US reducing dependence on imported oil

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OIL price per barrel in future delivery (seven years out) was reportedly quoted at $23 on January 25, 2003. It rose to $40 on January 25, 2005 and further increased to $62 on January 25, 2006.

Rising oil prices have hit economies, heavily dependent on imported oil. First of all, higher crude prices have led to increase in inflation. Secondly, import of costlier oil has resulted in worsening of trade and current account deficits in many countries including Pakistan and finally, the current oil situation poses a hazard to a country’s oil security.

Countries depending heavily on oil imports are taking steps to meet the situation according to their own circumstances. The US President’s State of the Union address on January 31, 2006 was partly related to this problem. The measures proposed by him are aimed at reducing US dependence on oil imports, particularly from the Middle East. It is proposed to replace 75 per cent of US oil imports from the Middle East by 2025.

As a matter of fact, the US has been trying to diversify its oil imports sources since long. According to the latest report on the subject, crude oil from the Middle East represents only about one-fifth of total US oil imports, while the country is importing a significant percentage of its requirement of oil from Canada, Mexico and Venezuela.

The plan announced by the US President firstly, proposes a 22 per cent increase in clean-energy research at the Energy Department ‘to fast-track breakthroughs in how autos, homes and businesses are powered’.

Another proposal is to include $150 million in 2007 budget to make ‘cellulosic ethanol’ – a fuel made from agricultural waste products such as wood chips, stalks or weeds – cost competitive by 2012.

Yet another proposal is to invest more in zero-emission coal-fired plants, solar and wind technologies and clean, safe nuclear energy.

Finally, it has been proposed to step up research to make better batteries for hybrid and electric cars and hydrogen vehicles.

Observers in the US have been expressing their views on the US plan to reduce its dependence on the Middle East oil, as announced by the President. The Saudi Ambassador in the US expressed his annoyance over the remarks regarding reducing dependence on the Middle East oil and stated that he would request an explanation of the statement from the US administration.

Some of observers have expressed the view that the plan is too optimistic, since ethanol and wind and solar technologies are not going to be an effective and viable substitute of crude oil in the near future. Others stated that similar plans were announced in the past, also, but as soon as the oil prices showed a downward trend, such plans had been abandoned.

However, certain indicators that have come to light recently lead to the conclusion that oil prices may not substantially decline from their higher levels in the near future. Governments should, therefore, be more serious this time about the need to accelerate the pace of work aimed at exploring alternative energy sources and new technologies.

In the first instance, the futures crude market is presently sending a somewhat different and disturbing signal. Up to 2002, oil futures did not generally move above $20 per barrel. Even by the end of 2004, the oil futures lagged behind the current prices.

However, during last year, the long-term future prices had soared, in some cases, to as much as $62 a barrel, which signifies that the market perception about future oil prices had now changed and that the oil market now saw future prices at a considerably higher level in the coming years.

Secondly, analysts are of the view that the market is right now trying to consider as to what price could persuade the oil companies to go into new production without hurting demand too much.

According to recent reports, new oil reserves were either in very difficult and remote areas or they were in places such as Iran and Iraq. Besides, with the passage of time, the cost of oil production had also gone up considerably.

Analysts are of the view that the world should prepare itself to buy oil at $50 to $60 per barrel or even higher, in the coming years.

Thirdly, spare capacity in world’s oil fields is reportedly almost non-existent, while the global demand for oil continues to grow. The oil industry’s storage and distribution system is, also, under pressure and unable to cope with the rapidly growing world consumption.

Both short-term and long-term oil prices could ease, if there had been an appropriate excess petroleum capacity. However, the excess capacity is only about 1.5 million to two million barrels a day, and the entire quantity is in Saudi Arabia. Besides, this excess capacity is of heavy sulphurous crude oil which the refiners are reluctant to accept.

Fourthly, oil exporters have become used to the higher crude prices and higher oil revenues and they may not be prepared to accept a reduction in their oil revenues. That is why they start considering a cut in the oil production quotas as soon as they see the slightest sign of a decline in the international crude prices.

The oil production was, no doubt, kept unchanged in the last OPEC meeting but some of the OPEC members have a mind to cut oil production when they have their next meeting during the spring season.

Moreover, the Iran situation remains disturbing due to which the international oil prices are likely to stay at their higher level, unless the problem is peacefully resolved. A deterioration of the aforesaid situation, on the other hand, may send the oil prices soaring, although such a price increase may not be beneficial for any one.

Countries heavily depending on imported oil including Pakistan must be prepared to buy pricier oil for some time to come. All such countries should keep their dependence on imported oil within reasonable limits, so that the oil imports do not adversely affect their economy.

We should try our best to keep the oil consumption in the country at the minimum possible level by eliminating waste and misuse. At the same time, efforts should continue to find new oil reserves within the country and, to develop alternative sources of energy.

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I've heard some more talk from people within the goverment for funds for researching more alternative sources and such as well.