Changes in energy technology and in the way oil and gas reserves are estimated, have led to major changes in estimates of future of U.S. dependence on energy imports, how this affects U.S. strategy, and the nature of the U.S. strategic partnership with the Arab Gulf states. The Energy Information Agency (EIA) of the U.S. department of Energy has made major reductions in its part estimates of U.S. direct dependence on crude oil imports.
The Burke Chair has prepared a revised and greatly expanded study of these new estimates, supported by additional material provided by the International Energy Agency (IEA) and various oil companies. This report is available on the CSIS web site here. It presents a wide range of supporting graphs, tables, and maps to explain the shifts that have taken place in recent years and projections for the period between 2015 and 2040.
U.S. Direct Dependence on Petroleum Imports
The 2015 EIA projections of U.S. imports reflect the possibility of a far lower dependence on imports, a greater possibility of a possible U.S. shift to crude exports, and a far wider range of uncertainty in every aspect of the future U.S. strategic dependence on direct imports of crude oil and liquid fuels.
The reference case estimate the EIA issued in April 2015 cuts the percentage of import dependence in 2040 by roughly 50% relative to its 2013 estimate and examined a range of cases in which the U.S. might achieve total self-sufficiency or become a net exporter of both oil and case. These changes have a major potential impact on U.S. strategy, and the need to maintain U.S. forces in the Middle East and to secure Gulf energy exports.
The EIA summarizes these trends as follows:[i]
U.S. crude oil production from tight formations leads the growth in total U.S. crude oil production in all the AEO2015 cases. In the Reference case, lower levels of domestic consumption of liquid fuels and higher levels of domestic production of crude oil push the net import share of crude oil and petroleum products supplied down from 33% in 2013 to 17% in 2040.
In the High Oil Price and High Oil and Gas Resource cases, growth in tight oil production results in significantly higher levels of total U.S. crude oil production than in the Reference case. Crude oil production in the High Oil and Gas Resource case increases to 16.6 million barrels per day (bbl/d) in 2040, compared with a peak of 10.6 million bbl/d in 2020 in the Reference case. In the High Oil Price case, production reaches a high of 13.0 million bbl/d in 2026, then declines to 9.9 million bbl/d in 2040 as a result of earlier resource development. In the Low Oil Price case, U.S. crude oil production totals 7.1 million bbl/d in 2040.
The United States becomes a net petroleum exporter in 2021 in both the High Oil Price and High Oil and Gas Resource cases. With lower levels of domestic production and higher domestic consumption in the Low Oil Price case, the net import share of total liquid fuels supply increases to 36% of total domestic supply in 2040.
The end result is a situation where the U.S. still seems likely to remain dependent on crude oil imports, albeit at levels where the reference case is well under 30%, and could be as low as 17% in 2040 - roughly half the level of dependence estimated in 2013. At the same time, the U.S. is projected to be able to export gasoline and products by 2021.
At the same time, the EIA analysis of future direct dependence examines other cases that examine the uncertainties in key technologies and economic scenarios: [ii]
As a result of declining consumption of liquid fuels and increasing production of domestic crude oil, net imports of crude oil and petroleum products fall from 6.2 million bbl/d in 2013 (33% of total domestic consumption) to 3.3 million bbl/d in 2040 (17% of domestic consumption) in the Reference case . Growth in gross exports of refined petroleum products, particularly of motor gasoline and diesel fuel, results in a significant increase in net petroleum product exports between 2013 and 2040.
…As in the Reference case, the United States remains a net importer of liquid fuels through 2040 in the Low Oil Price case. In the High Oil and Gas Resource case, as a result of higher levels of both domestic crude oil production and petroleum product exports, the United States becomes a net exporter of liquid fuels by 2021.
Refiners and oil producers gain a competitive advantage from abundant domestic supply of light crude oil and higher GOM production of lower API crude oil streams, along with lower refinery fuel costs as a result of abundant domestic natural gas supply . In the High Oil Price case, the United States becomes a net exporter of liquid fuels in 2020, as higher oil prices reduce U.S. consumption of petroleum products and spur additional U.S. crude oil production. U.S. net crude oil imports—which fall to 5.5 million bbl/d in 2022 as domestic crude oil production grows—rise to 8.9 million bbl/d in 2040 as domestic production flattens and begins to decline.
By 2040, the level of net liquid fuels exports is significantly larger in the High Oil and Gas Resource case than in the High Oil Price case. In the High Oil Price case, higher world crude oil prices make overseas refineries less competitive compared to U.S. refineries. As a result, net U.S. exports of petroleum products increase by more in the High Oil Price case than in the High Oil and Gas Resource case. However, the availability of more domestic crude oil resources in the High Oil and Gas Resource case results in a significantly greater drop in net crude oil imports and a larger overall swing in liquid fuels trade than in any of the other AEO2015 cases
… U.S. net imports of liquid fuels as a share of total domestic consumption continue to decline in the AEO2015 Reference case, primarily as a result of increased domestic oil production. Net imports of liquid fuels as a share of total U.S. liquid fuel use reached 60% in 2005 before dipping below 50% in 2010 and falling to an estimated 33% in 2013 (Figure E5).
The net import share of domestic liquid fuels consumption declines to 14% in 2020 in the AEO2015 Reference case—compared with 26% in the AEO2014 Reference case—as a result of faster growth of domestic liquid fuels supply compared with growth in consumption. Domestic liquid fuels supply begins to decline after 2023 in the AEO2015 Reference case, and as a result, the net import share of domestic liquid fuels consumption rises from 14% in 2022 to 17% in 2040. However, domestic liquid fuels supply in the AEO2015 Reference case is 25% higher in 2040 than in the AEO2014 Reference case, while domestic consumption is only 3% higher. As a result, despite increasing after 2020, the percentage of U.S. liquid fuel supply from net imports in the AEO2015 Reference case remains just over half that in the AEO2014 Reference case through 2040.
Other forms of U.S. Strategic Dependence on Stable Global Energy Exports and Indirect U.S. Energy Imports
Direct imports, however, are only part of the story. U.S. strategic dependence on the flow of world oil exports involves a number of other variables – several of which are now more important than direct import dependence.
These variables include:
· The rising instability in the Middle East, North Africa, and other exporting areas since 2011. Civil war, insurgency, and violent Islamist extremism in or near key exporters, and a growing arms race between Iran and the Arab Gulf states.
· The lack of any credible strategic alternative to U.S. power projection into the Middle East and the Gulf, and a U.S. strategic partnership with the Arab Gulf states – coupled to the fact any other potential source of power projection would now have to come from China and Russia.
· The fact that U.S. energy prices are shaped by world oil and energy prices and any crisis affecting world oil and gas exports has a major direct impact on the U.S. economy.
· The steady increase in U.S. dependence on the overall health of the global economy.
· The fact that the U.S. is now critically dependent on the steady flow of manufactured goods and industrial imports, and these now come from countries whose economies and ability to export is critical dependent on the flow of Gulf and other oil and gas exports.
If these variables are taken fully into consideration, U.S. strategic dependence on the stable flow of world petroleum exports will increase regardless of the level of U.S. petroleum imports and the need for U.S. strategic partnerships with key oil exporting states will be at least as critical in the future as the present.
There is no simple way to quantify U.S. economic dependence on the global economy and secure flow of global energy exports. It is all too clear, however, that this dependence continues to increase. As the “great recession” showed all too clearly after 2007, the U.S. economy is critically dependent on the health of the global economy.
The U.S. must pay world prices for energy. Even in a partial recovery year like 2010 the global economy depended on the predictable flow of 45 million barrels a day of crude oil imports, 23.75 million barrels of refined products, and 1.6 trillion cubic feet of gas. Any major interruption in the flow of energy exports raises world market prices, and the U.S. economy must pay such prices regardless of where the interruption occurs.
There is also ample historical evidence as to just how quickly oil prices can change in a crisis, and past price rises would have been much sharper if the U.S. had not acted to reassure and support its Gulf allies, or what would have happened if the conflicts that began in 2011 had spread throughout the region and sustained or even increased peak oil prices.
There are other reasons why the U.S. defense strategic guidance issued in early 2012 gave the same strategic importance to the MENA region as rebalancing to Asia, why the U.S. has since built up is asymmetric warfare capabilities in the Gulf, why U.S. forces are involved in Iraq and Yemen, and why recent U.S. Navy seapower studies project an increase in U.S. naval deployments.
In spite of the increase in reserves and production in other regions, the MENA area still dominates the reserves of exportable oil and plays a critical role in reserves of gas. The same is true of current production, and it is clear that both reserves and production are concentrated in the Gulf region. BP estimates that:[iii]
· Some 52% of world oil reserves are in the MENA region, with some 48% of that total in the Gulf.
· A little over 36% of world oil production took place in the MENA region in 2013, with some 32% in the Gulf.
· Roughly 48% of world natural gas reserves are in the MENA region, with more than 42% in the Gulf.
· A little over 21% of world natural gas production took place in the MENA region in 2013, with some 17% in the Gulf.
Like the EIA, the International Energy Agency (IEA) estimates that the growth in future world oil production through 2040 will be dominated by the Middle East, while the increases in prediction in other key areas like Brazil, Canada, and the U.S. will be far more limited or decline. [iv]It notes in its summary of its World Energy Outlook for 2014 that, “The short-term picture of a well-supplied market should not obscure future risks as demand rises to 104 million barrels per day, and reliance grows on Iraq and the rest of the Middle East.” It also projects that the Middle East will be a key supplier of LNG through 2040 [v]
The U.S. strategic role in the Middle East, and its partnership with the Arab Gulf states, remains a vital U.S. strategic interest because the flow of energy exports through the Gulf, the Strait of Hormuz, the Gulf on Oman, and nearby waters in the Indian Ocean is so vulnerable, and because the turmoil and conflict elsewhere in the Middle East has meant there are so few pipeline alternatives.
While new pipelines will increase capacity marginally in the future, the strategic importance of this increase will be offset by the fact that the estimate increases in Gulf oil exports will exceed the new pipeline capacity and the pipeline ports on the Indian Ocean will be well with the range of potential Iranian attacks, [vi]
At the same time, the U.S. is already critically dependent on indirect imports of petroleum in the form of manufactured and industrial goods. The CIA World Factbook estimates that U.S. had a $16.72 trillion economy in 2014. The data on U.S. imports and exports lag a year, but total U.S. exports were $1.575 trillion in 2013, or roughly 9% of the U.S. GDP while U.S. imports were $2,273 trillion in 2013, or roughly 14% of the U.S. GDP.
In 2013, at a time when U.S. direct dependence on energy imports was far higher than is projected for the future, the CIA estimated that energy imports only accounted for 8.2% of total U.S. imports – or $186 billion. In contrast, 24.7% of total U.S. imports were industrial supplies ($622 billion), 30.4% were capital goods ($691 billion), and 31.8% ($723 billion) were consumer goods -- for total of 86.9% of all U.S. imports ($1,975 billion).
These percentages all highlight the importance of the stable flow of global trade, since much of the U.S. manufacturing center and high technology activity is now dependent on the steady flow of imported elements and components. As a result, U.S. growth and health of the U.S. economy, and of American jobs, is critically dependent on the flow of imports of industrial supplies and capital goods.
All of these U.S. imports are, however, critically dependent on the flow of Gulf and MENA petroleum exports to the states that provide such exports of industrial supplies, capital goods, and consumer good to the U.S.. As a result, they become indirect imports of petroleum. China, Korea, Japan and other key exporters to the U.S. are critically dependent on Gulf energy exports. These nations that accounted for over 33% of all U.S. imports – – a percentage of U.S. trade roughly four times larger than direct U.S. import dependence on petroleum imports in 2013.
These conclusions are supported by the data on foreign dependence on Gulf and MENA oil that International Energy Agency provided in its report on Energy Supply Security 2014, Emergency Response of IEA Countries 2014.[vii] They are further reinforced by data that BP has issued on interregional trade movements. The BP Statistical Review of Energy for 2014 reports that the “Middle East” – which consists almost totally of Gulf oil exports in BP reporting – exported a total of 19.4 million barrels a day of oil in 2013. Out of this total,[viii]
· 2.0 MMBD went to the U.S. out of total imports of 9.8 MMBD.
· 2.1 MMB went to Europe out of total imports of 12.6 MMBD.
· 3.1 MMD went to China out of total imports of 6.9 MMBD.
· 2.5 MMD went to India out of total imports of 4.1 MMBD.
· 3.3 MMD went to India out of total imports of 4.5 MMBD.
· 1.1 MMD went to Singapore out of total imports of 3.0 MMBD.
· 4.6 MMD went to the rest of Asia out of total imports of 7.5 MMBD.
Taken together, these data indicate a level of continuing U.S. strategic dependence on indirect imports that goes far beyond the uncertain future U.S. need for direct petroleum imports. The also indicate a critical need for the U.S. to reappraise how it assesses strategic dependence and its vital national security interests. Almost none of the official estimates of U.S. import dependence – past, current- or future – take indirect imports into consideration.
The unclassified U.S. official assessments of the impact of major energy interruptions have not kept current with these shifts in direct and indirect strategic dependence, and the risks of a major war in the Gulf. They are badly out of date and need to focus on the broader impact of such a conflict on the global economy as well as on oil and gas supply and price effects.
The International Energy Agency (IEA) has conducted recent public studies of the impact of major energy interruptions in 2011 and 2014, although they did not examine the risk of a major war in the Gulf region, or the broader economic consequences of energy interruptions on world trade and the global economy. As a result, the IEA issued the following warnings:[ix]
· Although the oil delivery system has changed dramatically since the oil shocks of the 1970s, there is still a high risk of a supply disruption which could have great economic consequences for IEA member countries.
· Capacity constraints, both in production and refining, have increased the potential of supply falling short of demand. Given this delicate balance of supply and demand, even a disruption of relatively small volume can have a significant impact on the market.
· Global demand growth exacerbates market tightness, further re-enforcing the need for investment in capacity expansion.
· Uncertain investment climates in some producer countries, often described as an aspect of “resource nationalism”, may also hamper the development of future supply streams.
· Geopolitical tensions and terrorism create uncertainty as to the continuous availability of supply. This “risk premium” adds to the volatility of an already tense market, where available oil supplies are increasingly concentrated in fewer countries.
· Natural disasters, such as extreme weather conditions, can disrupt the supply/demand balance, cutting off supply or causing demand to spike.
· ...the unexpected event!
Work by the IEA also shows that past interruptions have been much smaller in scale and duration that what could happen in the future.
Some additional work has been done by U.S. think tanks and the U.S. Congress, but it does not have official standing of work by the EIA, and such work has never fully examined the impact on indirect imports.[x] Accordingly, the public modeling efforts of by the Department of Energy badly need to be updated to examine the new threats posed by non-state actors and the growing potential impact of a major war in the Gulf. Like the overall nature of U.S. import dependence, such assessments need to focus on the impact on indirect imports and world trade, and on the nature of regional dependence on energy imports to sustaining exports to the U.S., particularly in the case of Asia.
[i] U.S. Energy Information Administration, Annual Energy Outlook 2015, p. 14,http://www.eia.gov/forecasts/aeo/pdf/0383%282015%29.pdf, ES-4.
[ii] U.S. Energy Information Administration,http://www.eia.gov/forecasts/aeo/pdf/0383%282015%29.pdf, pp. 18-19.
[iii] BP Statistical Review of World Energy, June 2014, pp. 6, 8, 20, and 22,http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review... .
[iv] World Energy Outlook 2014 by Dr. Fatih Birol, Chief Economist of the International Energy Agency (IEA),http://www.slideshare.net/internationalenergyagency/world-energy-outlook...
[v] World Energy Outlook 2014 by Dr. Fatih Birol, Chief Economist of the International Energy Agency (IEA),http://www.slideshare.net/internationalenergyagency/world-energy-outlook...
[vi] Source: EIA, world Transit Energy Chokepoints, November 10, 2014, p. 2,http://www.eia.gov/countries/analysisbriefs/World_Oil_Transit_Chokepoint... .
[viii] BP Statistical Review of World Energy, June 2014, p.18, http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review... .
[ix] International Energy Association, Response System for Oil Supply Disruptions, 2012,http://www.iea.org/publications/freepublications/publication/EPPD_Brochu... .
[x] For example, see William Komiss and LaVar Huntzinger,The Economic Implications of Disruptions to Maritime Oil Chokepoints, CNA, CRM D0024669.A1/Final, March 2011,https://www.cna.org/sites/default/files/research/The%20Economic%20Implic... . For a Congressional report, see
Jim Saxton, “The Strait of Hormuz and the Threat of an Oil Shock,” Joint Economic Committee, United States Congress, July 2007, http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=6c23... .
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