The turmoil in Egypt highlights the risks that come along with an entrenched global oil market. No country, most notably the United States, is in a position to shield itself from price spikes like the recent ones resulting from Egyptian unrest.
Oil prices have risen since late last year because of several factors, a big one being the improving global economy. On Monday a barrel closed over $100, at $101.01, for the first time since September 2008. A barrel of Brent crude oil, the global benchmark, stood at $70 in August.
Spikes are not unusual during international crises, especially in the Middle East, the richest oil region in the world. They’re also largely unavoidable, especially for the United States, the world’s top oil-consuming country, whose transportation sector is 95 percent dependent on oil.
America consumes almost 20 million barrels a day, according to the federal government. That eclipses the second-highest oil-consuming nation, China, by almost threefold, according to the Energy Information Administration. In 2009, the last full year of available statistics, the United States imported 5.95 million barrels of oil per day from nations in the Organization of Petroleum Exporting Countries (OPEC), and most of its members are in the Middle East.
Experts agree that so far, the Egyptian turmoil should not lead directly to an oil shortage, but the risk of it can stir the global market and debate in Washington.
“Nothing has happened that I’ve seen that has cut down on the availability of oil,” oil tycoon T. Boone Pickens told National Journal Daily on Monday. “But the uncertainty has obviously crept into the market.”
So what’s got the oil traders all worked up? “They think it could go to the ultimate conclusion and that is that Saudi Arabia could be overthrown,” Pickens said. “And that’s the largest supply of oil in the world.” Saudi Arabia shipped 367 million barrels of oil to the United States in 2009.
The chances of that happening are slim, Pickens and other experts agreed, but the risk is inherent in the global market.
“I think oil price spikes are a part of the world we live in now,” said David Pumphrey, deputy director of the energy and national security program at the Center for Strategic and International Studies. “They become more pronounced when we are in a situation where the market is starting to tighten, which is what has happened the past several months.”
Egypt is in a unique position in the oil supply chain even though it produces only 700,000 barrels a day. The Suez Canal and Sumed pipeline serve as vital transportation arteries for global oil shipments. For now, no evidence suggests that either of those avenues will be blocked, but Pumphrey said the risk could compel individual shippers to slow down shipments there or choose alternate, longer routes.
The price spikes aren’t unexpected and neither are the debates Congress will likely have if oil prices result in $4 a gallon gasoline reminiscent of the “drill, baby, drill” debate of late 2008. Most reaction in Congress—on both sides of the aisle—to high oil and gas prices is to call for the United States to reduce its dependency on foreign oil.
Republicans and oil-state Democrats say the United States should do that by drilling for more oil. But the problem may be ingrained in America’s dependence on oil, no matter where it comes from.
“Our oil prices would reflect world oil prices even if it was entirely produced in Wyoming and the Gulf of Mexico,” said Joel Darmstadter, a senior fellow and economist at Resources for the Future.
“The real question is how do you minimize your exposure to the role of oil in your economy overall, not just the part that’s imported,” Pumphrey said.
In order for that to happen, the transportation sector needs to be weaned off oil, increasing public transportation, shifting to electric vehicles, and, if Pickens had his way, natural gas engines for large trucks. These policy ideas, while generally supported in Congress, come with price tags and government incentives that are opposed by most Republicans and some moderate Democrats.
Even if Congress does pass legislation incentivizing alternative transportation fuels and technology (which in the lineup of energy measures are some of the more likely ones to pass) the time it will take to shift from oil to natural gas and electric vehicle technology will be a long journey.
The Senate’s point man on these issues, Energy and Natural Resources Chairman Jeff Bingaman, D-N.M., sought to convey that challenge on Monday.
“The truth is,” Bingaman said, “most of the action that could be taken would have to occur over a substantial period of time.”
This article appears in the February 1, 2011 edition of NJ Daily.