European Affairs

The United States is both a major producer and consumer of energy, producing more than 70 percent of its total energy consumption. We are self-sufficient in virtually all our energy resources except for natural gas and oil, and natural gas imports come mainly from Canada. By far the most important shortfall is in the oil sector, where we import over half of our needs.

Following the oil shocks of the 1970s, the United States and other leading economies have diversified their sources of supply, largely through increased production in the Western Hemisphere, the North Sea and West Africa. Today, U.S. oil imports come from four key countries - Canada, Mexico, Venezuela and Saudi Arabia.

The rate of growth in U.S. oil demand has slowed significantly since the first oil shocks because of substantial increases in energy efficiency, particularly with regard to transportation, buildings and appliances.

The energy intensity of the U.S. economy has declined by 30 percent since 1970, meaning that we have reduced the amount of energy required to produce each unit of economic output by nearly one third. Nevertheless, based on current trends, the United States will be importing around two thirds of its oil requirements by 2020, even assuming increased efficiencies.

That trend is evidence of a larger problem, which is a geopolitical market problem. The bulk of the world's low-cost reserves and the spare capacity lie in a very volatile region of the world.

We must think long term. We are not interested in setting arbitrary, near-term targets for import dependency that are unachievable.

We would prefer to develop energy technology, achieve the breakthroughs and reduce the cost of alternative technologies, while facing the reality that we must increase domestic supplies of energy to accommodate America's projected economic and population growth in coming decades, ultimately relying on free energy and technology markets to set the optimal outcomes.

In any case, our energy security concerns extend beyond the availability of our own oil imports, a fact that often gets lost in the debate. The oil market is global, and energy security for the United States is linked not only to our energy supplies, but to those of our trading partners.

Any serious and prolonged disruption in energy flows from any one region in the world could adversely affect our economy and those of our trading partners, even if our own energy trade was not physically disrupted.

The world oil market, not the U.S. oil market, sets the world oil price. And the world oil price strongly influences U.S. domestic gasoline prices and, through a substitution effect, the price for natural gas.

In our dialogue with major oil producers we have repeatedly received assurances that they oppose the use of oil supply as a political weapon. Oil market instability harms producers and consumers alike, and we are confident that producers would work for market stability.

There are other measures that consuming countries could take, if needed. In the United States, for instance, President Bush has directed that the Strategic Petroleum Reserve be filled to its 700-million barrel capacity, a level that it has never reached before. It is now at over 600 million barrels, the highest level ever, and climbing.

We are currently in the process of filling the Strategic Petroleum Reserve (SPR) through a royalty in-kind program, whereby the federal government receives royalty payments from production on federal leases in the form of oil, rather than cash. The oil is then deposited in the SPR.

Working with its allies in the International Energy Agency (IEA), the United States also participates in an emergency response system that can put strategic stocks on the market to mitigate any cut-off of physical supplies. The IEA member countries currently hold stocks representing about 114 days of imports.

Forecasts for oil export capacity growth by country show that among the fastest growing sources will be the countries of the Caspian Basin, Nigeria, Canada and Russia. While there are exciting developments in these areas, however, the Middle East still holds some 67 percent of the world's proven oil reserves, and the Persian Gulf holds 90 percent of the spare oil production capacity.

With its huge, low-cost reserves and spare production capacity, the Middle East will continue to play a pivotal role in the world oil market for years to come. That is one reason why, in our ongoing dialogue with suppliers, our contacts with Saudi Arabia, the world's largest oil exporter, are of prime importance.

One place for productive discussions with Saudi Arabia is the International Energy Forum (IEF), which seeks to bring consuming and producing countries together to share perspectives. We are pleased that the IEF's secretariat will be based in Riyadh, at the invitation of the Saudi government.

While the main role of the secretariat will be to further the dialogue between producers and consumers through support of the IEF process, it also plans to focus on improving the data that serves as a basis for the functioning of the world oil market.

The IEF has been instrumental in building support for oil market transparency through better data and has lent its support to the Joint Oil Data Initiative, the goal of which is to accelerate and improve the availability and timeliness of data and to harmonize key data across countries.

In our efforts to increase and diversify sources of global energy, we welcome Saudi Arabia's desire to negotiate a $25 billion natural gas investment program with several international oil companies. The project has had some fits and starts, but we remain hopeful that the negotiations will prove successful.

This initiative could serve as a bellwether for foreign direct investment in other sectors of the Saudi economy, and should help to expand economic growth and employment opportunities for Saudi Arabia's growing population.

We are also optimistic about Kuwait's $7 billion plan for foreign oil companies to develop Northern Kuwaiti oil fields; and we think Qatar serves as a good example of the progress that can be made through opening an economy to outside investment.

Qatar offers a good business climate for foreign investors, and its national oil company, the Qatar Petroleum Corporation, has a long history of joint ventures with U.S. companies. Most of the approximately $10 billion in direct investment in Qatar's economy is in the energy industry.

The United States also recognizes Russia's pivotal role in the global energy market. Russia has vast oil and gas resources, and the development of those resources significantly increases the diversity of supplies to the world market. Russia is the second largest oil exporter after Saudi Arabia.

Last May, President Bush and President Vladimir Putin launched the U.S.-Russian Energy Dialogue. Under it, we have engaged Russia in an in-depth energy dialogue through energy and commercial energy working groups.

We are also planning annual Commercial Energy Summits, the first of which was held in Houston in early October. That meeting brought together not only officials of our two governments, but also Russian and U.S. energy executives, to talk about deals and opportunities that we think will bear fruit.

In the Caspian, we actively support creating an East-West energy corridor that will allow energy from Azerbaijan, Kazakhstan and Turkmenistan to reach world markets at competitive prices. We support efforts to build multiple pipelines so that the Caspian Basin will continue to be a rapidly growing source of reliable new energy supplies.

These efforts are intended to complement, not distract from, our support for Russia's efforts to develop its energy export potential. President Bush has stressed cooperation with Russia on Caspian energy development, and we view this as a win-win situation.

West Africa also has significant potential. Offshore, deep-water operations in Nigeria, Angola and Equatorial Guinea look increasingly promising. Some experts believe that West Africa's production capacity could rise by 58 percent by 2010, from 4.3 million to 6.8 million barrels a day. West Africa is a particularly attractive source of energy because of the quality of its crude.

Venezuela is our fourth largest oil supplier and one of our largest regional trading partners. In our energy dialogue with Venezuela, we support U.S. energy investors and encourage the liberalization of Venezuelan rules on foreign direct investment. We support Venezuelan moves to open up the natural gas sector with the participation of U.S. companies.

Our objectives are to further the concept of a free trade area of the Americas, underscore the importance to Venezuela of a good investment climate, and advance talks about a bilateral investment treaty.

There is also a robust energy dialogue between the United States and the European Union and its member states, such as Britain and France. There are many similarities in our approaches, for example, to nuclear power and promoting technology as a means to address the long-term challenge of global climate change.

Finally, we put a lot of emphasis closer to home in North America. We would like to see Canada develop its full oil and gas potential and expand its energy trade with the United States.

We have moved to expedite the authorization of cross-border energy projects, with both Canada and Mexico, which we view as extremely important. We will do all in our power to make sure that Canada and Mexico develop their domestic energy resources, each in their own way, at their own speed and in full respect of their sovereignty.

The United States has the infrastructure and the capability to expedite construction of the facilities required to bring gas, electricity and oil efficiently over our borders from these two neighboring countries.

As part of our longer-term program to diversify our energy supplies, we are funding research into advanced fuel technologies, particularly hydrogen fuel cell technology. The Department of Energy has implemented a new partnership with automakers to accelerate the development of advanced, fuel-efficient technologies such as hybrid gas-electric and hydrogen fuel cells.

And the fiscal centerpiece of the tax incentives in the President's National Energy Plan - which were devoted only to renewable and emissions-free energy - is a consumer tax credit for a hybrid and fuel cell vehicles.

Robert C. McNally, Jr. is Special Assistant to the President on the White House National Economic Council. Previously, he was a Vice President of Tudor Investment Corporation where he was responsible for monitoring and evaluating fiscal and monetary policies in G7 and emerging market countries. 


This article was published in European Affairs: Volume number IV, Issue number I in the Winter of 2003.