Forty Years After OPEC Embargo, U.S. Is Energy Giant

Forty years ago this month, the Organization of the Petroleum Exporting Countries proclaimed an embargo on oil exports to the U.S. as retaliation for its support of Israel in the Yom Kippur War. It would last only five months, but it haunts U.S. energy policy to this day.

The modern global energy market bears scant resemblance to what existed 40 years ago. Today’s market is far more diversified and resilient. Thanks to the shale gas revolution and soaring domestic oil and gas production, the U.S. has reduced the cost of its energy and become a major exporter of refined products. Add in the political and economic tumult within many OPEC member countries, and it’s clear that, by almost any measure, OPEC is far weaker and the U.S. is far stronger than in 1973.

Nevertheless, the U.S. continues to mandate the use of corn ethanol -- a farm subsidy that has been masquerading as an energy program since the 1970s. And the promoters of ethanol still hype the supposed danger of "our dependence on imported oil." Every administration since President Richard Nixon’s has engaged in sloganeering about energy independence -- including Barack Obama’s, just this past August -- despite increasing global interdependence.

Symbolic Move

Looking back, it’s obvious that the OPEC embargo itself was largely a symbolic move. The main reason for gasoline shortages in the wake of the embargo was not a lack of crude oil, but rather federal price controls, Anas Alhajji of NGP Energy Capital Management LLC and other economists have concluded. Indeed, America’s crude-oil imports in 1973 exceeded those in 1972 by 372 million barrels, data from the Energy Information Administration show. In 1974, those imports jumped again by 85 million barrels.

Since then, although oil remains a critically important commodity, petroleum’s share of the global energy market has been in steady decline. In 1973, it accounted for 48 percent of all global energy use. Last year, its market share fell to 33 percent.

That slide has largely been caused by the increasing use of coal, natural gas and nuclear power. Over the past four decades, oil use has grown by 34 million barrels per day, or 61 percent - - on its face, a healthy increase. At the same time, coal use has soared by nearly 44 million barrels of oil equivalent per day, or 140 percent. The next biggest gainer has been natural gas, of which global consumption has increased by about 39 million barrels of oil equivalent per day, or 184 percent. During that same period, nuclear energy saw huge percentage growth, rising by 1,100 percent. In absolute terms, however, nuclear remains a relatively small player, producing about 11 million barrels of oil equivalent per day, which is less than 5 percent of global energy demand.

This diversification of the energy market, along with growing national strategic petroleum reserves, has made the global economy more resilient to sudden changes in oil prices. For its part, the U.S. has also become more efficient in using petroleum. Back in 1973, it consumed about 17.3 million barrels of oil per day, using it to generate almost 17 percent of its electricity. Today, that share is down to about 1 percent.

Americans are also getting more economic growth from each barrel of oil they consume. In 1973, the U.S. population was 212 million; its gross domestic product was $5 trillion. Today, the population is about 316 million, and GDP has grown to about $14 trillion. (Both GDP figures are in 2005 dollars.) In other words, the U.S. has increased its population by half and nearly tripled its economic output, while consuming only 7 percent more oil.

Adding to the U.S.’s enviable energy position is its shale gas boom. In 2012, the country produced an average of almost 66 billion cubic feet of natural gas per day -- more than at any other time in its history. Prices have fallen (they’re now at about $3.64 per million British thermal units) to the point where the U.S. has a price advantage over every other country, with the possible exception of Qatar. Cheap gas is fueling a resurgence in U.S. manufacturing of everything from steel to fertilizer.

Enough Hand-Wringing

The surge in natural gas production has occurred alongside a major increase in oil output. Last year, U.S. production rose by about 800,000 barrels per day, the biggest annual increase since 1859. This year, it is expected to climb by another 600,000 barrels per day. And that has helped spur a huge increase in exports. Yes, exports. In July, the U.S. exported an average of nearly 3.9 million barrels of refined products per day, up from a paltry 211,000 barrels per day in 1973.

At the same time, OPEC’s oil production has been languishing. Ongoing conflicts in Libya, Nigeria and Iraq have reduced output. Iran remains hamstrung by Western sanctions over its nuclear program. In Venezuela, where crime and inflation are soaring, oil production stands at its 1994 level, about 2.7 million barrels per day.

Considered as a whole, OPEC member countries have a combined population of some 429 million -- about 115 million more than the U.S. -- yet their combined GDP is $3.3 trillion, a fourth that of the U.S. OPEC’s per-capita GDP is $7,800, which is about 62 percent of the world average and less than one-sixth that of the U.S., which is nearly $50,000.

OPEC-bashing makes for good political sound bites. But the reality is that the U.S. does not need to achieve energy independence. It is becoming ever more interdependent in the global energy market. And that’s a good thing. Yes, we still import oil, but we then export increasing amounts of it in the form of diesel fuel and other manufactured products. We are also exporting increasing amounts of coal. And we may soon export significant volumes of natural gas and domestic crude.

Forty years of hand-wringing over the evils of OPEC is enough. The energy superpower of today is the United States.

This piece originally appeared in Bloomberg

This piece originally appeared in Bloomberg