At a May 12, 2009, Senate Foreign Relations Committee hearing on Energy Security Historical Perspectives and Modern Challenges, Senator Lugar discussed energy security with former President Jimmy Carter, FedEx President Fred Smith and General Charles F. Wald, USAF (Ret.).

Watch Senator Lugar's opening statement:

Read the witnesses' testimony:

• Former President Jimmy Carter
• FedEx President Fred Smith
• General Charles F. Wald, USAF (Ret.)

Energy security impacts every aspect of life in the United States, from the cars we drive and how much we pay at the gas pump to our vulnerability to foreign terrorism and our relationships with other countries. Many of the countries that export oil have unstable or hostile governments that threaten American national security. By buying oil from these countries instead of developing domestic fuels, we support governments that are repressive to their own citizens and potentially dangerous to the American people.

As Senator Lugar noted in a speech to the Brookings Institution, the United States has less than 5 percent of the world’s population, but consumes 25 percent of its oil. If oil prices remain at $60 a barrel through 2006, we will spend about $320 billion on oil imports this year alone. And demand for oil will increase far more rapidly than we expected just a few years ago. According to current projections, the U.S. will require almost 30 million barrels of oil per day by 2025. We can change this situation by reducing our consumption of oil, developing new fuel sources, and adopting the infrastructure necessary to support the shift from oil to domestic energy sources. Shifting our fuel preferences away from oil will help the United States in a number of ways. Reduced dependence not only will eliminate our economic and military vulnerability to “oil autocracies,” but it also will reduce global warming and create American jobs in the farming, manufacturing, engineering, and transportation sectors. America has a history of scientific innovation; we must use this legacy to develop new energy sources right here in the United States.

This section explores in greater detail why our society’s dependence on oil and natural gas is a national security problem. It addresses six dangers in particular: supply disruption, the finite nature of energy resources, the use of energy as a weapon, the use of energy revenues to prop up undemocratic regimes, global climate change, and the costs of high energy prices to the developing world. This page seeks to identify each threat, explain the nature of the threat, examine the consequences, and provide real-world examples.

Threat #1: Supply Disruption

Nature of the Threat: Oil production is a multi-step process. It must be extracted from the ground, shipped to a refinery, refined into useful products (such as gasoline, fuel oil, or propane), and distributed via pipeline or tankers. Natural disasters, war, and terrorist attacks could disrupt the supply of oil to the world market at any of these points.

The vulnerability of oil supplies is not a new concern. The first Gulf War, for instance, caused Iraq to withdraw 3.7 million barrels per day (mbd) from the world oil market. However, at that time world oil production exceeded consumption, so other countries were able to make up for the short-fall from Iraq. World demand has rapidly increased over the last few years; more countries are buying larger quantities of oil. In addition, OPEC members coordinate their production quotas more closely today than in past years, and they have collectively decided to keep prices high by keeping supplies low. Consequently, in today’s tight market, any major disruption of oil supplies could create scarcity and drive up prices.

Consequences: Supply disruption on a grand scale would stress the world economy. Every day, two thirds of the world’s oil passes through one or more of seven narrow “chokepoints,” or waterways that tankers must pass through to deliver their oil. For example, every day more than 17 million barrels of oil (twenty percent of the world’s oil supply), pass through the Straight of Hormuz alone. Damage or blockade of this straight would delay oil shipments to the United States, Western Europe, and Japan. There are six other geographic chokepoints that present special threats to oil transport tankers, and several cross-continental pipelines that deliver millions of barrels of oil to multiple countries. In short, supply disruption is a very real threat.

Modeling experts testified at a March 30, 2006 Senate Foreign Relations Committee hearing that supply disruptions could cause America’s GNP to decline by five percent or more, causing a severe recession. They also noted that oil supply disruptions have preceded nine of the last ten recessions in the United States.

Examples: Corrosion of the Alaskan pipeline. In August of 2006, the British Petroleum Corporation (BP) announced the closure of its Prudhoe Bay oil field on Alaska’s North Slope after routine maintenance revealed a small leak and corrosion of one of its transit pipelines. The decision to shut down the oil field and replace the faulty segment of pipeline will reduce output by 400,000 barrels per day. Oil futures jumped over two dollars in the twenty-four hours after the shutdown was announced.

Hurricane Katrina and Gulf Coast devastation. In September of 2005, Hurricanes Katrina and Rita decimated the U.S. Gulf Coast, affecting oil production, importation, refinement, and distribution. Roughly 94% of the oil production in the Gulf of Mexico’s Outer Continental Shelf shut down as a result of the hurricanes (7% of total U.S. consumption). The storms also damaged the Gulf Coast ports, prevented U.S. imports of 2.5 mbd, and forced the shutdown of seven refineries in Texas and Louisiana. Finally, electrical power outages shut down oil pipelines from the Gulf Coast area to the East Coast and Midwest. As a result of these supply disruptions, crude oil prices jumped from about $55 to more than $65 per barrel.

Venezuelan Oil Strike. The Venezuelan oil strike of 2002 also dramatically affected supplies. From December 2, 2002 to February 2, 2003, Petroleos de Venezuela, S.A. (PDVSA), Venezuela’s national oil company, went on strike to protest the policies of President Hugo Chavez. According to a recent GAO report, production fell from 2.9 mbd to 1.5 mbd and all exports stopped as a result of the strike. President Chavez responded by firing up to 40% of the striking workers and resumed production. Nevertheless, Venezuelan exports of oil to the United States fell by 1.2 mbd in the winter of 2002-2003. Because global surplus oil production capacity in 2002-3 was approximately 5.6 mbd, the United States was able to compensate for supplies lost due to the Venezuelan strike. By contrast, global surplus capacity has since declined to less than two percent in recent years as a result of increased demand in the developing world. A predictive model developed by the GAO estimated that a disruption of Venezuelan crude oil to the United States in 2006 could cause prices to spike by $11 per barrel initially.

But these shocks, which helped send the price of oil to $70 a barrel, were minor compared to what would occur if major oil processing facilities in Saudi Arabia were sabotaged. In late February of 2006, terrorists attempted such an attack. They penetrated the outer defenses of Saudi Arabia’s largest oil processing facility with car bombs before being repulsed. A successful terrorist attack – either through conventional ground assaults, suicide attacks with hijacked aircraft, terrorist inspired internal sabotage, or other means – would be devastating to the world economy. Al-Qaeda and other terrorist organizations have openly declared their intent to attack oil facilities to inflict pain on Western economies.

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Threat #2: Finite Reserves of Oil and Natural Gas

Nature of the Threat: World demand for energy is increasing. Therefore, future oil sellers will be able to choose their buyers. As large industrializing nations such as China, India, and Brazil grow their economies, worldwide demand for limited oil and natural gas supplies will increase. Chinese consumption, for instance, more than doubled between 1995 and 2005. This will drive up prices in the short term. In the long term, we will face the prospect that these supplies may not be abundant and accessible enough to support continued growth in both the industrialized West and in large, rapidly growing economies.

Second, oil and natural gas production requires continuous reinvestment and exploration. Without it, the amount of product for sale will stagnate, then diminish. Historically, privately run international oil companies have been much more likely than government-controlled national oil companies to develop new technologies and fields. Since government-run national oil companies control 79% of oil reserves today, there is no guarantee that they will be willing or able to devote the resources necessary to increase production capacity to meet growing demand. This fear is exacerbated by what is described in “peak oil theory,” an idea that stresses the finite quantity of product accessible in oil wells. According to the theory, once the peak is reached, it will become increasingly difficult to extract oil. The resulting scarcity could increase competition for oil and further drive up prices.

Consequences: As we approach the point where the world’s oil-hungry economies are competing for an insufficient supply, oil will become an even stronger magnet for conflict than it already is. Similarly, governments that control oil will gain leverage in the international system relative to countries without energy resources.

Examples: Unreliable Production Numbers. Mexico, traditionally a reliable exporter, reported in July 2006 that its crude oil production output fell much faster than anticipated, from 1.92 mbd in January 2006 to about 1.74 mbd in June. The drop sparked speculations that Mexico’s Cantarell, the world’s second-largest oil field, may lose up to 75% of its production capacity by 2008, reported the Wall Street Journal. This prospect would alter dramatically Mexico’s status as a powerful oil exporter, making the United States even more dependent on oil from hostile regimes.

According to a recent report in the Economist, examples of mismanagement and underinvestment plague most state-run oil companies. For example, despite large reserves, Indonesia has become a net importer as a result of nationally-controlled Pertamina’s failure to develop new fields. Similarly, Iran’s national oil company today produces less oil than did the private oil companies that existed prior to the Iranian revolution.

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Threat #3: Use of Energy as a Weapon

Nature of the Threat: Economies worldwide are so oil and natural gas dependent that energy rich nations can intimidate or blackmail other nations by threatening to cut off supplies. Since a total of 79% of the world’s oil reserves are state-controlled, threats to withhold oil supplies could not be countered effectively by buying from other sources. A severe oil shortage would affect everything from the delivery of groceries to the ability to power military vehicles. Thus, oil exporters who disagree with the United States sometimes threaten the restriction or redirection of energy supplies. Energy monopolists make these threats for a variety of reasons. Some believe that they are not accorded the amount of international respect they should receive as energy-rich nations, and want to increase their international influence. Others threaten to withhold oil in order to intimidate neighboring states or deter sanctions.

Consequences: Countries on the losing end of this transaction could be forced to pay much higher prices for fossil fuels. Worse, they could be forced to endure energy disruptions that lead to hardships and loss of life. Given these stakes, threats of energy embargoes could lead to military conflict.

Examples: Overt Threats to the United States. Both Iran and Venezuela have threatened to use oil as a weapon. In response to international community proposals to sanction Iran for its nuclear enrichment program, senior Iranian nuclear negotiator Javad Vaeedi commented, “the United States may have the power to cause [our country] harm and pain, but it is also susceptible to harm and pain. So if the United States wants to go down that path, let the ball roll.” Though Iranian Oil Minister, Kazem Vaziri-Hamaneh, later contradicted the statement, the threat highlighted why U.S. dependence on foreign oil is untenable in the long term. Similarly, Venezuela’s oil minister, Rafael Ramirez, warned that U.S. aggression against Venezuela would result in a redirection of Venezuelan oil to other markets, namely China.

Energy Blackmail of Ukraine and Kuwait. The United States is not the only country to have suffered energy-related blackmail. In January, 2006, Russia threatened to cut off natural gas exports in mid-winter if Ukraine did not submit to a price increase of more than 450%. Not only did this cut-off threaten Ukraine’s people and economy, it also had ripple effects across Europe as other nations saw their gas supplies dwindle. Russia and Ukraine eventually resolved the standoff, but in a way that nearly doubled the price Ukraine paid for natural gas, from $50 per thousand cubic meters to $95. Critics charged that the price increases were motivated by Russia’s geostrategic goals of increasing its international footprint and punishing Ukraine for democratizing and moving towards alignment with the West.

This threat is not unique to the post-Cold War era. In the 1980s, during the Iran-Iraq war, Iran tried to intimidate Iraq’s Arab financial supporters by firing missiles at their oil tankers as they traversed the Persian Gulf. The conflict was not resolved until the United States stepped in to protect the smaller countries’ tankers by allowing them to fly American flags and declaring that an attack on an American-flagged ship would be considered an act of war against the United States.

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Threat #4: Energy Revenues Keep Undemocratic Regimes in Power

Nature of the Threat: Two different types of oil companies exist. International oil companies are private-sector entities whose profits benefit their investors. By contrast, national oil companies are state-controlled entities whose profits go directly to their governments. National oil companies control seventy nine percent of the world’s oil reserves. As a result of our dependence on foreign oil, we transfer hundreds of billions of dollars each year to some of the least accountable regimes in the world – regimes that operate outside the norms and constraints of the international system.

Consequences: Energy revenues prop up repressive regimes by providing them with the resources to reward corrupt bureaucracies and repressive police forces. The influx of energy wealth also can destroy the impetus to diversify or reform an economy in ways that ensure the benefits flow to the people. In addition, energy wealth can fund foreign adventurism, regional mischief, and terrorism. Ultimately, an international system that weights guaranteed access to fossil fuels above law and order, adherence to international agreements, and democracy will be less safe for all countries.

Examples: Russo-Venezuelan cooperation. Venezuelan President Hugo Chavez’s recent jaunt around the world illustrated how oil money empowers dictators. As part of a July 2006 world tour to campaign for a Venezuelan seat on the U.N. Security Council, Chavez praised Belarus and Iran, two countries the United States has long decried as non-democratic. According to a New York Times report, Chavez also finalized with Russian President Vladimir Putin a deal worth $3 billion to send Russian military technology to Venezuela. Russia agreed to sell 24 Russian Sukhoi fighter jets and 53 helicopters to Venezuela to replace the country’s aging F-16 fleet. Unsubstantiated rumors circulated of Venezuela’s plans to buy Russian surface-to-air missiles as well. Putin also secured licenses for Russia’s state-owned natural gas giant, Gazprom, to develop parts of the Rafael Urdaneta gas field in the Gulf of Venezuela. Similarly, the Russian president praised the ongoing investment and exploration work in Venezuela of the state’s top oil firm, Lukoil.

Government-funded terrorism. As Thomas Friedman pointed out in a recent New York Times article, the terrorist group Hezbollah has promised to compensate Lebanese civilians for the devastation they suffered in the July/ August 2006 war with Israel. According to a recent Hezbollah proclamation, each Lebanese family that lost a home will be paid the equivalent of one year’s rent and the cost of furniture. Since 15,000 families lost their homes, the cost of Hezbollah’s promise would reach upwards of $3 billion dollars. As a terrorist organization, Hezbollah does not receive tax revenue, membership dues, or own profitable companies. It is financially supported by the government of Iran, which derives most of its government revenue from oil sales. Thus, this is a clear example of a government using oil money to support terrorism.

Stymied democratic reforms. Recent elections in energy-rich Azerbaijan and Kazakhstan demonstrate how oil and natural gas resources can insulate countries from international pressure to democratize. The Bush administration did much to encourage the two countries to hold free and fair elections in the fall of 2005. Leaders in both countries pledged free elections and allowed opposition parties to present their views in advance of the elections. Despite these promising signs, both countries cracked down on dissent on Election Day, and accusations of ballot-stuffing, intimidation at the polls, and harassment ensued.

The United States chose to continue working with the region to develop two new oil pipelines and a natural gas pipeline. But the decision was made in part because working with the Caucasus region was a less objectionable option than continuing to allow OPEC (and an increasingly repressive Russia) to monopolize world energy markets. In an oil-dependent world, choices like this will become more common.

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Threat #5: Global Climate Change

Nature of the Threat: The world’s over-reliance on fossil fuels, and especially petroleum, has created a very dangerous equation. The worldwide demand for oil is enriching many authoritarian regimes. At the same time, the burning of these fossil fuels greatly increases the amount of greenhouse gases in the atmosphere that could cause major changes in the earth’s climate.

Consequences: Global climate change could have dramatic consequences in the long-run, from melting polar ice-caps that could raise sea levels and flood coastal cities, to expanding tropical disease zones for plants and humans. In the long-run, these changes could bring drought, famine, disease, and mass migration, all of which could lead to conflict and instability.

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Threat #6: High Energy Costs Contribute to Instability in the Developing World

Nature of the Threat: Poorer nations are often far more dependent on oil imports than rich ones; their industries are more energy intensive, while their cars and their homes are less energy efficient. As a result, low-income countries spend twice as much of their national income on imported oil as the developed countries. While a $10 jump in the world price of crude shaves half a percentage point from economic growth in the West, it hits the poorest countries—where people make less than a dollar a day—nearly three times harder, according to the World Bank.

Consequences: The more developing countries have to spend on energy, the less they can spend on education, economic programs and infrastructure maintenance. By stunting development and increasing poverty, high world oil prices contribute to instability that can lead to internal strife and regional conflict. They also can cancel out the benefits of foreign assistance and help build the resentments and frustrations that breed terrorism and contribute to state failure.

Examples: Consequences for Ethiopia. As one of the world’s poorest nations, Ethiopia has suffered myriad problems as a result of rising oil prices. Increased transportation costs have affected the competitiveness of the country’s major export, coffee. Efforts to stabilize the precarious agriculture sector were hurt by sharply rising fertilizer costs, which are linked to energy prices, and shortages of truck fuel damaged drought relief efforts in the south. Even basic infrastructure needs are suffering—the cost of sorely-needed paved roads soared in response to skyrocketing prices for oil-based asphalt.

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