Clearing the Record on Oil

September 1, 2004

By S. Fred Singer

There are a number of myths about oil that are prevalent in the United States, especially regarding U.S. "dependence" on foreign oil and military action as a "subsidy" for the oil industry. It is especially dangerous, however, when these myths become the basis for policy recommendations.

First, in the United States, the principal use of petroleum is for transportation, not for electrical generation. According to the U.S. Energy Information Agency (EIA), transportation accounted for 68 percent of total petroleum consumption in 2002. Petroleum consumption for transportation is heavily taxed – not subsidized – by local, state and federal governments. Annually, the federal government alone collects about $40 billion. Of this, more than $33 billion is spent for highways and similar improvements, about $6 billion on mass transit and about $70 million for the EPA administered Leaking Underground Storage Tanks Fund.

Second, to claim that U.S. military action subsidizes the petroleum industry by insuring secure sources is dubious at best. After the first Gulf War, we returned the captured oil fields to Kuwait. We are returning the oil fields in Iraq to that government. According to the EIA, in 2002 less than 12 percent of total U.S. petroleum consumption came from the Persian Gulf states. These sources are more important to Europe and the Far East than to the United States.

Third, the sources of the petroleum are not important because there is a world market for oil in which the U.S. is a major component, but not the defining factor. The defining factor is the combination of the competition among various energy sources and the competing consumption of many users in all countries which, together, establish the world-wide price. Lengthy disruptions of supplies from one region will cause a temporary increase in world price that will result in expansion of production and facilities in other regions. Although inconvenient, a major disruption could trigger the use of the Strategic Petroleum Reserve to smooth price increases. Many nations are more vulnerable than the United States to such disruptions.

Fourth, we do not need the military to secure stable sources. For decades, nations, tyrants and dictators have willingly sold petroleum because it is in their benefit to do so. And it is in their benefit to protect their sources. Permitting disruptions deprives these countries of needed revenues. An exception to this "need to export" occurred in the 1970s when certain nations attempted to influence American policy towards Israel by initiating what was called the Arab Oil Embargo and denying export to the United States. The attempt failed totally. During the embargo, the United States imported more oil than it did prior to the embargo. This failure is clear evidence of a world market in a fungible (interchangeable) commodity in which no nation, or region, can dominate. The long lines many Americans experienced at the gas pumps during this time were a result of a foolish government policy to allocate the distribution of fuel – rather than a shortage of fuel.

Finally, an interruption in world oil supplies -- for whatever reason and no matter where it occurs – will raise the world price to all oil consumers and damage the national economies of importers, like China and – of course – poor nations that depend greatly on oil.  In this respect, the United States is less vulnerable.  In 2002, petroleum generated slightly more than 2 percent of total electricity generated at power plants. That same year, solar generated about 0.01 percent of the nation's electricity. Coal, in contrast, generates about 54 percent of the nation's electricity. Moreover, the source of this coal is the United States, which has more than adequate amounts and requires no military commitments outside its borders to protect it. 

It's important to have a national dialogue on energy policy. But getting the facts straight is the first order of business.

S. Fred Singer is the president of The Science & Environmental Policy Project (SEPP) <http://www.sepp.org/>