Joel Darmstadter
In the Presidential campaign, mercifully grinding to a close, you will have heard much
about energy security and energy independence – with much of the rhetoric misguidedly
conflating the two: even zero oil imports – whether from the Persian Gulf or in total – do
not spare us repercussions from events outside our borders. There’s a saying which has
by now morphed into a cliché but remains valid: An oil disruption anywhere – and
whatever its genesis – means price increases everywhere. As long as the US remains a
substantial oil consumer – not just importer – those threats endure.
The other cliché which, for good reason, we didn’t hear much about during the campaign
was a reminder that there’s no free lunch. Something like a significant gasoline tax hike,
oil floor price, or import tariff could help to wean us off oil by spurring conservation and
stimulating alternative energy development. But even in an atmosphere not stressed by
financial turmoil, these ideas – with their perceived pocket-book implications – haven’t
resonated with the public.
Joel Darmstadter is Senior Fellow at Resources for the Future (RFF). These remarks
were prepared for presentation at RFF Symposium “Energy Policy Challenges: Is the
Past Prologue?” October 29, 2008. For audio access, go to:
I referred a moment ago to widespread repercussions set in motion by seemingly
localized events somewhere in the world. Such occurrences – unexpectedly sharp
demand growth, a significant refinery outage, muscle-flexing by OPEC, purposeful
disruption or violence impeding oil flows – can all translate into price shocks and
disarray in oil markets.
But there are energy-related political factors which, though amorphous, less direct, and
not necessarily reflected in the marketplace, deserve our concern as well. So, a few
thoughts on that political dimension, beginning – given your indulgence – with a 30second digression.
It may not be charitable to evoke the name of yet one more failed securities firm. But
some of you may recall a TV commercial of some 15 or so years ago which had Jimmy
Connors remind us that, “when E.F. Hutton talks, people listen.”
Well, when two respected national figures – one, a distinguished scholar and former
Secretary of State; the other, a prominent economist and former chair of the President’s
Council of Economic Advisers -- talk, people listen, or ought to.
I have in mind last month’s Washington Post op-ed, in which Henry Kissinger and
Martin Feldstein combined their considerable heft in pondering the worrisome and
unsettling condition of world oil markets. It’s not opportune here to get into their ideas
about constructing a countervailing multi-country strategy to face down OPEC. (That
topic deserves a whole day’s discussion on it own.) No, what I’d like to tease out of the
Kissinger-Feldstein collaboration – maybe taking a big leap in doing so – is something
else. It is that their co-authored column nudges us into recognizing the importance of a
perspective on oil, and energy more generally, that capitalizes on the complementary and
mutually-reinforcing insights provided by expertise both in economic analysis as well as
in international relations.
We may, that is, have reached a point where consideration of geopolitical factors, on the
one hand, and analysis of markets, on the other, are more and more flip sides of the same
coin. Focusing on one aspect without the other might be a seriously blindsighted
approach to strategic thinking.
Now, whether it makes any sense to try and embed all this within some grand new
conceptual paradigm, I have no clue. I’ll just stick to four illustrative straws in the wind
that give some credence to my argument. Most of these will be familiar to you.
Sudan confers favorable oil-exploration rights to China. While that may crowd
out American companies from bidding for those rights, the long-term oil-market
consequences needn’t be serious. Not so for the foreign-policy implications if
that preferred treatment buys off, say, China’s passive stance in UN Security
Council consideration of Darfur.
Russia’s intimidating posture vis-à-vis gas exports to Ukraine a few years ago, an
apparent determination to ensure territorial primacy over pipelines to the West,
and unpredictability in treatment of foreign investors – these things convey a
strong sense that energy is a legitimate tool in settling political grievances and
signal a willingness to make it part of the country’s foreign policy; EU importers
of Russian natural gas, take particular note. For, while in a fungible worldwide
oil market, rerouting of oil shipments can mute the effect of blocked flows from
one or another place, disrupted gas shipments aren’t as easily dealt with.. It will
be some years before an international network of liquefied natural gas (LNG)
trade will facilitate such compensatory measures.
Using the oil weapon to transform the political landscape within Venezuela and
forge ideological alliances elsewhere may make Hugo Chavez a genuine political
menace in the hemisphere, though it may also depict a leader voicing positions
more delusional than realistic. Who knows? At the very least, we’re having to
share a continent with someone who has shown a demonstrated ability to be a
nontrivial, troublesome irritant. Be aware not only of Venezuela’s substantial
conventional oil reserves but, prospectively, exploitation of its larger Orinoco tar
belt deposits.
Then, as my final example, there’s the nuclear dilemma which, depending on the
state of play in our international relationships, can tilt toward a hard line or soft
line. As against our conflict with Iran, we’re on the verge of finalizing our
nuclear-cooperation agreement with India which, while defended on grounds of a
friendly country’s civilian nuclear power requirements, conveniently overlooks its
refusal to sign the Nuclear Non-Proliferation Treaty as well as its unwillingness to
subject all its nuclear military applications to U.S. oversight. A “monumentally”
flawed deal, The Economist called it – not without justification.
Now, having cited cases having arguable national security implications for the U.S., let
me also caution against national security being employed as the bugbear to repudiate
perfectly rational commercial initiatives. Several years ago, Congress effectively, and for
no discernible security threat, nixed the sale of some Union Oil assets to China’s offshore
oil company. It is hard to see how China’s equity interest in some Western oil properties
would – once again noting the fungibility within an interconnected world oil market –
adversely affect U.S. strategic interests.
But let me recap the main thrust of my presentation. And that is: no matter how
resourceful we are in seeing to our domestic energy needs, and even with an international
oil market reverting to some degree of normalcy, we’d better keep an eye on those events
and situations where energy-rooted turmoil can genuinely impact our – and other
countries’ – national, and not just energy, security.