cheapest source of energy
available. That concentration of energy production in one
area makes the world economy more vulnerable to supply
disruptions, including by a dictator eager to create a
temporary shortage that drives up prices or encourages
others to turn a blind eye to his aggressive plans.

An energy issue of great importance from a security
point of view is the extent to which China would become
a large-scale oil importer. No consensus on this issue was
evident at the conference.  To the extent that China comes
to rely on Persian Gulf oil, Beijing might feel more of a
need to develop a blue-sea navy capable of defending its
sea lanes of communication, and China might become
interested in a broad alliance (including security as well as
energy) with some of the oil-rich states not friendly to the
United States.

Most of the issues about energy security concern
economic policy. Economists, by their professional
orientation, prefer to use markets to provide a regular
supply at an economically appropriate price.  The
increasing reliance on market forces for oil has served
United States interests well by undermining OPEC's ability
to keep oil prices high.  Given the established track record
of success that comes from relying on the markets, the
U.S. government is likely  to use  markets  as the 
foundation  of U.S.  energy security policy.

But in the event of a large supply disruption, markets
might not work quickly enough and well enough to satisfy
the U.S. public.  Economists may argue that buffer funds
are the best insurance against large disruptions, but the
experience of the last decade is that the U.S. public is not
prepared to pay higher gas taxes to fund buffer stocks.

Recommendations



- The U.S. government needs to pay close attention to long-term prospects for
Chinese oil imports.
- The United States needs to have a robust capability to defend Persian Gulf oil
from any threat.
- Clearer agreement is needed on when and how to use the Strategic
Petroleum Reserve.This digest has been prepared by Dr. Patrick  Clawson, an
INSS Senior Fellow.  He can be contacted at (202) 287-
9210 ext 547; by fax at (202) 287-9239; or on the Internet:
[email protected].