Quenching the U.S. thirst for oil

Joseph S. Nye, Project Syndicate

The United States consumes a quarter of the world's oil, compared to 8 percent for China. Even with high Chinese growth expected in coming years, the world will not run out of oil anytime soon. Over a trillion barrels of proven reserves exist, and more is likely to be found. But two-thirds of those proven reserves are in the Persian Gulf, and are thus vulnerable to disruption.

In the past, rising prices had a strong effect on U.S. oil consumption. Since the price spikes of the 1970s, U.S. oil consumption per dollar of GDP has fallen by half, which also reflects the general economic shift away from industrial manufacturing to less energy-intensive production. After all, it requires a lot less energy to create a software program than it does to produce a ton of steel.

In the early 1980's, energy costs accounted for 14 percent of America's economy. Today, they account for 7 percent. Adjusted for inflation, oil prices would have to reach US$80 per barrel (or $3.12 per gallon of gasoline) to reach the real level recorded in March 1981.

According to the U.S. government, if there are no supply disruptions, and the American economy grows at an annual rate of 3 percent, the price of a barrel of oil will decline to $25 (in 2003 dollars) in 2010 and then rise to $30 in 2025. The energy intensiveness of the economy will continue to decline at an average annual rate of 1.6 percent, as efficiency gains and structural shifts offset part of the overall growth in demand. Nonetheless, dependency on oil will grow at an annual rate of 1.5 percent, from 20 million barrels per day in 2003 to 27.9 million in 2025.

The American political system has difficulty in agreeing on a coherent energy policy.

But over the next decade, the politics of energy in the U.S. may gradually change. Some observers detect a new "Geo-Green" coalition of conservative foreign-policy hawks, who worry about America's dependence on Persian Gulf oil, and liberal environmentalists.

In the hawks' view, the real energy problem is not the absence of petroleum reserves, but the fact that they are concentrated in a vulnerable area. The answer is to curb America's thirst for oil rather than increasing imports.

Greens argue that even if energy supplies are abundant, the ability of the environment to support current rates of consumption is limited. The middle of the range of scenarios considered by the Intergovernmental Panel on Climate Change projects that atmospheric CO2 concentrations will reach nearly three times their pre-industrial level in 2100. While the Bush Administration remains skeptical about the science behind such projections, some state and local governments are enacting measures to cut CO2 emissions. More importantly, companies such as General Electric are committing to green goals that go well beyond government regulations.

A recent report by the bipartisan National Commission on Energy Policy exemplifies the new coalition. While President Bush argues that technological advances in hydrogen fuels and fuel cells will curb oil imports in the long run, such measures require major changes in transportation infrastructure that will require decades to complete. The commission suggests policies that could be implemented sooner.

For example, in recent testimony before Congress, James Woolsey, a commission member and former CIA director, urged the use of hybrid gasoline/electric vehicles that could charge their batteries overnight with cheap off-peak electricity; energy efficient ethanol made from cellulose; and a ten-mile-per-gallon increase in fuel-efficiency requirements. He argued that this agenda could cut gasoline consumption significantly in a matter of years rather than decades. It would also avoid the need for dramatic increases in gasoline or carbon taxes, which are broadly accepted in Europe and Japan, but remain the kiss of death for American politicians.

But U.S. government policies are unlikely to change Americans' energy consumption significantly in the next few years. Even if a new administration were to enact new policies after Bush leaves office in 2008, there would still be a lag prior to any effect on actual consumption.

In the next few years, market forces are likely to be more important than government policies in influencing consumption patterns. But over the next decade, the combination of markets and policies could make a big difference. For example, between 1978 and 1987, government regulations produced an improvement of 40 percent in the fuel efficiency of new American-made cars.

In a surprise-free world, the Bush administration is probably right that Americas thirst for oil will grow by 1.5 percent annually over the next two decades. But political disruption in the Persian Gulf or a new terrorist attack in the U.S. would drive up oil prices rapidly, and the political climate in America might also change quickly.

The probability of such events is not negligible. Energy independence may be impossible for a country that consumes a quarter of the world's oil but has only 3 percent of its reserves. Even so, a major decline in America's thirst for oil is not out of the question in the longer term.

The writer is a professor at Harvard and author of Soft Power: The Means of Success in World Politics.