from that country. Similarly, conflicts in Nigeria between ethnic groups can disrupt the amount of crude oil (approximately 570,000 barrels per day) imported from that country. Thus, in a short time and by events out of its control, the United States can suffer an oil shortage of imported oil (to the tune of 2,000,000 barrels per day) that leaves a large gap in the required 18,000,000 barrels per day currently refined in the United States.
Furthermore, the oil industry itself has been a story of vast swings between periods of overproduction, when low prices and profits led oil producers to devise ways to restrict output and raise prices, and periods when oil supplies appeared to be on the brink of exhaustion, stimulating a global search for new supplies. This cycle may now be approaching an end. It appears that world oil supplies may truly be reaching their natural limits. With proven world oil reserves anticipated to last less than 40 years, the age of oil that began near Titusville may be coming to an end. In the years to come, the search for new sources of oil will be transformed into a quest for entirely new sources of energy.
Political and investment risk factors continue to affect future oil exploration and production and, ultimately, the timing of peak oil production. These factors include changing political conditions and investment climates in many countries that have large proven oil reserves. These factors are important in affecting future oil exploration and production.
Even in the United States, political considerations may affect the rate of exploration and production. For example, restrictions imposed to protect environmental assets mean that some oil may not be produced. The Minerals Management Service of the United States Department of the Interior estimates that approximately 76 billion barrels (76 x 109 bbls) of oil lie in undiscovered fields offshore in the outer continental shelf of the United States (which is necessary for a measure of energy security). Nevertheless, Congress enacted moratoriums on drilling and exploration in this area to protect coastlines from unintended oil spills. In addition, policies on federal land use need to take into account multiple uses of the land including environmental protection. Environmental restrictions may affect a peak in oil production by barring oil exploration and production in environmentally sensitive areas.
The government must adopt policies that ensure our energy independence. The US Congress is no longer believable when the members of the Congress lay the blame on foreign governments or events for an impending crisis. The Congress needs to look north and the positive role played by the government of Canada in the early 1960s when the decision was made to encourage development of the Alberta tar sands. Synthetic crude oil production is now in excess of 1,000,000 million barrels per day – less than 6% of the daily liquid fuels requirement in the United States but a much higher percentage of Canadian daily liquid fuels requirement. In the United States, the issue to be faced is not so much oil reserves but oil policies.
The economics of crude oil inventories provides the key to unlocking this mystery. The net cost of carrying inventories is equal to the interest rate, plus the cost of physical storage, minus the convenience yield. The convenience yield is driven by the precautionary demand for the storage. When the convenience yield is zero, a market is in full carry, future prices exceed spot prices and inventories are abundant. Alternatively, when the precautionary demand for oil is high, spot prices are strong and exceed future prices, and inventories are unusually low. The strategic petroleum reserve should be used to give the country a measure of energy independence and to thwart the efforts of the cartel to control crude oil – a world commodity.
A measure of dependency on crude oil can be viewed by various importing countries (Alhajji and Williams, 2003). In the United States, increasing crude oil imports is considered a threat to national security but there is also the line of thinking that the level of imports has no significant impact on energy security, or even national security. However, the issue becomes a problem when import vulnerability increases as crude oil imports rise which occurs when oil-consuming countries increase the share of crude oil imports from politically unstable areas of the world.
More generally, there are four measures of crude oil dependence: (i) crude oil imports as a percentage of total crude oil consumption, (ii) the number of days total crude oil stocks cover crude oil imports, (iii) the number of days total stocks cover consumption, and (iv) the percentage of crude oil in total energy consumption (Alhajji and Williams, 2003).
The dependency on foreign oil in the United States has increased steadily since 1986 and has reached record highs in the past two decades – the degree of import dependence as percentage of consumption increased from about 50% in the early-to-mid 1980s to 60% in the early 1990s (because of higher economic growth and lower oil prices on the demand side and declining US production on the supply side). Currently, 65-70% of the daily oil and oil products is imported into the United States. There have been some minor fluctuations but the changes in the amount of oil imported into the United States are usually related to changes in the US economy and the US oil production.
The United States is the only oil-importing country with significant production which is also a net importer. It is also unique in that among the net importers it has the lowest dependence in terms of net imports as a percent of consumption but it also has the highest absolute level of imports. The geo-political and economic interests and commitments raise the level of concern by US policy makers about dependence on imported oil.
In addition, commercial oil stocks in the United States have been at their lowest level in three decades. Total crude oil inventories, which include commercial and stocks in the Strategic Petroleum Reserve (SPR) are relatively low, in terms of daily coverage. Current commercial inventories are near the level at which spot shortages can occur. The past decade has seen scenarios in which the decline in commercial stocks is greater than the increase in the Strategic Petroleum Reserve, and the capacity of the Strategic Petroleum Reserve and commercial stocks to deal with a crisis is less than before the refilling program began (Williams and Alhajji, 2003). Moreover, the premature release of crude oil from the Strategic Petroleum Reserve can jeopardize national security in case of continued political problems in the oil-producing countries and weakens the ability of the United States to respond to real shortages.
Although some of the oil-importing countries have made progress in reducing their dependence on oil, the dependence of the United States on crude oil has increased in recent years from 38% of total energy consumption in 1995 to approximately 40% at the current time. This indicates two possible areas of concern regarding the extent to which crude oil influences energy security: (i) the increase in the crude oil share of energy use, and (ii) the inability or unwillingness of the United States to reduce dependence on imported oil.
It might be argued that the degree of dependence has no impact on energy security as long as foreign oil is imported form secure sources. However, if the degree of dependence on non-secure sources increases, energy security would be in jeopardy. In this case, vulnerability would increase and economic and national security of individual oil-importing countries would be compromised.
The percentage of imports from the top five suppliers can be used as a measure of the supply vulnerability to an interruption by one or more key suppliers. This is an important measure of the vulnerability of the United States to supply disruption because it shows the high level of import concentration by importing from few suppliers. The top five suppliers to oil-importing countries are Saudi Arabia, the Commonwealth of Independent States (former Soviet republics), Norway, Venezuela, and Mexico. The United States has a unique arrangement as well as location with Canada and Mexico but the political stability of Saudi Arabia is always open to discussion and question. In addition, problems in Venezuela underline the United States vulnerability to interruption from a major supplier. Venezuela has had severe problems and the potential for an interruption in oil supply always exist. Iraq crude has been off the market for several years (oil supply from Iraq is only just starting again) and conflict in Nigeria has significantly influenced oil output.
Another important measure of vulnerability is the share of world crude coming from the Gulf region. The Gulf region has been viewed historically as a politically
