Economy, not national security justifies ANWR drilling

Published January 1, 2002

“Energy security” is becoming the by-word for politicians anxious to do something on the home front to support the war on terrorism.

Apparently, the belief that reliance upon foreign oil is a dangerous Achilles heel during wartime–particularly during wartime in the Middle East–is hardwired into our collective DNA. Accordingly, Americans are anxious to sacrifice something–gas-guzzling cars, Arctic caribou, whatever–to become less dependent on foreign oil.

Don’t bother. Oil imports aren’t a problem and energy independence is no solution.

The market for oil is global

First, even if every drop of oil we consumed came from Oklahoma, Texas, and Alaska, a cutback in OPEC production would raise domestic oil prices as high as if all our oil came from Saudi Arabia. That’s because there are no regional markets for oil–only global markets–and regional prices invariably rise to the world price.

In 1979, for instance, Great Britain was “energy independent”–all the crude oil it consumed came from the North Sea. But the oil price spike of 1979 hit Great Britain as hard as it hit Japan, a country dependent upon imports for its oil. No country can protect itself off from the influence of the world market.

Second, once oil is in the tanker or refinery, there is no controlling its destination. During the 1973 embargo, for instance, oil that was exported to Europe was resold to the United States or ended up displacing non-OPEC oil diverted to the U.S. market. It was no more possible for OPEC to keep its oil out of U.S. ports than it was for the United States to keep its grain out of Soviet silos several years later.

Third, reliance on foreign oil imports does not affect our military capabilities. Defense Department officials have testified that the military could fight two major regional wars the size of “Operation Desert Storm” nearly simultaneously while using only one-eighth of America’s current domestic oil production.

Fourth, “energy independence”–even if achievable–would be harmful in that higher prices would be paid for energy than is necessary. After all, the United States imports Persian Gulf oil for a reason; it’s significantly less expensive than domestic petroleum or non-fossil fuel alternatives. Artificially limiting our access to foreign oil is to artificially limit our access to cheap oil–hardly a wise policy in the midst of a recession.

That’s not to say we shouldn’t increase domestic oil production or conserve energy. It’s just that those policies cannot be justified on the grounds of “energy security.”

So why drill in ANWR?

The case for drilling in ANWR, for example, is not that it will immunize our economy from OPEC. It can’t. The real case for drilling in ANWR is twofold.

First, oil exploration is the most productive use of some of the land within that region. Second, ANWR might hold so much crude oil that it could reduce OPEC’s share of the market, reducing the cartel’s leverage over world prices.

It’s doubtful whether drilling in ANWR would do much to bring down oil prices. Industry’s best estimate is that ANWR could produce about 1 million barrels of oil per day at its peak. That’s a 1.25 percent increase in global production that, all things being equal, would reduce world oil prices from $20 per barrel to about $18. That’s not inconsequential. But it’s not a cartel-breaker either.

On the other hand, ANWR may well hold about 5 billion barrels of economically recoverable reserves (a reasonable estimate given what we know). That oil would have a discounted value of about $30 billion. That’s a lot of wealth we could create for an economy nosing into a recession, and a lot of jobs we can create in the process of oil recovery.

Oil an unlikely weapon

Regardless, we likely won’t have to worry about politically inspired attempts to use the “oil weapon” against the United States in the war against terrorism. OPEC nations are first and foremost profit maximizers. Never once have they allowed foreign policy considerations to get in the way of the bottom line, self-serving declarations to the contrary notwithstanding.

The October 1973 embargo is a good case in point. The announced 5 percent monthly production cutbacks were canceled within a month. By December 25, OPEC had agreed to a 10 percent increase in January production. The promise to tie oil exports to Israeli withdrawal from Palestine had a shelf life of only two months.

Economics, not politics, explains the introduction and termination of that embargo. An increasing buildup of oil inventories throughout 1973 signaled to OPEC that production cutbacks were warranted. The tightening market of November and December signaled that greater profits could be had by expanding production. OPEC’s cover story was an attempt to win a few foreign policy points for actions it would have taken anyway. America’s got a lot of things to worry about right now. But reliance upon foreign oil imports isn’t one of them.

Jerry Taylor is director of natural resource studies at the Cato Institute.