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Those concerned about energy security usually advocate increasing drilling in the United States. But some argue that a better policy for promoting energy security would be instead to conserve domestic oil reserves—to set aside certain deposits, such as in the Gulf of Mexico, for use in an emergency.

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Real Energy Security: Drill, Baby, Drill—But Not Now
Jeffrey A. Frankel
December 6, 2010
 

 

In the wake of the April 2010 oil well blowout off the coast of Louisiana, policymakers are rethinking off-shore drilling. Clearly, federal regulators’ neglect of safety rules needs to end. But what larger implications should we draw for domestic oil drilling?

The tension has been between those who give primacy to the environment and those who give primacy to business—those who oppose oil drilling and those who support it. The energy security goal, prominent ever since September 11, 2001, is usually assumed to point in the direction of increased exploitation of domestic oil resources: “Drill, baby, drill.” But a more appropriate slogan for the policy of exploiting domestic reserves might be “Drain America first.”

A true understanding of energy security could tip the balance in the direction of conserving American oil resources. Oil wells—including BP’s Deepwater Horizon site, now capped—should be saved, their future use to be made conditional on a true national emergency, such as a long-term cutoff of Persian Gulf oil resulting in a global oil price of $200 a barrel or more.

Defining the Goal

Public debate is hampered by the lack of working definitions of energy security and energy independence. What are these terms supposed to mean? Ending U.S. imports of oil is not feasible in the foreseeable future: the gap between domestic deposits and our consumption is too big. Ending imports from the Mideast is not relevant: oil is mostly fungible, and a drop in global supply would raise the global price and thus have virtually the same effect on the American economy regardless of where the cutoff takes place.

What, then, should be the goal of energy security policy? Imagine that at some point in the coming half-century, there is a sudden interruption in oil exports from the Persian Gulf, perhaps because of military conflict between the United States and Iran, an Islamist revolution in Saudi Arabia, or terrorists’ use of radiological weapons. Precedents, of course, are the oil shocks of 1973–1974 (precipitated by the Arab oil embargo in connection with the Yom Kippur War), 1979 (the fall of the shah of Iran), and 1990 (Iraq’s invasion of Kuwait). 

Following such a shock, the quantity of oil in the U.S. Strategic Petroleum Reserve (SPR), about 725 million barrels, could at best tide us over for only a few months. If the global crisis threatened to go on for years, the economic effects could be severe. This fact currently constrains U.S. foreign policy and military policy, which is part of what we mean by energy security. Also important for our national security are two more points. First, every year our oil imports transfer many billions of dollars to dictators and extremists who are potential enemies. Second, our military runs on oil.

The goal of policy now should be to take steps that would reduce the consequences of such a shock and allow nonmilitary response options. The solution is to leave some domestic oil underground (or underwater) for use in such emergencies—and only in such emergencies. Reserves in the Gulf of Mexico are precisely the ones we should save. They are like the SPR, except we don’t have to pump the oil up only to pump it back down again.

Buried Treasure

The continental shelf of the Gulf of Mexico may be the best location for designating certain deposits as reserves, to be tapped only during a well-defined emergency. As a share of U.S. consumption, the supplies are still substantial—unlike onshore oil deposits in the lower 48 states, which have already been largely depleted, sometimes under the shortsighted energy security logic of “Drill here, drill now.” The reserve idea doesn’t work as well for oil in the North Slope of Alaska. In such remote locations, drilling and pipeline-laying require time, and experts say it would take more than a decade to start pumping.

Even for known oil deposits off Louisiana and Texas, there would be a lag between the outbreak of a geopolitical crisis and the date when the oil would start flowing. But this is no reason to dismiss the idea. The oil shocks of 1979 and 1990 led to immediate sharp increases in the world price of oil—and caused or at least contributed to U.S. recessions—not because the supply of oil actually fell, but rather because everyone was afraid that it would. As a result, rational speculation increased holdings of oil in inventories, bid up the price, and had the same macroeconomic effect as if the supply had in fact been shut off. But if we had a reserve supply, the knowledge that domestic oil would come on-stream within a few years would help moderate the panic. Thus, even in the short term after a shock, the reserves would encourage lower inventories and lower prices than without them.

Because the quantities are nowhere near sufficient to match U.S. consumption, conserving offshore Gulf oil deposits for an emergency would not solve all our energy problems. Only technological progress and energy conservation can do that—and they in turn require a gradual increase in retail energy prices. But on the margin, a barrel of oil from the Gulf of Mexico would be far more valuable under crisis conditions than it is today.

Jeffrey Frankel is the James W. Harpel Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government.

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