Published July 26, 2011
Ratings agencies are threatening to downgrade the U.S. dollar. Our biggest creditor, China, is telling us to get our fiscal house in order. Congress can’t seem to find common ground to meet this moment of crisis. Can things possibly get worse? Yes, they can.
Just imagine what would happen if another disruption in the global oil market were added to the already explosive situation we are in.
If terrorists were to strike the major oil production facility in Saudi Arabia, or if the countries of Iran and Venezuela jointly decided to cut a significant amount of oil production, an enormous spike in energy prices would be guaranteed. The U.S. economy would slide back into a nearly catastrophic recession. It would take much more than a simple vote of Congress to get the rating agencies to restore the U.S. dollar as the most stable currency in the world.
Unfortunately, these international energy disruptions are all too possible. What’s worse, they are completely out of our control because we are utterly dependent on the petroleum that is produced in regions of the world that are relatively unstable, do not have America's best interests at heart, or both.
Unlike the current debt ceiling debate we are in though, we may have time to act before a crisis occurs.
I recently participated in an war-game called Oil ShockWave, where a simulated cabinet had to grapple with economic and national security consequences of these international energy crisis scenarios involving Saudi Arabia, Iran and Venezuela. It was a sobering exercise that showed how little we can do once oil prices are sent skyrocketing.
Oil ShockWave showed that the best way to solve a crisis is to not get in one. As we see from the current debate surrounding the debt limit, a crisis will certainly motivate action, but during the crisis is when we have the fewest options.
True leadership and vision comes from seeing an opportunity to solve a problem before it becomes an emergency. In energy, just as with the debt ceiling, we’ve seen for a very long time just how vulnerable we are. The only question that remains is, will we wait for a potentially catastrophic energy disruption to take action, or will we put in place a real set of solutions to avoid a real Oil ShockWave?
Energy security receives a lot of lip service, but it is something that has eluded us as a nation. Everyone understands the importance of reducing our dangerous dependence on oil, but the facts are that it requires a series of short- and long-term policies. Yes, we must produce more domestic oil while conserving as much possible, but simply drilling more and using less won’t insulate the U.S. from an oil price shock.
Because 90 percent of proved oil reserves are held by state-owned enterprises, there is no free market for oil. The Organization of Petroleum Exporting Countries (OPEC) engages in collusion that would be illegal in the United States. Iran, which currently chairs OPEC, wants to keep production at current levels so energy prices remain high. Other key players want to increase production so prices will be lowered to a point where the West doesn’t pursue alternatives to oil. Heads they win, tails we lose.
As such, the reality of the situation is that unless we dramatically reduce our dependence on petroleum, we will never fully be in control of our energy future. In addition to producing more American oil as soon as possible, we must also take advantage of our other abundant sources of domestic energy that are used to power the electrical grid, including coal, natural gas, wind, nuclear, solar, and more.
The U.S. uses 70 percent of its oil in the transportation sector, so the best way to truly displace petroleum is to connect the electric grid to the transportation sector through electric vehicles. This long-term goal of electrifying the transportation sector requires action and problem solving from both the public and private sectors. It is an opportunity for leadership that can have a profound impact our national and economic security.
During the Oil ShockWave simulation in which I took part, the credit ratings agencies threatened to downgrade the U.S. dollar because skyrocketing energy prices crippled the economy and severely weakened our GDP. A few hours later, in real life, the ratings agencies threatened a downgrade because of the failure to respond to the approaching debt ceiling and deficit crisis.
Personally, I don’t take a lot of comfort when life imitates a war game. I do however think there is a lot that can be learned from the current debt debate, and applied to the area of energy security.
The first and most important lesson: don’t wait for the crisis to happen.
Stephen Hadley is the former National Security Advisor to President George W. Bush.