Energy Security and the Blowout

By John Ballard

Dr. Jeffery Frankel of the Harvard Kennedy Business School suggests we regard offshore oil deposits as part of our strategic oil reserves, saving it for future shortages resulting from national emergencies. This appeared at his blog Wednesday.

Ever since September 11, 2001, �energy security� has received increased emphasis. The energy security argument is viewed as able to tip the balance between the dueling environmental and business arguments. Usually it is taken as self-evident that the energy security goal argues in the direction of increased exploitation of domestic oil resources: �Drill, Baby, Drill.� But some of us have long thought that a more appropriate slogan for the policy of using domestic reserves as aggressively as possibly would be �Drain America First.� A true understanding of energy security could tip the balance the other way instead, in the direction of conserving American energy resources. Oil wells such as the Deepwater Horizon site, once it is capped, should be saved, their future use to be made conditional on a true national emergency, such as a long-term cut-off of Persian Gulf oil resulting in a global oil price of $200 a barrel or more.

Oil deposits in the Alaska National Wildlife Reserve might also be considered part of a strategic reserve but Frankel points out that "[e]xperts say it would take more than a decade to start pumping from where we are now: in such remote locations drilling and pipeline-laying take time."

He makes a good case for keeping the wells we now have but capping and saving some of them to be used in the event of some national emergency interrupting oil supplies.

What, then, should be the goal of energy security policy? Imagine that at some point in the coming half-century, there is a sudden cut-off in oil exports from the Persian Gulf (or the Arabian Gulf, as our non-Iranian friends on the Arabian Peninsula prefer to call it). I don�t know what would be the geo-political crisis that would cause such a cut-off. Perhaps military conflict between the US and Iran, Islamist revolution in Saudi Arabia, or terrorist use of radiological weapons. Precedents, of course, are the oil shocks of 1973-74 (precipitated by the Arab oil embargo in connection with the Yom Kippur War), 1979 (the fall of the Shah of Iran) and 1990 (Iraq�s invasion of Kuwait).

What would be the impact of a big new shock on the economy of the US and other industrial countries? The quantity of oil in the Strategic Petroleum Reserve (SPR) could at best help tide us over only for a few months. If the global crisis threatened to go on for years, the economic effects could be severe. This fact currently constrains US foreign policy and military policy, which is part of what we mean by the phrase energy security. Also important for our national security are two more points. First, our oil imports transfer every year many billions of dollars to dictators and extremists who are potential enemies. Second, our military runs on oil. (As did Japan�s in 1941, which is largely why it went to war.)

The goal of policy now should be to take steps that would reduce the impact of such a shock in the future, creating non-military response options. The solution is to leave some domestic oil underground, or underwater, for use in such emergencies, and only in such emergencies. Reserves in the Gulf of Mexico are precisely the ones we should save. Think of it like the SPR, but without going to the trouble of bringing the oil above ground only to pump it back underground.

This can be a teachable moment for America.
At this writing the magnitude of this catastrophe has yet to be fully seen. Hopes are fading for the success of the "top kill" remedy and within the last twenty-four hours even the official statements say this is not only bigger than the Exxon Valdez disaster, it is the biggest oil disaster in our history.

As the days and weeks unfold the US Government needs no longer to be held hostage to the demands of the petroleum industry. The political will to do something affirmative is about to counterbalance the revenue streams that have been bribing the people of the oil-dependent Gulf Coast and their elected representatives. When James Carville snarls at a Democrat administration the matter is serious. To use a bad analogy, this time he is the canary in the mine. 

Any final damage settlement can include more than the monetary payoffs and claims that will keep the insurance industry and lawyers on all sides employed for years to come. A political and public relations settlement will be forthcoming which might well include the control and future of offshore oil wells along the American coast. That oil can be part of America's Strategic Petroleum Reserves. And there is no reason to stop with BP. I have watched the so-called "experts" on television for the last several days and listened to their various opinions. Maybe I'm wrong, but they all, including those from BP's competitors,  seem to be circling the wagons.

Untapped oil in the ground represents future revenue as well as petroleum security. All of them should share in whatever settlement comes of this disaster. There are nearly four thousand offshore drilling rigs in the Gulf. All future production from a designated number should contribute per-barrel royalties to the States of Louisiana, Mississippi, Alabama and Florida by way of damage compensation, to be applied by those states as they see fit to ameliorate the damages resulting from this blowout disaster.
It should not be a trivial amount.
In the words of an interview I heard, the amount should hurt the industry as much as it would hurt their heart if they had one.