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Awash in Oil

Will there be an energy crisis of the sort invoked by President Bush? One perhaps precipitated by antipathies in the Middle East? Until September 11, it was widely believed that the likelihood of a calamitous shortfall in supply was much lower than it had been in the past.

Consider the early 1970s, a time of heightened awareness of geopolitical and environmental vulnerabilities. The Club of Rome, an international group of 100 scientists, businesspeople and political figures, asked four political scientists in 1971 to use computer models from MIT to predict the future of the world. The Limits to Growth, in which the results were published a year later, became an international cause clbre that sold nine million copies in 29 languages. Among the study’s major conclusions: the world was going to run out of petroleum by 1992, creating an energy catastrophe.

It didn’t happen, not least because by 1992 the world had already experienced an entirely different kind of energy disruption. Just as the book appeared, several Middle Eastern nations nationalized Western oil companies’ assets. Because the value of the dollar was falling, petroleum prices, then as now denoted in U.S. dollars, also fell. The new owners of the Western oil assets became unhappy. United States support of Israel during the 1973 Arab-Israeli war made them unhappier still. The Organization of the Petroleum Exporting Countries (OPEC), dominated by Muslim nations, embargoed sales to the United States. Oil and gasoline prices shot up.

All of this was terrible for Western nations’ economies. Between the early 1970s and early 1980s, the price of oil went up by a factor of 10. In consequence, U.S. expenditures on energy, as a fraction of gross domestic product, almost doubled, from eight to 14 percent. (These figures, like others in this article, come from the Energy Information Administration of the U.S. Department of Energy.) Rising energy costs helped push unemployment and inflation to record highs; the U.S. economy lurched like an unseaworthy boat from recession to recession. “It was a really awful time,” says Hal Varian, an economist who is dean of the School of Information Management and Systems at the University of California, Berkeley. “When you’re doing economic comparisons you sometimes have to throw out the statistics from those years-the numbers were so freakishly bad, such outliers, that they’re not very useful for normal economic analysis.”

Buffeted by the oil shocks, Americans profoundly-and, it seems, permanently-changed their relationship with energy. Between 1973 and 2000, U.S. energy consumption jumped by about a quarter. But this rise came mostly from the concurrent rise in U.S. population. In fact, U.S. per-capita energy consumption-that is, consumption per American-actually declined slightly from 1973 to 2000. Amazingly, the drop occurred despite the seemingly unslakable U.S. appetite for power-hogging air conditioners, electricity-drinking computers and, more recently, gas-guzzling sport-utility vehicles.

Paradoxically, the United States imports a greater proportion of its petroleum than ever before-but needs it less. In the 1970s, notes Howard Gruenspecht, an economist at Resources for the Future, a Washington, DC-based research group, “the United States used oil for all kinds of things-home heat, electrical power, you name it. Now the great bulk of it is used for just one purpose: transportation.” Oil imports have quadrupled since the OPEC embargo, because U.S. drivers continue to be addicted to petroleum. But oil use has fallen in many other sectors of the economy. At the time of the embargo, for example, almost one-fifth of U.S. electricity was generated by petroleum; today the figure is less than one one-hundredth. In 1973, one out of every four houses in the United States was heated by crude oil; this year it is fewer than one out of ten. With the nation no longer completely dependent on one energy source, the U.S. economy has significantly more resilience against energy shocks than before. “Retail gas prices came close to doubling between the spring of ‘99 and the spring of 2000,” says Pietro Nivola, a senior fellow in governmental studies at the Brookings Institution, a Washington, DC-based think tank. “Consumers screamed about it, but overall, the impact was small, because the whole economy is less dependent on petroleum.”

To the extent that it was intended to increase the geopolitical power of OPEC nations, in fact, the embargo of the 1970s backfired. “The rise in prices made new investments in oil very attractive,” says Fadhil Chalabi, director of the Centre for Global Energy Studies in London, who was the acting secretary general of OPEC for much of the 1980s. “Oil companies found huge new supplies of oil in places like west Africa, the Caspian Sea, the North Sea and Mexico.” The flood of new oil put the traditional OPEC nations-especially Saudi Arabia, by far the cartel’s dominant producer-in an awkward position. To keep prices high, Saudi Arabia and neighboring Persian Gulf states had to cut production. But when they cut production, they lost the income from selling oil. They were losing money so that others could profit. In the mid-1980s these nations lifted the limits; oil prices sank.

But it may have been too late, if Chalabi’s perspective is correct. Like the United States, the West as a whole had become less reliant on petroleum in general and Middle Eastern petroleum in particular. “Even in Europe, the dependence on gulf oil has fallen dramatically over the last 20 years,” Chalabi says. “Europe has gone from importing 70 percent of its oil from the Persian Gulf to less than 30 percent because of the increases in North Sea oil and oil from west Africa.” Worse from the OPEC perspective, any attempt to raise prices will accelerate the transition away from oil to natural gas, coal and nuclear power.

Noting these factors, both the U.S. Energy Information Administration and the International Energy Agency (a Paris-based group with representatives from 26 nations) project that oil will flow in the future like never before. Desperate for hard currency, new Caspian Sea oil centers like Russia, Azerbaijan, Kazakhstan and Turkmenistan have opened the spigots wide; unable to stop them without shutting themselves out of the market, Persian Gulf oil states watched prices fall to a two-year low in November. Iraq, which has been more or less at war with the United States for a decade, nonetheless sells it 613,000 barrels of oil a day. It would like to sell more-Saddam Hussein needs the cash. “It used to be believed that overwhelming demand will make us run out of oil,” Chalabi says. “In fact, the real question is whether there will be enough demand for oil to use the supply.”

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