Three reasons US is better off 40 years after Arab oil embargo

Four decades after the 1973 Arab oil embargo, the US has more efficient cars, a strategic oil reserve, and a homegrown energy boom that is reducing its reliance on OPEC oil. But oil prices remain high and some see the nation's newfound resource wealth as a boom that will eventually go bust.

By , Staff writer

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    Cars line up in two directions in 1973 at a gas station in New York City. Arab oil exporters inflated prices and cut off supplies beginning forty years ago Wednesday, sending a shockwave through the US economy.
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The world has changed. For US energy, that's a good thing.

Forty years after the first Arab oil embargo exposed the risks of dependence on foreign oil, the US has made adjustments to reduce its vulnerability to short-term supply disruptions. Here are three of the biggest changes:

  1. Energy boom: New drilling techniques are coaxing vast amounts of fossil fuels from stubborn shale rock formations in Texas, North Dakota, Pennsylvania, and elsewhere. The US is producing so much natural gas that it's beginning to export it. 
  2. Demand: Americans have dramatically reduced the number of factories and residences that use oil. Transportation remains its biggest vulnerability. Here, too, there's progress, as Americans begin to pare back their driving. When they do drive, it's in cars that on average go twice as far on a single tank of gasoline as the average car did in 1973. Or, they drive in cars that don't run on gasoline at all – opting for electricity or even natural gas as a fuel instead. 
  3. Emergency reserves: When Arab oil exporters raised oil prices and then cut off the supply of oil to the West starting 40 years ago Wednesday, there was no backup plan. Today, there is. The International Energy Agency formed in response to the oil embargo, and coordinated a global network of emergency oil supplies in the case of future oil shocks. These strategic reserves have helped to offset the power of the spigot wielded by the Organization of the Petroleum Exporting Countries (OPEC).  

In September, the US dropped to the world's No. 2 importer of oil. It's expected to surpass Russia and Saudi Arabia this year as the world's largest producer of oil and gas combined. After decades of fueling economic growth with the supplies of other nations, the US is increasingly reliant on homegrown energy, and poised to capitalize on global demands.  

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"The US has improved its global economic and energy security position by increasing US energy self-sufficiency," Guy Caruso, a senior adviser in the energy and national security program at the Center for Strategic and International Studies, a Washington-based think tank, writes in an e-mail. "Nevertheless as part of a globalized oil market the US remains vulnerable to economic damage if oil supplies are disrupted significantly. A disruption anywhere causes economic dislocation everywhere." 

It's why the notion of energy independence – popularized by President Nixon in the embargo's aftermath, and co-opted by most every president since – is an elusive one. As long as the US relies on commodities traded on international markets, many analysts say, its energy security will be inextricably linked to the ups and downs of producers and consumers across the globe. US dependence on foreign oil has dropped since peaking in 2005, but it remains a significant portion of total supply. About 45 percent of the crude oil and petroleum products the US consumed in 2011 came from foreign sources, according the US Energy Information Administration. By 2019, imports are projected to account for a third of US petroleum and other liquids consumption.

Dwindling supplies of conventional oil also challenge the rosy outlook of US energy. Having tapped the oil that forms in cracks and pools underground, energy companies increasingly wring oil from source rocks like a sponge. For some, this unconventional oil is an expensive and environmentally risky boom that will bust like any other. For others, production from shale is a long-term game-changer that dramatically redefines where oil comes from across the globe.

"All the easiest oil has been developed," Jack Rafuse, former energy adviser to the Nixon White House and principal of the Rafuse Organization, a Virginia-based energy consulting firm, says in a telephone interview. "... But the US has used much more oil than the world ever knew even existed and continues to do so. That’s the way oil reserves work. You keep finding more and developing new technologies."  

It's a costly and energy-intensive enterprise, which is one reason oil prices remain historically high in this brave new world of energy. The other is that while demand is flat in the US, it's booming elsewhere. A growing middle class in China and Southeast Asia is embarking on its own love affair with the automobile.

"China will increasingly be vulnerable to volatility in the global oil market as its consumption surges," Jason Bordoff, former energy security adviser to President Obama and director of Columbia University's Center on Global Energy Policy, writes in an e-mail. "For this reason, China is building a massive strategic petroleum reserve, and over time there will be increasing pressure from North American and European consuming countries for China, which is not a member of the International Energy Agency, to cooperate in the use of strategic stocks to address disruptions in the global oil market."

Supply disruptions in Iran, Libya, Nigeria, Sudan, Yemen, and Syria put upward pressure on prices. A weak dollar has also helped to keep oil prices steadily above $100 and gas prices above $3.

Because unconventional oil is costly to produce, prices per barrel must remain in the $80-to-$100 range to earn a decent return on the investment, according to Mr. Caruso. A sudden drop in those prices could dramatically crimp production from shale formations.

Like any windfall, the question going forward is what to do with the resource wealth. The US has long imposed restrictions on the amount of crude oil it exports in the interest of protecting domestic supplies, but some analysts eye a not-too-distant future where the US profits from selling its crude on the global market.

In natural gas, the US is already turning some of the nation's import terminals into export terminals. After a nearly two-year hiatus, the US Department of Energy has issued permits for three liquefied natural gas export terminals this year, and many expect more on the horizon.

"Forty years later, we have this potential power shift from East back to West because of this tight oil and gas boom and our ability to meet incremental demand," David Goldwyn, former special envoy for international energy affairs under Secretary of State Hillary Clinton and president of his own energy analysis firm, says in a telephone interview. "But neither the government, industry, or the public has yet accepted the fact that circumstances have changed.... We only get this huge geopolitical benefit if we connect the US market to the global market" and export.

Not everyone sees it that way. Natural gas prices are dramatically cheaper in the US than abroad, and critics say opening the industry to exports would drive up prices and erode the nation's competitive advantage. It would also further incentivize drilling for natural gas, which is a cleaner fossil fuel than coal but still produces carbon dioxide at a time when many scientists say the atmosphere already has a dangerously high concentration of the heat-trapping gas.

It's why the technique has stirred environmental opposition and remains controversial among the broader public. Forty-four percent of Americans favor the increased use of fracking, according to a September Pew Research poll, while 49 percent oppose it. That's up 11 points from the 38 percent of Americans who opposed increased use of fracking when asked in March.

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