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America’s New Oil Weapon

by Arthur Herman

For our good and the world’s, we should export our crude

On July 30, in Galveston, Texas, history was made, although few Americans noticed.

The oil tanker BW Zambesi docked at a terminal there and took on a load of 400,000 barrels of a kind of ultra-light crude oil known as condensate, then proceeded to the South Korean oil refiner Caltex.

The event marked the first time in nearly 40 years that the United States had sold its own crude oil. A ban on crude sales has been in place since 1975 (the Obama administration made a rare exception in this case, for this ultra-light oil). It’s a lasting legacy of what has become an outdated energy policy, and of the outdated foreign policy that went with it.

Clausewitz famously defined war as politics by other means. Today the other means of politics also include energy, and particularly oil. Thanks to our current booming domestic energy production, the United States at last has an oil weapon in the arsenal of “soft power” that it can use to advance both its own interests and the good of the world.

This is ironic, because over the past 40 years oil has been associated with harmful purposes. Leading oil-exporting countries such as Russia, Iran, Saudi Arabia, Moammar Qaddafi’s Libya, Saddam Hussein’s Iraq, and Hugo Chávez’s Venezuela have used their version of the oil weapon to prop up authoritarian and despotic regimes around the world, including their own. Some have used their dominance of the global oil market to finance terrorist groups such as al-Qaeda, Hamas and Hezbollah, and (in Qatar’s case) the Islamic State — while Russia’s burgeoning oil and gas revenues have underwritten Vladimir Putin’s military adventurism in Ukraine and Eastern Europe.

The Middle East powers of OPEC have also been adept at using oil to blackmail the West into doing their bidding on matters of foreign policy. Arab producers, for example, have consistently used the threat of an oil-price hike like the one that crippled the world economy in 1973 to coerce Europe into tolerating Arab hostility to Israel, just as Putin now uses his control of Europe’s flow of natural gas to tame opposition to his aggression in Ukraine.

For the sake of protecting world oil supplies, the United States has intervened in the bitter internecine conflicts among Middle East oil producers. Ronald Reagan had to use the U.S. Navy to escort oil tankers through the Persian Gulf during the Iran–Iraq War, in the course of which the USS Vincennes shot down an Iranian airliner by mistake, killing all 290 passengers and crew. Likewise, George H. W. Bush and NATO had to intervene massively to save oil-rich Kuwait from the clutches of Saddam Hussein in the 1991 Gulf War, while Bill Clinton had to acquiesce in the increasingly corrupt U.N. oil-for-food program that kept Iraqi oil flowing and Hussein’s vicious regime funded.

The Islamic State’s use of captured Iraqi oil wells to pay for its murderous atrocities is just the latest and most blatant example of the oil-into-terrorism dynamic that’s ruled the Middle East for decades — and all, ironically, under the protective umbrella of American arms. Just keeping the region’s shipping lanes, including the Strait of Hormuz, open to tanker traffic costs the Pentagon on average $50 billion a year — a service that earns us the undying enmity of populations in that region even as their governments take our protection for granted.

But now, thanks to the shale-oil revolution, the U.S. has an opportunity to strike back. Congress and the president could use our new energy abundance to advance our own strategic interests for a change, while also supporting and fostering democratic allies, combating state sponsors of terrorism, and deterring aggression, whether it’s in Eastern Europe or East Asia — all without putting a single boot on the ground or launching another Hellfire missile.

At the heart of this transformation is, of course, the boom in oil and natural-gas production in the United States, thanks to hydraulic fracturing, horizontal drilling, and other technologies that have unlocked unconventional hydrocarbon resources in a sudden but lasting profusion. In 2000, fracking accounted for only 1 percent of total oil and natural-gas production in the U.S. Today it’s almost 30 percent of all oil production and almost 40 percent of all natural gas, and those percentages are going steadily upward as the U.S. tops one OPEC producer after another.

Indeed, this July the United States replaced Saudi Arabia as the world’s No. 1 oil producer, and virtually every industry study indicates that the trend will continue through the next two decades and beyond. American oil production could surge by as much as 50 percent between this year and 2040 — with no fall-off in sight. As a Brookings Institution study has just concluded, the United States is “on track to become the dominant player in global energy markets” — as big a player as, perhaps even bigger than, Saudi Arabia is today.

Leverage over the global energy market on this scale deserves a coherent and carefully thought-out policy, geared not just toward “energy independence” (an elusive, even misleading, term, as we shall see) but also toward an “energy security” strategy that advances the cause of freedom and the position of our allies while punishing our foes and diminishing their power.

There are four major steps that the United States could take — although the current Congress and president have been unwilling to take them — to seize our new strategic opportunity and to increase the reach and impact of our emerging oil weapon.

The first is completing the Keystone XL pipeline, which has been suspended for almost four years. Quite apart from benefits in terms of jobs and investment, finishing our portion of this oil pipeline meant to connect Canada to the U.S. Gulf Coast would go a long way toward healing relations with the other surging oil producer in the Western Hemisphere, Canada, which President Obama’s dithering and delays have unnecessarily alienated.

In fact, Keystone is just one of 25 infrastructure projects crossing from Canada into the United States that are currently sitting in limbo, projects including other oil and natural-gas pipelines. Both nations would benefit from completion of these projects. On one hand, Canada is a natural customer of American natural gas (we became the world’s biggest producer in 2010). On the other, Canada’s oil reserves stand close to 175 billion barrels. Only Saudi Arabia and Venezuela have more.

Completing Keystone, in other words, would vitalize a growing energy infrastructure that connects our two countries and that eventually could extend into Mexico — setting the stage for a North American energy bloc. The three countries’ combined daily oil output of 17.5 million barrels already almost equals that of Saudi Arabia and Russia combined, or that of OPEC’s four biggest producers (the Saudis, Iran, Iraq, and Kuwait).

A North American energy bloc wouldn’t put OPEC out of business. But it could serve as a powerful counterweight to OPEC’s dominance of the global market, giving market-oriented democracies of the Western Hemisphere greater leverage over supply and price and reducing the sway of the Middle East’s princes and despots.

Yet none of this can happen without the second step of finally lifting the 1975 ban on oil exports. Once again, there are sound economic arguments for lifting the ban, including creating new jobs and increasing government revenue, as well as using American sales of crude to stabilize world prices. But even more important from an energy-security standpoint, the United States would then be free to use its oil exports to support our allies in times of economic or geopolitical crisis, for example if Iran closed the Strait of Hormuz or China cut off shipments of oil to Japan and South Korea via the Strait of Malacca.

We could use exports not only to stabilize prices but also to exert a steady downward pressure on them. A new Brookings Institution–sponsored study by NERA Economic Consulting predicts that lifting the export ban could lower world crude prices by as much as $6 a barrel just in the first year. That would mean significantly less revenue for despots and terrorists, even as our exports made the market more efficient and responsive to normal supply and demand instead of to the whims of countries such as Iran, Venezuela, and Saudi Arabia.

Indeed, U.S. exports could prevent OPEC from ever again using the threat of an oil cutoff to blackmail our allies. At the same time, American tankers carrying oil to developing countries in Africa and Asia could make “energy diplomacy” as integral a part of America’s foreign policy as “Chinook diplomacy” is today — but in a less symbolic and far more potent form.

Critics of lifting the ban have argued that allowing U.S. crude exports would force domestic gasoline prices up at the pump because there would be less oil to refine. This claim, however, misunderstands the nature of the current North American oil market. Domestic refineries in the Midwest and on the Gulf Coast are geared for refining a heavier crude than the light crude from today’s shale production. The latter — known as “tight oil,” since it is fracked from tight shale formations — is ideally suited, however, for refineries in Europe. And if the Keystone pipeline is completed, American refineries will have plenty of heavier oil flowing in from Canada.

Far from raising gas prices, U.S. exports would — by raising the amount of crude available to be refined worldwide — actually push prices down at home by as much as twelve cents a gallon, according to an estimate by the Houston-based firm Cambridge Associates. This would save consumers some $420 billion a year.

America’s oil weapon will work according to a simple economic formula: supply and demand. By keeping world supply up, the United States can put downward pressure on prices. This not only would promote economic growth around the globe and especially in emerging economies, but also would squeeze the revenues of OPEC and Russia, the key sponsors of terrorism and aggression worldwide, as their share of the global market shrank.

They already fear the impact of American crude. Russia in particular has watched the shale-oil explosion in this country with deep misgiving and has tried to halt a similar trend in Europe. Iran saw its former stranglehold over Europe’s oil supply collapse as the United States’ tumbling demand for imported oil allowed Europe to buy what it needed from other sources, and at relatively low prices. That in turn enabled Europe to enforce sanctions on Iran that for the first time took a real bite out of the Iranian economy and forced Tehran to the bargaining table in Geneva.

This year, the Saudis will have to cut their production by 3 percent to keep prices and revenues up as U.S. demand for OPEC imports declines. If U.S. exports were able to push oil prices significantly below the current level of $90–100 a barrel, as the NERA study implies they can, it would trigger a near-panic in capitals such as Riyadh, Tehran, and Moscow — and a surge of economic growth virtually everywhere else, including the United States.

Indeed, it’s easy to imagine the additional panic in OPEC’s headquarters in Vienna if Congress were to take the third step in unleashing America’s oil-as-strategic-tool potential by authorizing drilling in the Arctic National Wildlife Refuge, or ANWR.

The almost unlimited possibilities for tapping into the reserves in Alaska’s North Slope have been overshadowed by the shale revolution. But opening the ANWR reserve could supply America’s oil weapon with a gusher of mammoth proportions. There are more than 10 billion barrels of oil locked up in ANWR, roughly 40 percent the amount of the Saudi reserves. Drilling in ANWR could, in a decade or so, produce twice as much oil as is currently flowing from the Bakken shale formation in North Dakota. In addition to creating jobs and raising government revenue, tapping into these federal lands would put still more downward pressure on world oil prices — and give America still more leverage against OPEC producers.

Beyond that, crude oil flowing from Alaska would be perfectly located for export to Asia. One of the reasons the oil-export ban was extended in the 1990s was to prevent newly opened production in Alaska from being diverted to Japan — a dramatically shortsighted move but one typical of the zero-sum assumptions that governed American energy policy then and still prevail today.

America would enjoy a clear strategic advantage in helping democratic allies such as Japan and South Korea (the latter of which has to import 97 percent of its energy) get all the oil and natural gas they need and in using similar exports to other Asian countries to reinforce our containment of China’s aggressive moves in East Asia.

The fourth and final step that Congress and a new administration should take is to rethink the future of our Strategic Petroleum Reserve. Located on the Gulf Coast in a series of salt caves, the SPR is, like the crude-export ban, a relic of Ford- and Carter-era energy policies and fears that if OPEC cut off its oil exports our economy would grind to a halt.

Today, some 700 million barrels of oil sit in the reserve. At current prices, that’s almost $77 billion worth of crude waiting for a crisis that isn’t in the offing anymore. Instead of thinking of the SPR as an energy piggy bank that we can tap only in a national emergency, a better plan would be to treat it as a true strategic reserve. Deploying it could involve both selling it into the global market to stabilize prices and using it to keep allies such as Japan and South Korea supplied with the energy they need in the event of a major crisis in the Persian Gulf.

Congress is taking limited action on some of these fronts, but more is needed. And action on Capitol Hill is not enough.

A bill sponsored by U.S. representatives Gene Green (D., Texas) and Fred Upton (R., Mich.) would require the State Department and other executive-branch agencies to authorize energy-infrastructure projects such as the Keystone pipeline within 120 days. The bill recently passed the House of Representatives, but it is now all but stuck in the Democrat-controlled Senate — and it would certainly face a presidential veto if it arrived on President Obama’s desk.

Likewise, the North American Energy Security Act, co-sponsored by Alaska senator Lisa Murkowski (a keen proponent, not coincidentally, of relaxing the rules on drilling in ANWR), Arizona senator John McCain, North Dakota senator John Hoeven, and others, would shorten the time required to obtain drilling permits for federal lands and would lift the current ban on exporting natural gas. There’s still an urgent need to lift the oil-export ban, and doing so must be the centerpiece of any American energy-security policy. Yet many in Congress are terrified of passing a bill that might be followed by a price rise at the pump, even if the two events were entirely unrelated.

Further, there’s the problem of America’s continued dependence on oil from the Middle East. The shale revolution has already cut imports from the Middle East by half. But even as production continues to rise and new fields are developed, both the International Energy Administration and BP predict that we won’t see true “energy independence” from OPEC until 2035 at the earliest — and only if domestic consumption declines by 3 percent or more.

So the true long-term solution for energy security has to be cutting demand, by gradually shifting away from oil and gasoline and toward natural gas and its derivatives, including methanol and ethanol. This would free up huge capacities of world oil supply and allow the United States to export a greater share of its crude oil than it otherwise could.

If America does not take these steps, its shale-oil revolution will never provide true energy independence. Nor will it make OPEC’s power, and America’s security responsibilities in the Persian Gulf and Middle East, disappear, since OPEC will still be a principal supplier to Europe and Asia. In concert with the strategy outlined here, however, the shale revolution can offer a new era of energy security to both us and our allies, and provide a new tool with which American leadership can promote economic growth and geopolitical stability.

– Mr. Herman, a senior fellow at the Hudson Institute, is the author of Freedom’s Forge: How American Business Produced Victory in World War II and of a forthcoming biography of Douglas MacArthur. He can be reached via Twitter: @ArthurLHerman.

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