Commentary Magazine


Oil Dependence

To the Editor:

R. James Woolsey argues that American dependence on Persian Gulf oil generally, and Saudi oil in particular, creates a vulnerability that would be reduced by cutting U.S. oil consumption and imports, increasing Russian production, and increasing our use of alternative fuels [“Defeating the Oil Weapon,” September].

But to begin at the beginning: there is no “oil weapon.” U.S. vulnerability to the effects of price increases and supply disruptions is independent of either the degree to which we import our oil or the source of our imports. However counterintuitive, this stems from the fact that there can be only one price in the international oil market (excluding transportation costs and the like), so that a supply disruption raises prices identically for those who import all of their oil from the Persian Gulf, for those who import none of their oil from the Gulf, and for those who import no oil at all.

The UK, which is self-sufficient with respect to oil, and Japan, which is completely import-dependent, face the same oil prices. In 1973, the “embargo” directed against the U.S. and the Netherlands had no effect at all, since both countries were able to buy oil in international markets on precisely the same terms as everyone else. (Prices increased because of the production cut by Arab OPEC, and gasoline lines in the U.S. were caused by price and allocation regulations, which Ronald Reagan had the wisdom to discard in 1981.) Accordingly, we face no “predicament” as a result of dependence.

Mr. Woolsey tries to circumvent this fact by arguing that only the Saudis can provide spare production in the face of a future crisis that might yield a price increase. That is simply incorrect. Data from the federal Energy Information Administration—which is conservative in such matters—show that excess production capacity outside the Persian Gulf is 2 to 3 million barrels per day (mbd). The U.S. Strategic Petroleum Reserve (SPR) holds about 583 million barrels, with a drawdown capacity of about 4 mbd. If all Iraqi and Kuwaiti production were to cease, and Saudi production remained constant, the reduction would be about 4.5 mbd. If Saudi production were cut by an additional 3.5 mbd—strange behavior in the face of a price increase, particularly with U.S. forces nearby—world production would be reduced by about 10 percent. But even if only half the available replacement capacity from outside the Persian Gulf were used, prices would rise by about $12 per barrel over the going rate of about $29 per barrel. For purposes of comparison, prices in inflation-adjusted terms in 1982 were over $56 per barrel.

Yes, more excess production capacity, other things being equal, would moderate even further the effects of a supply disruption. The U.S. cannot create much more production capacity, Mr. Woolsey claims, so we must become more “efficient”; but he never makes clear why market forces fail to yield optimal efficiency. Does Mr. Woolsey really believe that bureaucrats and politicians are better than the market at foreseeing future supply disruptions? Apparently he does, since he advocates tax credits and other regulatory measures that have never worked and that—for reasons both economic and technological—cannot work.

Mr. Woolsey also thinks we should “help” (that is, subsidize) the expansion of oil-production capacity in Russia because expanded capacity there would reduce oil prices and the price effects of a future Persian Gulf disruption. Here again, is there a reason that market forces are insufficient to engender optimal investment in such insurance? Mr. Woolsey does not say. He then advocates a modern version of the Synthetic Fuels Corporation—a Carter-era disaster—to develop alternatives to petroleum-based transportation fuels, a proposal he alleges to be economic even with oil prices as low as $10 or $15 per barrel. Really? Then why isn’t the greedy private sector producing such fuels?

The real problem that the U.S. faces, hardly mentioned by Mr. Woolsey, is that Arab oil revenues are used indirectly to fund terrorist activities, a problem of national-security policy rather than of energy policy. Notwithstanding Mr. Woolsey’s optimism, U.S. oil consumption cannot be reduced more than trivially, particularly given the needs attendant upon future economic growth. A reduction in U.S. or world oil demand would affect low-cost Saudi or Persian Gulf production little if at all. Replacing the Baathist regime in Baghdad would do far more to reduce oil prices and lessen the threat of disruption.

Benjamin Zycher
Pacific Research Institute
San Francisco, California

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To the Editor:

The vicious and bloodthirsty attack on America that took place on September 11, 2001 was carried out mostly by Saudi nationals, subsidized by the wealth of the Saudi oil cartel, led by a scion of one of Saudi Arabia’s wealthiest families, and inspired by the Wahhabism that is the official theology of the Saudi state. That they did what they did is testimony to the totalitarian intensity of their version of the Islamic faith and to their annihilative hatred of the West, modernity, and modernity’s great symbol, America.

But the attack of September 11 was also testimony to something else, something indigenous to America that R. James Woolsey fails to note: a genuine fifth column of American supporters of Saudi Arabia, motivated by worship not of Allah but of the almighty dollar, whose pagan rites are performed at the shrine of the oil cartel. American defenders of this cartel have maintained a criminal indifference to the raging anti-Americanism of their Saudi clients. It is they who left America defenseless against the plots of Osama bin Laden—not by being his co-conspirators but by systematically shielding Saudi Arabia, bin Laden’s shadow church and bank, from the scrutiny it deserves.

Saudi wealth pays for vast influence among the rich in America, operating through the great multinational banking and brokerage houses and the energy companies as well as through media conglomerates, think tanks, and other eminently respectable institutions. The tentacles of this influence reach into the State Department, the Central Intelligence Agency, the Federal Bureau of Investigation, the Defense Department, and all the other agencies of the federal government responsible for protecting and defending the American people from foreign attack. They also reach into American electoral politics, mainly through the Republican party, which is organically incapable of imagining that money and patriotism can ever come into contradiction.

With a subversive finesse akin to that once displayed by Soviet agents (and no less sinister for being based in wealth rather than in ideology), the Saudis and their American friends have neutralized the nation’s defenses. Even as American military bases were being blown up, American naval vessels attacked, and American embassies truck-bombed by al Qaeda operatives financed by Saudi wealth and inspired by Saudi religious doctrine, Saudi Arabia itself continued to be depicted as playing a “moderate” role in the world. American intelligence agents who have tried to explore this Saudi role soon learn how careers in government service are ruined.

The American henchmen of the Saudi oil cartel need to be exposed. Their wealth must not be allowed to shield them from inquiry. If their service to the Saudis is found to have transgressed the bounds of patriotism, they should be brought to the same bar of justice as were the Rosenbergs and Alger Hiss. There must not be a double standard in this country, one for leftist traitors and another for their rightist kin.

Tom A. Milstein
New York City

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To the Editor:

Since the Gulf war, the U.S. government has dominated oil production in the Persian Gulf as a result of its military occupation of Saudi Arabia, Kuwait, and other countries. If the U.S wanted to lean on these countries to increase what R. James Woolsey calls their “swing capacity” production, it could do so almost overnight. Oil prices would fall to $15 a barrel, or $1 per gallon for gasoline, and the American public would be saved tens of billions of dollars.

It would be useful to identify the lobbying forces that influence the U.S. government to keep the price of oil so high and ask how the American public might persuade its government to act in the public’s interest and lower the price of oil. Contrary to some commentators, the battle for lower oil and gas prices is not “over there.” It is “over here”—inside the Beltway.

Carl Olson
State Department Watch
Woodland Hills, California

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To the Editor:

R. James Woolsey favors conservation and the development of alternative transportation technologies and energy sources in order to wean ourselves from dependence on Saudi oil. But he has no patience for the view that we should try to encourage these good things by raising the price of oil artificially. The Saudis’ swing capacity, he argues, will always enable them to dump enough oil on the market to keep prices down and thus to force us to maintain our gas-guzzling ways.

Here, it seems to me, he fails to deal with a rather obvious possibility. If we were to tax gas aggressively at the pump, the Saudis could always try to defeat the measure, as Mr. Woolsey says, by arbitrarily increasing the supply. But nothing would stop us from increasing the tax still more, no matter what was happening to actual oil prices. The proceeds would go into our own treasury, not into the Saudis’ pockets.

It might be objected that these days an increase in any tax is politically unachievable. But there already are gas taxes. All that is required is legislation authorizing the President to deal aggressively both with the Strategic Petroleum Reserve and with the tax at the pump when the national interest so requires.

Louise Weinberg
School of Law
University of Texas
Austin, Texas

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To the Editor:

As R. James Woolsey notes, despite our significant progress in energy efficiency, we are now more dependent on foreign sources than ever before, with close to 60 percent of our oil now being imported. But there may be a more useful approach to this problem than those he suggests: the use of battery-powered electric vehicles (EV’s), which, unlike the hybrid cars Mr. Woolsey mentions, rely exclusively on electric power.

The auto industry deliberately commercializes hybrid cars, which, unlike pure EV’s, require gas and cannot be charged directly from an electrical outlet. Until automakers decide to operate in the national interest, especially in this time of war, the federal government should heavily subsidize further battery development, promote an infrastructure of rapid-charging stations, and aid in the cost of EV production.

Morris Altschuler
Rockville, Maryland

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To the Editor:

R. James Woolsey mentions hybrid electric vehicles as one strategy we should employ to reduce U.S. oil dependence. But even hybrids like the Toyota Prius and Honda Civic, which are greatly subsidized by their manufacturers, remain several thousand dollars more expensive to purchase than their internal-combustion counterparts. And although hybrids are very fuel-efficient, conventional cars already get high gas mileage, so the hybrids’ fuel savings fail to cover their extra cost.

Hybrids do reduce tailpipe emissions as well as petroleum use, so some subsidy may be justified. The IRS currently allows a $2,000 tax deduction for most hybrid purchases, and the Senate energy bill proposes to increase this to a $3,500 tax credit for 2002 models.

Michael E. Canes
McLean, Virginia

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To the Editor:

R. James Woolsey surprisingly omits nuclear energy as one means of liberating ourselves from the stranglehold of the Saudis. Despite the environmental hysteria we sometimes hear, nuclear energy is clean, safe, and inexpensive. France and Japan rely on it for 75 to 80 percent of their energy needs. President Bush has tepidly advocated the growth of nuclear power, but given the political clout of the environmentalist lobby, it will take political courage to confront the issue.

Frederic Wile
New York City

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To the Editor:

Among the useful suggestions R. James Woolsey makes for blunting the “oil weapon,” one is completely unrealistic. The conversion of cellulose grown on fallow land into ethanol is unlikely to make a dent in the supply of liquid fuels for transportation. The effort to discover or engineer micro-organisms capable of digesting cellulose efficiently has been going on for the better part of 30 years, but the bugs still do not find cellulose very much to their taste. Even assuming that we had such organisms, supplying them with nitrogen, separating them from the alcohol product, processing the cellulose, and other technological hurdles would make the fuel much more expensive than liquid hydrocarbons from petroleum.

Mordecai Shelef
Bloomfield Village, Michigan

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R. James Woolsey writes:

Of my eight correspondents, three—either implicitly or explicitly—want to assess our national policies regarding oil entirely in economic (or in one case in economic and environmental) terms, ignoring politics and strategy for the war in which we are engaged, two wish I had written about domestic lobbies and interest groups, and three have views about technology differing from my own.

Several correspondents add useful and interesting ideas, some on the subject on which I was writing, others on related issues. But Benjamin Zycher seems to live in a world inhabited by a limited number of economists and no one else—a world of perfect markets maintained pristine from the influences of war, politics, or other messy things. If it were not a slur on a number of able economists who are perfectly willing to factor such realities into their analyses, one would be tempted to borrow a line of George Orwell’s about intellectuals: “One has to be an economist to believe things like that. No ordinary man could be such a fool.”

Mr. Zycher asserts confidently that “there is no oil weapon.” It is important to realize the reason for this confidence in the face of common sense, Saudi crowding of the U.S. on various issues in the Middle East as recently as just before 9/11, the oil-price spikes and the following recessions of 1979 and 1973 (when even Mr. Zycher admits the price increase was caused “because of the production cut by Arab OPEC”), and so on and so forth. The reason is Mr. Zycher’s apparent belief that there is no effect on the U.S. as long as it is “able to buy oil in international markets on precisely the same terms as everyone else.” So an oil weapon that punishes all consumers is, to him, no weapon. But what is it about this lack of differentiation—which I fully recognize—that makes such a weapon any less useful, or indeed any less attractive, to those who wield it?

According to Mr. Zycher, it is “simply incorrect” for me to contend that “only the Saudis can provide spare production in the face of a future crisis.” It would indeed be incorrect if I had so written. My article states that “nearly three-quarters” of the world’s “swing” capacity lies in the “Middle East, including the Caspian Basin” and that the tactical power conferred by such Middle Eastern capacity lies “largely” with Saudi Arabia. A “large” share of three-quarters would constitute half or so of the world’s swing capacity, and this is what the Saudis possess—not “all.” But the substantial share of such capacity held by the Saudis does give them what Edward L. Morse and James Richard, in their definitive article on this subject in the March / April issue of Foreign Affairs (cited in my piece), called “the energy equivalent of nuclear weapons.” Mr. Zycher avoids disputing the views of real experts on the oil market such as Morse and Richard by misstating what I say.

He claims that I advocate “a modern version of the Synthetic Fuels Corporation.” Readers will search my piece in vain for that, too. Instead, they will find that I urge such steps as increased tax credits for hybrid vehicles. But Mr. Zycher is on a rampage against anything that would take into account external factors not priced by the market. “Is there a reason,” he asks, “that market forces are insufficient?” Happily, he was not consulted with regard to the U.S. government support that made possible the commercialization of the Internet (originally the Defense Department’s DARPANET), commercial communications satellites and space-launch vehicles (there’s this outfit called NASA), and, for that matter, railroads (hint: the U.S. government had a small hand in getting those built, too).

Mr. Zycher’s final attempted “gotcha” is quite remarkable, particularly in light of his assertion that “there is no oil weapon.” He alleges that I “hardly mention” the “real problem”: that “Arab oil revenues are used indirectly to fund terrorist activities.” Yet the first and last sentences of my article make it clear that this and other malign uses of oil revenues, such as for Iraqi weapons of mass destruction, are in fact the problem that my piece is addressing. Did he read it?

Tom A. Milstein, with vigor, and Carl Olson, somewhat less forcefully, stress the importance of focusing on domestic economic interests and lobbies and their roles regarding oil and oil-producing states. It is certainly a worthy subject—it just wasn’t mine.

Louise Weinberg likes gasoline taxes. So would I if they were not the third rail of American politics. Again, we are in a war, and we need an energy policy that will take effect quickly and will support the war effort. If I thought gasoline taxes would be more quickly accepted than subsidies for hybrids, I would favor them.

I have no problem in principle with Morris Altschuler’s electric cars, but I do not agree with him that subsidizing them would be “more useful” than the path I suggest. The reason is that the state of battery technology is not nearly as advanced as that of hybrids and of producing fuels from waste. Both of these are, essentially, available now technologically. Batteries with the capability to compete with internal-combustion engines are not, and are unlikely to be for some time.

Michael E. Canes is willing to subsidize hybrids but apparently only because they reduce tailpipe emissions. That may be one reason; but another reasonable basis for the government’s encouraging a technology is the goal of reducing what we pay to oil-exporting states that—in different ways—provide the funds for those who are at war with us.

Frederic Wile is surprised that I omitted any discussion of nuclear power. But our strategic problem is oil, and oil is no longer used in substantial volume to produce electricity; its share of electricity generation in this country is now down around 2 percent and dropping. Consequently, unless Mr. Altschuler’s batteries get developed, Mr. Wile’s nuclear power will not be fueling transportation any time soon.

Finally, Mordecai Shelef opines that conversion of cellulose into ethanol is “completely unrealistic” because we do not yet have micro-organisms capable of digesting cellulose. He also cites issues of processing, like “supplying [the organisms] with nitrogen.” But he is simply wrong about those organisms. None of them needs to be supplied with nitrogen, and at least three have been genetically engineered to digest the C5 sugars that are produced when polymers of hemicellulose are hydrolyzed (by heat); one of these also produces two of the three enzymes needed to hydrolyze cellulose by enzymatic action, and the third enzyme can easily be purchased. Although separation from alcohol was solved years ago, some of these developments are relatively recent. They were at least well under way when Senator Richard Lugar and I published “The New Petroleum” in Foreign Affairs nearly four years ago, and the technology has progressed rapidly since then.

For up-to-date information about this important and fast-moving field, readers should avoid Mr. Shelef’s counsel and consult real experts: Lee Lynd of Dartmouth (cited in my article) on the economics and the overall feasibility of the technology, and Lonnie Ingram of the University of Florida on the relevant developments in genetic engineering.

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