The Future of Foreign Oil

In recent months, US politicians have railed against America's dependence on oil from unsavory regimes in the Middle East. Let's get something straight: the number one exporter of oil to the US is Canada, followed by Saudi Arabia, Mexico, Venezuela, and Nigeria. While the Saudis are a major part of the American energy equation, the Kingdom's absolute monarch has been a consistent regional ally for the US since oil was discovered before the Second World War. Indeed, officials in Washington would be foolish to call King Abdullah anything but a friend.

Nevertheless, such rhetorical maneuverings are hardly surprising. On both sides of the political spectrum, the bogeyman of Iran (which has no hydrocarbon trade with the US) serves to advance a specific agenda. Conservatives would like to ramp up domestic production of oil in the Arctic National Wildlife Refuge (ANWR). Liberals would like to transition energy investment into alternative sources, like wind and solar power. 

Instability in the Middle East certainly affects global energy security, as supply routes often traverse hostile terrain. With respect to oil bound for US, however, the real threat is offshore. Saudi supertankers are primarily concerned with navigating the pirate-soaked chokepoints near the Strait of Hormuz and Bab el-Mandab. From this perspective, the Middle East is not the real problem with American energy policies.

But it soon could be. The International Energy Agency (IEA) warned on Wednesday that falling investment and the credit crisis could lead to an oil supply crunch in the near future. Swooning oil prices (which undercuts the incentive for producers to build new capacity) have exacerbated declining rates of production in 800 of the world's largest oil fields. All across the globe, projects slated for exploration have been delayed, threatening the future health of the oil pipeline.

Alarmingly, the IEA reported that the worst declines were found in developed country fields, such as the North Sea and Alaska. This trend signals a shift in control over the oil market. With spare capacity concentrated in the Persian Gulf and OPEC member-states, the Middle East will become a more important part of the global energy equation. The IEA, which serves the Organization for Economic Coöperation and Development (OECD), reported that, as a result, the West will lose influence over oil flows.

For the moment, the global economic contraction is tempering oil demand, with prices falling below $60 per barrel on Tuesday. Nevertheless, the IEA still predicts increasing commodities pressure from emerging markets in the Middle East and China until 203o. In the process, the OECD, which is a group of 30 high-income countries that embrace democratic and free-market principles, will lose the leverage it has previously enjoyed in the energy market. As the number of hydrocarbon sources shrinks, the West will become increasingly dependent on the Middle East for oil. 

President-elect Barack Obama has already suggested that some of his economic plans would include initiatives for green jobs. For environmental and geostrategic reasons, Mr Obama would do well to shift the American energy market away from oil. Unfortunately, as commodity prices continue to fall in the short term, it will be hard to incentivize cleaner, but more expensive, fuels. No doubt the financial crisis will amplify even marginal differences in cost.

Still, green technology is an investment in America's future. The energy market will not alone address important issues like greenhouse gas emissions, although the size of that market failure is significant. Perhaps it is more helpful to bundle the concept of energy security with climate change on a broader level. That is to say, energy security it not only a function of stability in the Middle East, but also affected by long term shifts in the market. And if the current trend continues, the West may well find itself playing according to someone else's rules.

And, just maybe, American politicians will be justified in their verbal attacks on foreign oil.