Environmentalists, politicians and journalists warn of the dire consequences of US dependence on foreign oil. The United States is accused of running a foreign policy based entirely on petro-centric interests and of fighting wars solely for the purpose of ensuring the free flow of oil at market prices. The US is criticized for its dependence on foreign oil, especially Mideast oil and for tolerating tyrants and despots in the quest for cheap affordable oil.So what is the truth about the US and its nasty little oil habit? In order to have a correct view of America’s oil interests, we must first understand US National Security Interests.
UNDERSTANDING U.S. NATIONAL SECURITY POLICY
1. Oil is the most critical natural resource of the global capitalist system and the stability of oil exporting regions is a critical US national security interest. This is why China, France, Russia, Mexico and most other industrial nations normally critical of the US are silent with regard to global oil politics.2. US national security policy is based on the concept of stability, not the free flow of oil at market prices. However
a. Oil prices are very sensitive to instability.
b. Capitalism thrives on stability. Stability encourages investment, creates markets and enhances trade.
c. Stability normalizes the availability of essential raw materials so companies and investors will risk capital to build, create, sell, profit and eventually pay taxes.
Therefore, as a nation that lives and breathes economic supremacy via the capitalist model, oil is the lifeblood and stability makes it available in a constant and affordable market.Does the US get most of its oil from the Mideast? No, we actually get most of our foreign oil from Mexico, Canada, Venezuela and then Saudi Arabia. Therefore much of our supply risk exists in the Western Hemisphere. However, since oil is a commodity its price is set in the world market independent of location. So lets try to understand this.
UNDERSTANDING THE WORLD OIL MARKET1. Oil is a commodity of varying qualities; therefore the source that supplies the highest quality (a characteristic that makes it easier to crack and turn into high quality distillates) will command the highest prices (we capitalists love that). Oil supplies of equal quality are priced based on several simple concepts – first, supply and demand (over production lowers prices); second, OPEC; and third risk (i.e. stability). 2. Oil is in huge supply, however; high quality crude oil that is easy to extract and deliver is not. Middle East oil is very high quality (sweet), they have lots of it and it is easy to extract and deliver. In fact many wells in Iraq, Saudi Arabia and Kuwait do not require pumps the oil shoots out at high pressure. Wells in Texas and the North Sea require expensive methods (water injection) or infrastructure (oil well platforms floating in rough seas) to get at the sweet crude. Oil fields in the former Soviet Republics lie on the wrong side of major mountain ranges, complicating delivery.3. The US produces huge amounts of oil and could produce more except for one interesting fact – it is cheaper to buy oil outside the US than to exploit all of our more difficult to extract domestic sources.4. OPEC (The Organization of Oil Producing and Exporting Countries) is a cartel of twelve nations – Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia the United Arab Emirates and Venezuela. Only six of which are located in the Middle East. Those five are: Iran, Iraq, Kuwait, Qatar, Saudi Arabia and United Arab Emirates.5. OPEC was founded by Venezuela (I didnt know that!) as a way to calm the volatile market price fluctuations of oil while simultaneously ensuring a profit for its members. The market sets oil prices; prices are moved by fluctuations in supply, demand and perceptions of risk.6. OPEC tries to leverage supply to control the market price of oil by setting production quotas for its members. Many times OPEC members do not follow the quotas that are set.7. US national security policy works to increase regional stability, this mitigates oil supply risk. Watch for my next blog where we will examine US OIL DEPENDENCE. Focker OUT!