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Peak oil in America

The United States was blessed with abundant reserves of crude petroleum, high quality and easily taken from the ground. Until 1973, we were the world's biggest producer of crude oil, and even today remain the third biggest, ranking behind only Russia and Saudi Arabia.

The United States was blessed with abundant reserves of crude petroleum, high quality and easily taken from the ground. Until 1973, we were the world's biggest producer of crude oil, and even today remain the third biggest, ranking behind only Russia and Saudi Arabia.

However, the amount of oil produced in America each year has been on a path of inexorable decline for two generations. That decline occurred despite the discovery and development of the supergiant field in Alaska's Prudhoe Bay, despite the fact that the U.S. drilled as many feet of exploratory and development wells between 1981-1985 as it had from 1951-1965, despite the fact that an increasing fraction of U.S. crude oil production has been coming from under the sea (and that from ever-increasing depths), and despite tremendous technological advances over this period.

The long-continuing and inexorable decline in U.S. crude oil production resulted not from a lack of cleverness or paucity of effort, but instead is the necessary consequence of the geologic reality that oil is a depletable resource-- you can't take the same oil out of the ground twice. No matter what we do, we can't turn the clock back to 1970.

The same thing will eventually happen elsewhere, as indeed it already has for Europe's North Sea and Mexico's Cantarell, the latter having been the world's second-biggest producing field. There are arguments over when that eventual decline in global crude oil production will set in. Some argue cogently that this global decline has already begun, while others regard it as still a number of years or decades away.

I would like to avoid a discussion of exactly how soon we will arrive at the global version of the pattern observed in the U.S. data above. Although that's a very interesting and important question, it's potentially a distraction from the main point I hope to make here. And that is that the peak in U.S. oil production has already produced some very profound changes in our world.

One unavoidable implication of the dual realities that U.S. oil production keeps falling and U.S. oil consumption keeps rising is that the volume of oil that we import from abroad has steadily risen, currently standing at around 10 million barrels of crude oil and an additional three-and-a-half million barrels of petroleum products every day, at a total cost of 300 billion dollars last year. That represents a phenomenal transfer of wealth. To borrow Peter Schiff's illustration, suppose we were to try to pay for this by selling off U.S. companies of the size of Unocal (the bid for which from a Chinese oil company two years ago generated quite a controversy). If we gave entire ownership of a different American company of this size to foreigners once each month as partial payment for the oil we import, we'd still fall far behind in meeting the current oil import bills.

And where is this transfer of wealth going? The list of the world's main oil exporters is hardly a group that the United States would like to see grow more powerful and rich as we sink further in debt. The influence that Saudi Arabian wealth can buy seems likely to have played no small part in the radicalization of Islam, both in the U.S. and around the world. And you must have also noticed that we've recently entered an era in which anyone who publicly criticizes the leader of Russia seems to end up dead. Mahmoud Ahmadinejad has declared he'd sacrifice half of Iran for the sake of wiping out Israel, and oil wealth will surely provide him the means to do so. By comparison, the belief by Venezuelan President Hugo Chavez that the U.S. President is the devil seems almost tame.

But if we want to acknowledge the real damage to U.S. interests, it is impossible to overlook Iraq. Now, I am not among those who believe that the purpose of the most recent war was to secure a U.S. supply of oil. But I do think that the war would not have happened if Iraq was a country with no resources. The risks from having someone like Saddam Hussein in control of such a vast sum of wealth, and fear of the damage he could cause with it, was in my opinion a key reason that the U.S. initiated that ongoing profound bloodshed.

If the U.S. were today to stop importing oil, the price on world markets would plummet, which would pull the rug out from under these and other potential enemies in a far more effective way than the U.S. armed forces, for all their might, are able to achieve through military operations.

So why don't we do it? President Richard Nixon said we should, in his 1974 State of the Union Address:

"Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving. "

As did President Jimmy Carter in April 1977:

These are the goals we set for 1985:

  • Reduce the annual growth rate in our energy demand to less than two percent
  • Reduce gasoline consumption by ten percent below its current level
  • Cut in half the portion of United States oil which is imported

President George H.W. Bush reaffirmed the desirability of that goal in October 1991:

When our administration developed our national energy strategy, three principles guided our policy: reducing our dependence on foreign oil, protecting our environment, and promoting economic growth.

His son, President George W. Bush, expressed the concerns more starkly in his 2006 State of the Union Address:

here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.

And, looking ahead, Senator Hillary Clinton (D-NY) has helped launch the Democrats' "Energy Independence 2020" plan.

So why, if all these leaders believed it is such a good idea to reduce U.S. oil imports, has it not happened?

The answer is that it's very hard to do. There's no apparent way to bring U.S. oil production back up, and reducing demand is extremely painful.

And that gives me a certain perspective on the question of what will happen when we see on a global basis the same inexorable decline in crude oil production that's already apparent for the U.S., the North Sea, and Mexico. Some say, when we really need it, we will find a solution.

But I say, we really need it right now.

James Hamilton is Professor of Economics at the University of California, San Diego, and contributor to the popular blog Econbrowser.

(Note: Commentaries do not necessarily represent ASPO-USA's positions; they are personal statements and observations by informed commentators.)

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