In the two decades since the fall of the Soviet Union, global
oil production has increased from 66 million barrels per day to almost 87 million;
much of that increase from Russia and the former Soviet Republics. This almost
certainly wouldn't have happened without the fall of the Soviet Union. For
example, enormous new oil fields of Azerbaijan and Kazakhstan were only developed
once foreign investors and technology were allowed in to make it happen.
Political and economic changes also brought new oil to
market. The Baku-Tblisi-Ceyhan (BTC) pipeline brings crude oil drilled in the
Caspian Sea to market through Azerbaijan, Georgia -- two former Soviet Republics
-- and Turkey. The BTC pipeline, which opened in 2006, would have been
impossible 20 years before.
The expansion of global oil production has been accompanied
by oil market consolidation. Mergers of oil companies like Exxon-Mobil,
Chevron-Texaco, BP-Amoco, along with significant infrastructure investments
created the first truly global oil market. Oil contracts are traded in liquid
commodity markets that create uniform oil prices around the world. Due to these
changes, price differences in oil only reflect actual substantive differences
in quality or transportation costs.
These developments were supposed to alleviate the energy
security concerns that the U.S. faced after the 1970s. America would no longer
be held hostage to supply shocks that could cut off our access to oil. American
soldiers would no longer have to fight to protect sources of oil.
That has not proved to be the case. The U.S. today produces
over 50% of the oil that it consumes, and a further 20% comes from our friendly
neighbors, Canada and Mexico. Imports from the Persian Gulf have fallen to 9%
of our consumption. In spite of these trends we still face concerns about
We no longer worry that our supply will be cut off, but we
face an even more vexing problem -- price. It doesn't matter to the American
consumer that the supply of oil that goes into his or her tank is diversified:
gasoline is the same whether it comes from Canada, Venezuela, Nigeria, or Saudi
Arabia. The integrated, globalized market that we have created means that the
price of oil is set globally.
This past May, as civil war was spreading in Libya, global
oil prices shot up to $113 per barrel. The U.S. only imported about 70,000
barrels per day of oil from Libya (about 0.6% of total consumption), but the
domestic price of oil, and the gasoline that American consumers depend on, shot
up equally fast.
It is global demand -- not supply diversity -- that determines
energy security in the modern world.
American policy is beginning to address demand, but too many
policymakers still believe that we can ensure energy security just by producing
more here at home or by importing more from Canada. The truth is that only by
reducing American dependence on oil -- foreign and domestic -- can policymakers
break the oil market's choke-hold on the economy.