Energy is vital to stability in the United States. Where supplies are vulnerable to disruption, energy security problems arise. This is perhaps most evident regarding oil dependency. The United States needs oil. Despite some progress on alternatives, oil continues to fuel our transportation fleet and our military. However, much of the nation’s oil is transported through fairly precarious means such as the Trans-Alaska Pipeline System or a limited number of foreign oil tanker channels. These delivery systems are vulnerable to disruption.
Energy security issues are not limited to oil, however. Natural gas supplies to much of the country run through a handful of trunk pipelines. Pipeline and tanker vulnerabilities affect oil from Columbia and other non-Persian Gulf nations as well. Electrical distribution is also somewhat vulnerable to disruption. Certain resources pose other energy security risks. For example, the terrorist risks associated with nuclear plants are finally being recognized subsequent to the terrorist attacks of September 11, 2001. Hydroelectric facilities would also be vulnerable to attack.
Markets react in three primary ways to vulnerable supplies. First, they demand a higher price to reflect the higher risks. Second, they invest in approaches to make the supply less risky. This includes diversification of suppliers, the development of new supplies, the establishment of stockpiles to cover demand if supply is interrupted, and the attempt to reduce the likelihood of supply disruptions. Third, markets develop substitute materials and ways to use the limited supplies more efficiently.
When government interventions curb these natural responses under the guise of "price stability," the long-term development of alternatives, and hence a more flexible response to supply shocks, can be lost. The oil industry is a useful example. Corporations have invested in diversifying their supply base across countries, and the rise of non-OPEC oil producers has greatly weakened the power of the cartel. However, it has been the United States government, rather than private firms, that has developed the largest stockpiles (such as the Strategic Petroleum Reserve) and spent billions of dollars in defense costs to reduce the likelihood of supply interruptions and price shocks. Most large oil importers have established similar oil stockpiles under requirements of the International Energy Agency.
Whereas many other countries have passed most of the cost of the stockpiles through to consumers, the United States has not. Because the government has borne these costs of securing supply via the general taxpayer, the costs of these activities are not reflected in the current price of oil. Thus, producers and consumers lack important price signals that would encourage investment in substitutes. The government’s costs act as a subsidy to oil, and these costs are huge. The cost of defending oil supplies from the Persian Gulf is estimated between $11 and $23 billion per year. (For a detailed discussion of Persian Gulf oil defense, including why those who argue the military cost attributable to oil is close to nothing are wrong, see Chapter 5 of Koplow and Martin. The full report is also available.
Strategic stockpiling of oil runs between $1.6 and $5.4 billion per year, depending on how interest accruals on past debts are treated. (This holding cost will fall or rise along with prevailing interest rates). Other energy security costs, such as spending on pipeline security or important oil installations in other countries by the US military are likely large as well. However, a lack of publicly-available data makes them difficult to estimate.
Source: Doug Koplow and Aaron Martin. Fueling Global Warming: Federal Subsidies to Oil in the United States, (Washington, DC: Greenpeace), June 1998.