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Seven Dangerous Side Effects of the U.S. Dependency on Foreign Oil

Production

Our fate has long been tied to the oil issue. But now we’re near the threshold at which our addiction will completely break us. We are quickly approaching what is called “peak oil”—the point at which world oil production will reach its maximum point and then begin to decline because of supply limitations.

Even the most optimistic projections of peak oil place it around the year 2023. Some would argue that peak oil has already been reached, and world production statistics are certainly not at odds with that conclusion. World oil production has been essentially flat since 2004. Only the temporary abatement of pressure on demand growth caused by the global recession has kept prices from skyrocketing. With no viable alternative in place, decreasing supply and increasing prices will culminate in a predicament where we the people still need oil to go about the business of daily life—but can no longer afford it.

One can certainly envision a world where few can afford transportation, even to go to work. Because transportation is a component of virtually every consumer product, the increase in oil prices will mean an increase in all prices. If the problem became severe enough, movement of goods vital to the economy could stop. Essentially, the American way of life as we know it would come to an end.

Yes, it’s a grim scenario. And one reason we’ve managed to get to this point without insisting on change is that most Americans don’t understand just how grim it is. To set the record straight, I provide an overview of just what foreign oil dependency has meant and continues to mean for the U.S. Read on for more information about why oil dependency is bad for America’s health:

It’s harmful to the environment. Oil spills, global warming, carbon emissions, greenhouse gases—these are just a few of the hazards connected to our dependency on oil. Fossil fuels are dirty, nasty, icky substances, and the nature and scale of the international oil extraction effort guarantees that there will be accidents. Tankers leak, as was the case of the Exxon Valdez, and BP-style explosions happen. As serious as all of these accidents are, they could be minor compared to the potential impact from what is not an accident—the burning of fossil fuels.

The total global emissions grew at 1.1 percent during the 1990s, but grew at the alarming rate of 3.3 percent between 2000 and 2004. This rapid increase in growth can be attributed in large part to the accelerating industrialization and economic growth in the developing world, China and India particularly.

Whether you believe in global warming or not, one thing is indisputable: Global atmospheric concentrations of carbon dioxide have been increasing for over a century, and they will continue to increase as more fossil fuels are burned. Whether you choose to ignore well-established science that carbon dioxide is a greenhouse gas and that the greenhouse effect has the potential to affect global temperatures is your choice. I prefer to find alternatives to fossil fuels before the effect of global warming is so pronounced that even the skeptics start to believe it. The potential impacts are far too numerous and uncertain.

It causes ongoing damage to the American economy (and weakens our power in the world). Oil dependence is slowly eating away at the true source of American power (our economy) as each year the U.S. exports more and more of its wealth in exchange for oil. U.S. trade deficits have created a situation that forces reliance on overseas capital to support the economy. Much of that capital comes from the petroleum exporting countries that, in turn, get it from oil consumption by American businesses and consumers.

Today the American economy is based less on producing either goods or services and more on consumption. This drives what is known as the “petrodollar” system. It begins with the purchase of oil by the U.S. consumer, which sends massive dollar-denominated cash flows to oil exporting countries. In addition, U.S. consumers buy imported goods resulting in flows of dollars to those countries. In turn, the manufacturing nations must purchase oil, which they accomplish with the dollars they obtained from selling products in the U.S. market. At this point, the oil exporters are awash in dollars, which they must either spend or invest.

The consequence is that, to a large extent, governments in the Middle East are funded by American consumers. The same money you use to fill your gas tank is ultimately funding things like terrorist groups and the Iranian nuclear program, but, perhaps more importantly, it is being used to buy assets in the United States. At the end of 2008, foreigners owned $3.5 trillion more in assets in the U.S. than Americans owned abroad, and the bulk of that difference can be explained by the oil trade deficit. The petroleum trade deficit is a wealth transfer. In 2008 alone, Americans purchased $453 billion of foreign oil (which accounted for more than 65 percent of the total trade deficit).

The oil we purchase quite literally goes up in smoke. When all is settled, Americans have swapped our equity for short-term consumption while the oil exporters have swapped their oil for long-term financial assets. I don’t think there is any question as to who is getting the better end of the deal.

It’s leading to the decline of the dollar. Although, in previous decades, the Federal Reserve has viewed energy prices as a component of inflation and reacted to increasing oil prices using anti-inflationary measures, the modern Federal Reserve has feared that increasing oil prices are more likely to precipitate a recession. The Fed has responded to price shocks by increasing the money supply in hopes of stimulating aggregate demand.

The long-term trend of the dollar is downward, which places upward pressure on oil prices. The Fed has responded to increasing oil prices by printing more money. Increasing the money supply makes a given dollar worth less, which means that more dollars are needed to buy a given quantity of oil. The falling dollar and the increasing price of oil have elicited policies from the Fed that cause the dollar to fall still further and the price of oil to increase even more, accelerating and intensifying the effects.

The increasingly unstable fiscal situation in the U.S. is not only a concern for Americans, it is also alarming to foreign holders of dollar-denominated assets. Oil exporting nations continue to accumulate dollars, but they also recognize that the lack of fiscal sanity in Washington will eventually erode the dollar’s value and, with it, their investment portfolios. Our fate is in their hands. If they begin selling oil in other currencies or divest their dollar-denominated assets, the dollar will go into free-fall, and the fallout in the U.S. economy could be far-reaching. It is vital to U.S. economic security to ensure that a breakdown in the petrodollar system, which may well be inevitable, does not precipitate an absolute economic collapse.

It helped cause the housing crisis. The housing bubble, which burst in 2008, has been the most damaging event for the U.S. economy in recent memory, but few realize the central role oil played in creating it. The first culprit was the petrodollar system. American consumers paid for billions of barrels of oil. That money landed with the oil exporters—oil sheiks and petro-state autocrats—who then bought financial assets in the U.S. market. In fact, between 2003 and 2008, the U.S. purchased $1.65 trillion of foreign oil, but over 45 percent of the money can be traced directly to funds used by foreign oil suppliers to purchase assets in the United States, and about half of that amount went straight into the bonds of Fannie Mae, Freddie Mac, or the U.S. government.

Another factor was increased liquidity. As previously mentioned, in recent years the Fed has printed more and more money and made it available to banks, which then made loans in the market. Of course, the Fed also controls banks’ reserve requirements and short-term interest rates, which they can manipulate to create more liquidity. And all that liquidity must go somewhere. Among other places, it ended up in questionable mortgage investments simply compounding the effects of petrodollar recycling.

The flow of petrodollars into government securities artificially depressed interest rates. Lower interest rates encouraged greater lending and borrowing. As a result, homeowners found a favorable environment and plenty of capital to encourage over-borrowing.

Without foreign oil dependence, the system that made possible the excessive borrowing that led to the crisis would not have existed. Individuals and even domestic corporations make much different investment decisions than do foreign governments. Without foreign oil, Americans would still pay for energy, but instead of being concentrated in financial assets like Treasury bonds, the price paid at the pump would be used to buy things like capital equipment and to create jobs and pay workers. Cash would ultimately end up in the hands of individuals in this country, not foreign governments. Equity that belongs to you is much better than debt you owe to someone else.

It creates strained foreign relations and sets the stage for an unstable future. The entire U.S.-Middle East foreign policy has been structured around the obvious importance of the region for the world’s oil supply. Policy makers don’t like to discuss it openly, but oil is always the elephant in the room when it comes to U.S. foreign relations—even with nations outside the Middle East.

One of the great questions in the context of geopolitical struggle for oil is whether the great oil consuming nations—which will soon include the U.S., China, Russia—will view one another as allies, competitors, or some combination of both. The U.S. has love-hate relationships with both countries. There is historic rivalry between the U.S. and Russia leading back generations. The relationship with China is murky at best.

Events are already in motion that could set the stage for a U.S.-Chinese confrontation. Oil consumption continues to grow modestly in the U.S., but in China it is exploding. On a global scale, oil consumption will certainly continue to grow into the foreseeable future, yet there are considerable questions as to whether global production can be increased much beyond current levels if at all. With both the U.S. and China needing oil, competition is inevitable. Responsibility lies with both sides to take actions to avoid the long progression toward a conflict. A Sino-American energy war is far too likely if both countries continue on their present courses without developing substantial alternative energy sources.

It gets us into wars. Oil has been at the center of many (indeed most) major military conflicts in the world, particularly those involving the West. From providing the impetus for Hitler’s invasion of the Soviet Union and Japan’s attack on Pearl Harbor in World War II to Saddam Hussein’s invasion of Kuwait, the resulting Gulf War, and, most would admit, the U.S. return to Iraq in 2003, oil has bred a century of conflict.

To be sure, America has made some bad choices to guarantee the uninterrupted flow of oil, often acting in ways very much in conflict with our national identity. Although the costs of the wars we have fought, both in terms of blood and treasure, have been great, the compromise of American values is perhaps even more disturbing.

It might be best to look at the war issue in the context of a war that hasn’t happened…yet. Take the U.S. relationship with Iran. For most of the 20th century, the U.S. and British governments supported dictators and manipulated the domestic political situation in Iran to ensure the continued flow of cheap oil, often at the expense of the nation’s people. Those policies backfired when the harsh rule of the U.S.-backed Shah was overthrown by a popular revolution. The Iranian population was left angry with the U.S., and the door was opened for the anti-American Islamic theocracy that followed. The path to power for the Iranian regime was laid, in no small part, by mistakes made by previous U.S. Administrations.

It makes us vulnerable to terrorist attacks. Terrorism is a reality of the modern world. Terrorism is not the product of Islam; rather it is the manifestation of a particular political agenda. All terrorist groups in the Middle East share a hatred for Israel, but seldom have major attacks impacting the United States had much to do with our support of Israel. Instead, most of these groups’ grievances relate to the effects of oil policies.

Take, for example, the story of the nation’s most wanted terrorist—Osama bin Laden. As an insurgent against the Soviet occupation of Afghanistan, Bin Laden was a de facto U.S. ally, and few dispute the claim that he received support from the CIA. Things changed in 1990 when Saddam Hussein invaded Kuwait, and Saudi Arabia came under threat. The Saudi royal family turned to the U.S. for assistance. Bin Laden offered to defend the country himself with his mujahedeen fighters but was turned down. After Saddam was expelled from Kuwait, the U.S. stationed as many as 20,000 troops in Saudi Arabia, Kuwait, and other nations surrounding Iraq to contain any future threat.

The U.S. response and the ability to assemble a broad international coalition had nothing to do with sympathy for Kuwait or feigned outrage at Saddam Hussein’s audacity to invade a sovereign neighbor. The U.S. and the rest of the world were understandably frightened of the prospect of Saddam controlling over 38 percent of the world’s oil and all of the world’s swing capacity. If he were allowed to control Iraq, Kuwait, and Saudi Arabia, Saddam would have had nearly absolute control over world oil prices.

The presence of troops began to breed resentment, especially in Saudi Arabia, where Islamic extremists were particularly insulted by the American presence so close to Islam’s holiest sites. It was the decision to keep U.S. forces in Saudi Arabia that many believe was the critical catalyst that would lead to the September 11 attacks. With U.S. troops set to be in the region seemingly indefinitely, hatred for America and the terrorist attacks that stem from that hatred are not likely to cease.

Without question this is a terrible laundry list of problems. And yet the U.S. doesn’t have to continue its downward spiral. It doesn’t have to be beholden to foreign resources. Despite what you may hear from some misguided leaders in government and industry, energy independence is possible.

Yes, the U.S. is a country without a sound energy policy and we’re presently being crushed by our own thirst for oil—but we’re still the greatest industrial power in history. By developing alternative fuels, the U.S. can create millions of jobs and spur economic growth. We do not need a “Manhattan Project” to create some technology from scratch. The technology already exists and has been used for other applications and in other places for generations. Not only can America produce its own fuel from other resources, it can do so economically.

But make no mistake: Such a large and important undertaking will require the commitment of millions of Americans all working toward the same goal. It’s a daunting prospect. I just hope for the sake of our nation that we’ll find the will to make it happen.

Breaking the Chains: Five Solutions for Ending Foreign Oil Dependence
By Lewis Reynolds, author of America the Prisoner: The Implications of Foreign Oil Addiction and a Realistic Plan to End It
(Relevance Media, 2010, ISBN: 978-0-9842478-0-6, $26.95, www.americatheprisoner.com).

America doesn’t have to depend on overseas sources for its vital national interests. Aside from creating millions of jobs, a move toward energy independence can begin the process of rebuilding the U.S. industrial base. This would allow us to provide one of the most stable and secure energy supplies in the world. Best of all, the new domestic energy can be both renewable and sustainable.

Here are a few possible solutions, excerpted from my book, America the Prisoner, that could help the U.S. break the chains of oil dependence:

Invest in new infrastructure to process alternative fuels. There’s little dispute over the feasibility of manufacturing liquid fuels from non-petroleum sources. Brazil is energy independent thanks, in no small part, to production of ethanol from sugarcane. Germany did it from coal during World War II. South Africa continues to do it from coal and natural gas using the technology they developed while isolated because of apartheid. The same technology used in South Africa and Germany that has been around for nearly a century is capable of producing fuels here in the United States. The only difference for us is that decades of research and the emergence of nanotechnology make fuel produced this way much more affordable and economically competitive with oil-based fuels.

The technology is simple. Gasification, the process of taking an organic material (such as coal or biomass) and converting it to a mixture of gases, is the first step. There are already multiple competing commercial technologies and at least 20 plants in operation or under construction in the United States alone, mostly in the chemical industry. Using a separate but related technology, the gases manufactured using this process can be reacted to form a wide range of fuels—including those already most familiar to Americans and compatible with the existing vehicle fleet and infrastructure like diesel, jet fuel, gasoline components, and ethanol. Even natural gas can be processed into liquid fuels using these technologies, and useful byproducts can be manufactured (such as plastics) just like they are from petroleum refining.

Contrary to conventional wisdom, production of fuel in this manner can be economical and, therefore, profitable—highly profitable. While the level of capital investment is indeed significant, higher than a comparably yielding oil refinery, capital cost is spread over a long useful life of a plant, and savings show up in other places. Even with the cost of raw materials, energy inputs, and depreciation of the plant included, the break-even cost of producing fuel is around $1.25 per gallon, an amount notably lower than the current wholesale price of gasoline and other liquid fuels.

Use existing biomass to ease our transition away from petroleum use. While virtually any organic material (like coal, natural gas, and biomass) can be used to manufacture fuel, biomass offers a distinct advantage—its use makes the entire fuel cycle carbon-neutral. A carbon-neutral fuel cycle means that no matter how much fuel we consume, there will be no net increase in carbon dioxide in the atmosphere.

The federal government has done significant research into determining available biomass resources. An April 2005 joint report of the U.S. Department of Agriculture (USDA) and the Department of Energy ascertained that annual national biomass potential “exceeds 1.3 billion dry tons annually—the equivalent of more than one-third of the current demand for transportation fuels.” Of that amount, more than 300 million tons per year are already available, currently unused or underused.

These resources are comprised of: residues generated by traditional logging operations and clearing of timberlands; forest thinning for purposes of fire suppression; processing wastes (including primary mills, secondary mills, and paper mills); and urban wood residues (such as construction and demolition debris; yard wastes; and discarded furniture, cabinets, pallets, containers, and scrap wood). While each of these supplies is relatively modest by itself, the combination is a formidable supply of biomass that could be refined to supplant a portion of the petroleum the U.S. currently imports.

Grow “energy” crops. If the U.S. is to go beyond the fuel production capabilities from the country’s existing supply of biomass, we will need to make the production of fuel from biomass consistent and sustainable, and that will require cultivating “energy crops.” The U.S. already produces ethanol from corn, making it the first crop grown in the U.S. specifically for the production of energy. Unfortunately, the use of corn for ethanol has several distinct disadvantages, the most important of which is its relative land efficiency. For the U.S. to supplant all foreign oil using corn ethanol (currently the most popular non-petroleum fuel, by far), a total of 561 million acres would need to be planted in corn, an amount of land that represents 29.7 percent of the 1,894-million-acre total land area of the contiguous 48 states.

The solution is finding alternative crops that have much higher yields. There are quite a few varieties of grasses and a few types of trees that produce enough biomass material to make their growth substantially more land-efficient than corn. Two examples include switchgrass and arundo (a perennial grass). One argument against using energy crops for fuel is its effect on the world food supply. In theory, the addition of arundo and switchgrass to the agricultural scheme should have very little effect if energy crops are grown on land that is currently not used for other agricultural production.

Implement government intervention wisely. Based on the capital cost of thermochemical fuel plants and cost of establishing high-yield energy crops, I estimate that infrastructure capable of supplanting all foreign oil would require $900 billion of investment, but any attempt for government to directly invest the amount needed to make energy independence a reality is not likely to yield ideal results. Still, to convince private investors to pour billions of dollars into the cause of energy independence and the technologies necessary to achieve it, there will have to be some legislative action.

There are many steps that government can take to grow and protect an alternative fuel industry. For starters, the greatest risk to a nascent alternative fuel industry is attack from powerful predators—oil exporters and multi-national oil companies. It is essential to the long-term survival of the industry that it be protected from a reactionary drop in prices.

One potential mechanism for protecting the energy industry is the establishment of a price floor for crude oil. The floor price could be set to ensure that alternatives, including fuel produced from biomass, could compete with oil even in a falling market. There are many ways to achieve this effect, I believe the best approach is an import tariff, which would help support not only alternative fuels but also the domestic oil and gas industry that has higher extraction costs than its overseas competitors.

Develop more fuel-efficient cars. CAFÉ standards, which were implemented after the oil embargo in the 1970s, have proven remarkably effective in driving fuel efficiency. From 1978 to 1985, a period of continuous increases in fuel economy standards, U.S. oil usage steadily decreased. Beginning in 1986, however, the U.S. experienced a period of low oil prices. When oil prices collapsed, interest in increasing fuel economy waned. It was no longer a pressing political issue. For this reason, along with resistance from the auto industry, CAFÉ standards have been largely forgotten as a means of promoting increased fuel efficiency. It’s time for a new focus on developing more fuel-efficient vehicles.

There are many proposed revolutionary innovations in vehicle design that could significantly impact fuel demand. Hybrid and plug-in electric hybrid vehicles are some of the most promising options. The forthcoming Chevrolet Volt, the first of the mass-produced plug-in hybrids, is a step in the right direction. Incremental steps are important, and improved fuel efficiency is essential, but Americans should beware of any false sense of security. Our consumption of foreign oil is so significant that no amount of improved fuel efficiency is going to bring energy independence without significant production of alternative fuels.

American Surveyor



One Comment on "Seven Dangerous Side Effects of the U.S. Dependency on Foreign Oil"

  1. KenZ300 on Mon, 9th Aug 2010 1:57 am 

    Our national security and our economic security are at stake.

    Consumer budgets will fall apart with $5.00 a gallon gasoline. When more of a family budget goes to transportation costs less will go else where.