Talley, William W. van Holst, II

English

University of Oklahoma College of Law

Oklahoma Law Review Volume 38 Number 5 1-1-1985 National Security Implications of the International Trade in Petroleum Products William W. van Holst Talley II Follow this and additional works at: https://digitalcommons.law.ou.edu/olr  Part of the Law Commons Recommended Citation William W. Talley II, National Security Implications of the International Trade in Petroleum Products, 38 OKLA. L. REV. 831 (1985), https://digitalcommons.law.ou.edu/olr/vol38/iss5/10 This Article is brought to you for free and open access by University of Oklahoma College of Law Digital Commons. It has been accepted for inclusion in Oklahoma Law Review by an authorized editor of University of Oklahoma College of Law Digital Commons. For more information, please contact darinfox@ou.edu. NATIONAL SECURITY IMPLICATIONS OFTHE INTERNATIONAL TRADE INPETROLEUM PRODUCTSWaiAm W. TALLEY II*I.In 1984 world oil production increased for the first time since 1979, in-dicating that world oil markets are adjusting to the dramatic price increasesthat occurred in 1979 and 1980 in the wake of the Iranian revolution. Nationalsecurity implications of the world oil trade may have appeared to decreaseduring the past five years as oil imports met a declining share of total energyconsumption by the United States and its allies. As oil prices have eroded,however, the structural shift away from oil has slowed. As oil regains or atleast maintains market share, the national security worries associated withdependence on foreign oil resurface.Twice in the last dozen years major interruptions in the world oil flow haveoccurred. The 1973-74 Arab oil embargo triggered the first "energy crisis,"and the Iranian revolution brought the "second shock." With two-thirds ofthe free world's oil reserves located in the strategically vulnerable and politicallyunstable Middle East, additional interruptions are likely to occur.To assess the impact on national security of the international oil trade, areview of the historical shifts in United States import volumes and sourcesshould be made. As late as 1970, the United States imported 3.4 million barrelsof oil per day. Most of this oil came from the Western Hemisphere, and almostnone from the Middle East. Natural gas shortages in the United States duringthe early 1970s coupled with economic growth, however, created an increaseddemand for oil. By 1974, United States oil imports had almost doubled, ex-ceeding 6.1 million barrels per day. A large percentage of the increase camefrom Saudi Arabia, Iran, and Nigeria. This increased demand for oil in theUnited States helped create the economic circumstances that allowed controlof world oil markets to shift from the major international oil companies tothe Organization of Petroleum Exporting Countries (OPEC).The Arab oil embargo and the resulting price increases failed to dampenthe United States' thirst for oil. The new, higher prices were eroded by infla-tion and United States oil imports resumed their climb, reaching a peak of8.7 million barrels per day in 1977 and remaining at 8.5 million barrels perday in 1979, when imports reached 43 percent of our oil supply. That year,the United States imported more than 2.1 million barrels per day from theMiddle East. Then came the second shock in 1979, with prices topping $40per barrel. This price shock threw the Western industrial nations into a severe* Ph.D., Nuclear and Chemical Engineering, President, the RAM Group, Ltd.Published by University of Oklahoma College of Law Digital Commons, 1985OKLAHOMA LAW REVIEWrecession. Consumers moved away from oil in earnest, and world oil produc-tion began a four-year slide.By 1983, United States oil imports fell to 5 million barrels per day, withonly 575,000 barrels per day coming from the Middle East. United Statesoil imports crept up to 5.3 million barrels per day in 1984, but imports ac-counted for only 30 percent of our oil supply. United States crude oil importsin 1984 came from a variety of sources. Mexico, the largest source, supplied658,000 barrels per day, followed by Saudi Arabia, the United Kingdom,Canada, and Indonesia. These five countries provided more than one-halfof the United States' 1984 crude oil imports. Imports are expected to reach5.5 million barrels per day in 1985. Thus, as the economy expands and oilprices decline, there appears to be an increasing dependence on oil importsagain. Currently, oil is readily available from new sources outside the MiddleEast. But as production from these more secure suppliers declines, the UnitedStates will be back knocking on the Saudis' door for more oil in the 1990s.In fact, Chevron predicts that U.S. imports will reach 6.9 million barrels perday and account for 50 percent of U.S. oil supplies by the year 2000.If a country seeks new oil supplies in the 1990s, most roads will lead tothe Middle East, which currently holds nearly two-thirds of the free world'sproven oil reserves. By the 1990s, at least five of OPEC's thirteen members,Ecuador, Gabon, Algeria, Nigeria, and Indonesia, are expected to need allthe oil they produce for their own consumption. The focus of power in OPECwill shift back to the Persian Gulf states, principally Saudi Arabia, Iran, Iraq,and to a lesser extent, Kuwait and the United Arab Emirates.II.The United States' primary adversary, the Soviet Union, is not only self-sufficient in energy, but is also a major exporter of oil and natural gas. TheSoviet Union holds an estimated 81 billion barrels of crude oil reserves, morethan any nation except Saudi Arabia. By comparison, U.S. crude oil reservesare reported to be 27 billion barrels. The Soviets also have 1,400 trillion cubicfeet of natural gas reserves, more than any other nation and more than 43percent of the world's total gas reserves.Soviet oil exports to non-Communist nations worldwide totaled $17.6 billionin 1984, compared to $18.6 billion in exports to Communist countries. Sovietgas exports totaled $3.6 billion to non-Communist countries in Europe, ver-sus $5.1 billion to Communist countries. Oil and gas exports are of enormousimportance to the Soviet Union's foreign trade balance. In 1984 crude andproducts accounted for 41.5 percent of all Soviet exports and brought morethan 60 percent of Soviet hard currency receipts from industrially developed,capitalist countries. From the standpoint of revenue, the Soviet Union's largestoil customers in 1984 were East Germany, Czechoslovakia, and Poland,followed by West Germany, Italy, Bulgaria, Finland, and France.After start-up of the new export natural gas pipeline from western Siberia,West Germany became the Soviet's largest gas customer, buying $1.4 billion[Vol. 38:831https://digitalcommons.law.ou.edu/olr/vol38/iss5/1019851 SYMPOSIUM: LA WAND NATIONAL SECURITY 833in 1984. Czechoslovakia was second with $1.3 billion in gas purchases, andItaly third, with more than $1 billion in gas purchases.With its huge gas reserves, the Soviet Union is expected to increase naturalgas use by its industries, leaving more oil available for export. However, ifthe Soviet's oil situation deteriorates to the point that it needs to import oil,there is the risk that it could decide to annex Middle Eastern oil fields ratherthan paying for the oil.III.For United States allies in Western Europe, the energy security picture isimproving. These nations currently produce 3.8 million barrels of oil per day,with most production coming from the British and Norwegian sectors of theNorth Sea. Clearly the advent of North Sea production has had a major im-pact because as recently as 1975 Western Europe produced only about 500,000barrels per day.In 1974, Western Europe imported 14.8 million barrels per day, including10.2 million barrels per day from the Middle East, 3.2 million barrels perday from Africa, and I million barrels per day from Eastern Europe, includingthe Soviet Union. This represented 97 percent of Western Europe's total oilconsumption. Thus, at the time of the Arab oil embargo, people began torealize how vulnerable Western Europe was to an oil supply cutoff, even thoughthe embargo was primarily directed against the United States.Through a combination of energy conservation, fuel switching, and increasedNorth Sea production, Western Europe has been able to cut its importssignificantly. For example, in 1984, Western Europe imports dropped to 8.6million barrels per day, including only 3.7 million barrels per day from theMiddle East. Thus in 1984 imported oil accounted for 70 percent of WesternEurope's total oil consumption. Even though the picture has improveddramatically since 1974, Western Europe remains vulnerable to a major inter-ruption in its oil supplies from the Middle East and Africa and in its oil andnatural gas imports from the Soviet Union. Moreover, most of WesternEurope's oil production is from the North Sea and is thus vulnerable tosabotage or military attack.In the event of a major interruption in Western Europe's oil supplies, theUnited States would be obligated to "share the shortage" through emergencyprocedures established by the International Energy Agency (IEA). Thesesharing arrangements are designed to reduce the economic leverage that "anygroup of producing countries could apply to consuming nations by an embargo.OPEC production peaked in 1979 at 30.9 million barrels per day, morethan one-half the world's total oil production. By 1984, however, OPEC pro-duction had fallen to 17.5 million barrels per day, only 34 percent of theworld's total oil production. OPEC is currently capable of producing abouttwice its current 16 million barrels per day. The combination of stable ordeclining oil demand in the major oil-consuming nations and increased oil-and natural gas-producing capabilities in many parts of the world has leftOPEC with sharply reduced market power.Published by University of Oklahoma College of Law Digital Commons, 1985OKLAHOMA LA W REVIEWWhile OPEC production was declining, non-OPEC producers increased theirproduction by 7.6 million barrels per day. In addition to the gains in WesternEurope mentioned earlier, other major producing gains were recorded inMexico, Brazil, Egypt, and India. The Soviet Union, by far the world's largestoil producer at 12.2 million barrels per day, recorded a small decline in 1984,its first in forty years.IV.The increased geographical diversity of available oil and natural gas sup-plies reduces the national security risks associated with oil imports in the future.Exploration in non-OPEC areas, however, has declined with falling oil prices,so major changes in the world's proven oil reserves are not expected.In addition to diversifying sources of oil imports, national security can beenhanced by replacing oil imports with other sources of energy. For example,the United States currently has a natural gas deliverability surplus of about3 trillion cubic feet annually. This surplus gas could be used to displace 1.5million barrels per day of imported oil, nearly one-third of current oil imports.A national policy that seeks to minimize oil imports for national securityreasons could take advantage of the breathing space provided by the currentworld oil surplus. The basic strategy would encompass maintaining domesticoil production at current levels, approximately 8.9 million barrels per day.With sufficient domestic refining capacity, this domestic oil production canmore than meet the U.S. demand for transportation fuels. Production ofdomestic natural gas and coal could be increased to meet industrial, commer-cial, and residential demand for stationary energy consumption. Oil and naturalgas imports from Canada and Mexico could then be used to meet any un-filled demand. With appropriate environmental and tax policies, a nationalgoal of eliminating oil imports from the Eastern Hemisphere could be achieved.Domestic synthetic fuels could then enter the market when economicallyjustified.The United States' allies have also made progress in shifting to other energysources. The International Energy Agency, which represents industrializednations in Western Europe, including the United States, Canada, and Japan,reports that since 1973 its members have increased their output of coal bymore than 29 percent, nuclear energy by more than 270 percent, and hydroelec-tric power and other energy sources by more than 21 percent. Oil now pro-vides about 44 percent of the total energy demand for IEA countries, com-pared to 51.4 percent in 1973. The agency projects that oil's share of thetotal energy market will fall to 39 percent in 1990 and to 34 percent by theyear 2000. Although oil imports are projected to increase to offset decliningdomestic production, oil imports as a percentage of total energy requirementsof the consuming nations are expected to remain around the current levelof 22 percent until 1990, then fall to 20 percent by 2000.V.According to Tom Cutler, of the United States Department of Energy andchairman of the North Atlantic Treaty Organization's Petroleum Planning[Vol. 38:831https://digitalcommons.law.ou.edu/olr/vol38/iss5/1019851 SYMPOSIUM: LA WAND NATIONAL SECURITY 835Committee, the United States military demand for oil during 1984 totaled486,500 barrels per day, down more than 50 percent from the 1969 Viet Nampeak of 1.1 million barrels per day. On a global basis, the handful of regionalconflicts and domestic insurgencies served to boost Allied military demandin 1984 to near 5 percent of total world consumption, or an estimated 2.5to 3.5 million barrels per day.Airplanes, ships, and tanks, which comprise a modern nation's fightingforce, make conventional military operations an oil-intensive activity. Thesemobile forces can account for 90 percent of a nation's military oil consump-tion. For these air and ground uses, there is no feasible energy substitute forpetroleum. Even the introduction of nuclear power at sea has not relievednavies from their reliance on oil.Cutler points out that there are two categories of military oil stocks, bothheld as refined products. Peacetime operating stocks support current consump-tion. War reserves are stored to satisfy wartime surge requirements. Thesestocks are ideally held in hardened underground facilities protected from enemyattack and pre-positioned at strategic locations. The U.S. military, for exam-ple, holds in excess of 30 million barrels of peacetime operating stocks andabout 60 million barrels as wartime reserves. The largest U.S. wartime stocksare located in Europe and in the Pacific Ocean. In addition, more than 450million barrels of crude oil have been stored in the National Strategic PetroleumReserve through fiscal 1984. This oil has cost the taxpayers $14.5 billion. Thegoal for the strategic reserve is 750 million barrels, to be reached by 1990.Other major oil users, especially West Germany and Japan, also hold sizeablestrategic stocks. IEA governments other than the United States now controlmore than 300 million barrels of oil stocks. Were a crisis to occur today,IEA governments could supply from stocks they now control, as much as3.7 million barrels per day for the first two months, declining to 3 millionbarrels per day for the next six months. While not enough for every con-ceivable emergency, this draw-down of strategic stocks could cushion theeconomic impact of a major crisis and provide time for necessary adjustments.However, this oil would have to be refined before it would be useful tothe military, which brings up one additional area of concern-the exporta-tion of the United States' refining capacity to producing countries. UnitedStates refining capacity in 1985 is estimated to be 15.4 million barrels perday, a 17 percent decline from the 1981 peak capacity of 18.6 million barrelsper day. Conversely, imports of refined petroleum products rose from 1.6million barrels per day in 1981 to nearly 2 million barrels per day in 1984.Domestic refinery runs in 1985 are projected to be 12.2 million barrels perday, or 79 percent of capacity. Thus, while refining capacity is currently ade-quate, the declining trend in capacity and the increasing trend in product im-ports since 1981 is cause for concern from a national security standpoint.In conclusion, one way to judge the strategic importance of the worldpetroleum trade is to measure the commitment that potential adversaries ofthe United States have made to weapons systems designed to interrupt oilshipment in the event of war. The Soviet navy, for example, now has 360submarines, compared to 138 for the United States. A primary mission ofPublished by University of Oklahoma College of Law Digital Commons, 1985836 OKLAHOMA LAW REVIEW [Vol. 38:831the Soviet submarine fleet in wartime would be to halt the shipment of oiland other strategic minerals to the United States and Europe. With this im-balance in submarine forces, it is doubtful that the U.S. Navy would be ableto protect oil tankers attempting to bring oil from Africa and the MiddleEast to the United States and Europe. Therefore, energy policies of the UnitedStates and Europe should seek to accelerate the movement away fromdependence on foreign oil, rather than being lulled into a false sense of securityby the current worldwide oil surplus.https://digitalcommons.law.ou.edu/olr/vol38/iss5/10

National Security Implications of the International Trade in Petroleum Products

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National Security Implications of the International Trade in Petroleum Products

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