The author of Riding the Indian Tiger says the inevitable end of U.S. dependence on oil will have far-reaching consequences for both consumer and producer nations
Over the past year there has been an ever-quickening drumbeat of dire news about oil. Predictions of $250 barrel super-spikes, declining global supplies, and the potential for energy wars made headline news. In the U.S., high prices at the pump became a leading campaign issue and a very real driver of inflationary fears. That inflationary pressure forced the emerging giants, India and China, to tighten monetary policy, which in turn constrained economic growth. But while oil will indeed come to an end as the primary energy supply for the global economic engine, it will most likely go out with a whimper and not a roar.
Putting the global recession aside for the moment, the premise always has been: Global dependence on oil is a reality, and demand is increasing at a steady rate primarily driven by the economic growth of India and China. Concurrently, new sources of oil are increasingly difficult and costly to find. So using the basic principle of supply and demand, we should conclude that oil prices will continue to increase without any end in sight, correct?
Not exactly. First and foremost, there is the issue of supply. During the next two to three years, Iraq's oil production will increase by 3.5 million barrels per day, adding 4% to the global supply. Production from new fields in Angola and Brazil is expected to add an additional 1 million to 2 million barrels per day during the same time.
Precarious Dependence on Foreign Oil
But additional production is not what will cause oil to retreat quietly. The end of oil may have begun with the Jan. 20 inauguration of President Barack Obama. His Presidency heralds, among other things, the rapid development of the most comprehensive energy policy that the world has ever seen.
Currently the U.S. consumes 19.6 million barrels of oil per day—25% of the world's total consumption. The U.S. also produces one-fourth of the world's carbon emissions, more than any other country on earth. Equally alarming is the fact that the U.S. imports 10.2 million barrels of oil per day, creating an unsustainable and strategically precarious dependence on foreign oil.
This situation is about to change faster than most expect. The new Obama Administration will soon unveil a comprehensive energy strategy that will focus on energy independence, renewable energy, and the rapid reduction of greenhouse gas emissions. The timing may be fortuitous as the U.S. economy deals with the impact of poor fiscal and financial oversight, an automobile industry on the brink of collapse, massive expenditures in Iraq, and a workforce that has pushed into the low-value service-industry sector.
Millions of New Green Jobs
This current economic plight has created a scenario in which the American public is ready, willing, and able to get behind a far-reaching and, in many ways, revolutionary energy strategy. The key elements of this strategy will include massive investment in renewable energy, including wind and solar; a rapid retooling of the U.S. automobile industry to manufacture highly fuel-efficient vehicles with a bias toward plug-ins; the creation of a digital electrical grid; investments in high-speed rail; and an aggressive carbon cap-and-trade program.
These investments will create millions of high-value, green jobs that cannot be outsourced, and while the impact of this program will be felt across the board, one of its most measurable short- to medium-term effects will be the rapid decrease in the importing of foreign oil. Specifically, in 2010 the U.S. will begin reducing foreign oil consumption by 10% per year, equal to roughly 1 million barrels a day. That's more than $30 billion in reduced capital outflows in the first year alone, welcome news considering our current balance of trade.
But that's only a small part of the story. The Obama Administration plans to create a cartel of oil-importing nations that will include India and China. This group will share technology, processes, and strategy with the stated goal of eliminating the group's dependence on foreign oil. The importance of this move cannot be overstated. India and China are keenly aware that their economies are increasingly becoming dependent on oil from volatile regions. We can expect this new group to move to aggressively share technology that will reduce the use of fossil fuels. That technology will be driven by innovation that is becoming more global with the rapid development of advanced battery technology, photovoltaic solar panels, wind turbine systems, and biofuels.
Lower Demand Will Lead to Change
The end of oil will be met with some resistance. There are many vested interests that would like to see our dependence continue. However, that resistance will be no match for the economic and strategic pressure aligned against it. In the short term our energy independence strategy, like the Manhattan Project or the Apollo program, will help pull the U.S. economy out of a recession while creating continuous downward pressure on oil prices. Low oil prices will further reduce the threat of inflation—high oil prices fuel higher food costs—and a reduced threat of inflation will allow central banks to maintain an easing of monetary policy. This will be welcome news to India and China. Low inflation will equate directly to an increase in GDP growth and domestic consumption for them.
And what will be the longer-term consequences of this energy revolution? As demand wanes and prices continue to remain low, significant economic and social stress will begin to be seen in the various oil dictatorships such as Iran, Saudi Arabia, and Venezuela. Ultimately this will lead to regime change and social upheaval in many of these countries. For the U.S., India, China, and the other oil-importing nations, the oil-producing regions will become far less relevant. Clearly there will be challenges along the way, but in the end oil will go quietly with nothing more than a whimper.