How Will Continuing Civil Unrest in the Middle East Affect Gas Prices in the US?

By Bruce Dorminey, Special to Climate Central

Credit: istockphoto

With airstrikes against the Libyan regime of Moammar Gadhafi continuing, and other parts of the oil-rich Middle East bubbling over with civil unrest, already jittery global oil markets have led to rising gas prices in the U.S. The price of gasoline in California is hovering near the $4 a gallon mark, with slightly lower costs in other parts of the contiguous states. Given the focus on political instability in the Middle East, we thought it would be prudent to ask an oil expert whether the current upheaval might also lead to turmoil in oil supplies here at home, beyond what’s already occurring. And, if so, would this also influence America’s current clean energy mix, and favor the expansion of renewable energy technologies? 

Since the late 1940s, the U.S. has been a net oil importer. And although American consumers use almost a quarter of the world's oil, U.S. oil production peaked in 1970, and now represents just under 10 percent of global production. Although many Americans assume the country gets most of its oil from Saudi Arabia, in fact the top two exporters of oil to the U.S. are Canada and Mexico. However, Saudi Arabia remains the source of more than 10 percent of the estimated 84 million barrels of oil the world consumes daily, and with its ability to boost production during times of crisis, the Kingdom plays a key role in determining world oil prices.

To get some perspective on global oil prices, we consulted Guy Caruso, a 40-year veteran analyst of global energy markets. Caruso has been an energy economist with the CIA; headed up the Paris-based International Energy Agency’s oil division; and served as administrator for the Department of Energy’s Energy Information Administration. He is currently a Senior Adviser in the Energy and National Security program at the Center for Strategic and International Studies, a Washington think tank. Note that this interview took place shortly before the U.S. and its European allies intervened militarily in Libya.

Q: Is the potential impact on price at the pump from the current Middle East crises being overplayed?

Caruso: At the moment, the physical disruption of the flow of oil has been rather limited. The real concern is the uncertainty over whether it will get worse. We were already in a pretty tight oil market due to increased demand in China and elsewhere. At this point, however, there’s no rationale for $5.00 a gallon gasoline. 

Q: Even so, in the words of Yogi Berra, it’s “déjà vu all over again.” Today, more than 60 percent of our oil is imported. That’s nearly twice as much as was the case in 1974. Did we fail to learn anything from the 1973-74 OPEC oil embargo?

Caruso: We’ve had a number of disruptions in supply since then, so it’s always difficult to predict if or when they’ll happen. You had the Shah of Iran overthrown in 1979 and that disrupted supply; then Iraq and Iran fighting each other for a number of years in the 1980s; then the Iraqi invasion of Kuwait. And right now, with respect to any actual physical disruption of oil supply, it’s been limited to Libya. 

Q: But a majority of the oil that is imported into the U.S. now comes from Canada and Mexico.

Caruso: Right. Most of our oil imports come from Canada, Mexico and Venezuela. We get very little oil from Libya, and although Saudi oil is number three or four on the U.S. import list, Saudi oil represents less than 10 percent of our total oil imports. 

Q: So even though less than 10 percent of our oil imports now come from the Middle East, how does this disruption affect prices globally?

Caruso: A disruption anywhere affects us. That’s why it’s important that we think of this globally. If there was an expansion of the disruption, it would lead to even higher prices and put some pressure on our economy. Even if we got zero oil from the Middle East, we still pay the world price.

Guy Caruso (Right) testifying at a House Select Committee on Energy Independence and Global Warming on 'The Future of Oil' in June 2008. Credit: Chip Somodevilla/Getty Images

Q: Even so, that doesn’t seem to be commonly appreciated by the general public.

Caruso: When people talk about energy independence, it makes for nice political rhetoric. But we can’t isolate ourselves from the world’s energy markets. Even if we produced all of our own energy, we would still be paying the global market price. The cost of trying to achieve energy independence would be extremely onerous.  

Q: Has our political leadership failed us in terms of energy policy?

Caruso: If our leadership has failed, it’s in not being more straightforward with their constituents. If you want to lower energy use or reduce emissions, for example, you have to pay for it. The political leadership has been reluctant to say that. If you want less dependence on foreign energy, then you have to use less. One way or another you have to do that through price/market mechanisms or regulation. When trying to get elected, it’s not easy to say, “voter, you have to pay more for energy if you want to achieve security and/or environmental goals.”

Q: If there were a full scale revolution in Saudi Arabia how would that impact the flow of oil there?

Caruso: A new government may decide they need the money. And it may only be a temporary disruption. In the case of Saudi [Arabia], about 10 percent of the world’s oil production is at stake. They are also the only country that has any significant unused capacity to bring onstream if something were to go wrong anywhere else. But thus far, the market has responded very moderately to what’s happening in Libya. We’re up about $10 a barrel. 

Q: We don’t import any oil from Iran, but due to oil’s global fungibility, would a disruption there also impact prices here?

Caruso: Yes. Even though we don’t import any Iranian oil, our economy would suffer. Our domestic oil producers get the global price. The only way to isolate yourself would be to impose price controls which have proven to be disastrous in the past. There are two ways to relieve upward pressure on price in any market, one is reduce demand, or increase supply, or a combination of both. But that’s not the way it’s couched in political rhetoric. It’s easier to say we need to stop importing from those bad guys.

Q: Should we raise CAFE (Corporate Average Fuel Economy) standards?

Caruso: Yes. Europeans reduce the pain by high taxes and the consumers probably don’t like it, but they adjust by buying smaller, more efficient vehicles and driving much less per vehicle per year than we do. But regulatory CAFE standards are politically more feasible in the U.S. The whole U.S. economic system is based on the ability to commute long distances. You don’t change those kinds of things overnight.

Retail gasoline prices in the US from 1993 to Feb. 2011. Credit: EIA.

Q: You’ve noted that politicians are unwilling to ask the public to pay more for energy. Why should they?

Caruso: A policy of imposing increased taxes on energy and/or taxes on carbon emissions… Higher taxes reduce consumption and adds to tax revenue at home. 

Q: And I assume these tax energy windfalls would go into research and development of next generation biofuels, for example. Ethanol and biofuels currently make up less than 5 percent of the U.S.’ liquid fuel supply.

Caruso: Second generation biofuels from non-food material, from cellulosic material for example, is still not economically feasible at the scales needed. The technology is simply not available for large-scale use at a reasonable cost. 

Q: But the general public seems to think that getting off oil for transportation would go a long way towards reducing carbon dioxide emissions. Is this, in fact, the case?

Caruso: Transportation is not the largest emitter of greenhouse gases; it’s electric power. In the U.S., 50 percent of electricity is generated from coal and that figure is in the 70 percent range in China and India. So, in reducing CO2 emissions, the biggest bang for the dollar is by starting with the reduction of coal for electricity generation.

Q: How long would it take to have a simple majority of vehicles in the U.S. operating on something other than gasoline?

Caruso: That will take twenty or thirty years. We have to realize these things are going to take decades and not mislead the public that things are going to happen quickly. The win-win is improving efficiency and using liquids that produce less emissions. 

Q: How long will it take the U.S. transportation sector to transition to oil free energy?

Caruso: Another 75 years would be reasonable. In the interim, we have a lot more oil to be found. So oil shortages are more of a geopolitical risk than a risk of resource depletion. 

A man carries heating oil in the tsunami-damaged town of Otsuchi on March 18, 2011. Japan was battling a nuclear and humanitarian crisis with engineers working to restore power to a stricken power plant in what the UN's top atomic expert said was a 'race against time'. Fuel shortages have hampered recovery efforts in many parts of Japan. Credit: NICHOLAS KAMM/AFP/Getty Images

Q: What impact will Japan’s current crisis have on the world energy markets?

Caruso: Japan currently consumes about 4.5 million barrels of oil per day. Initially, the reduction in economic activity will reduce energy demand. Over the next few weeks, reduced demand will mean downward pressure on price. But once recovery and restoration begins, demand for oil products will put upward pressure on price. During the recovery and rebuilding period there is likely [to be] an increase in demand for fuel oil and liquid natural gas for electric power generation to replace generating lost nuclear capacity. 

Q: What if Saudi Arabia and Iran head into full-scale revolt and the general turmoil continues through Labor day? 

Caruso: That would take 10 to 20 percent of the world’s oil off the table and be devastating. In the short run, you can’t replace that much oil. But the probability of that happening is low.

Q: So, once the current political upheaval is over you expect the oil to continue pumping as usual?

Caruso: Unless you had some unusual circumstances, the new government would need every resource it had to be able to deliver on the promises to its constituents.