Let us take a quick look back at the Saudi oil em-bargo of 1973 because it has influenced the debate ever since, even though the oil market has changed, the U.S. relationship with the Saudis has changed, and the Saudis’ relationship with the world oil market has certainly changed. Moreover, the U.S. Government and Center for Strategic and International Studies (CSIS) have played a role here. CSIS is not an advo-cacy group. We are not lobbyists. We are a non-profit organization. We are supported by a group of compa-nies, individuals, and others, and we work on a vari-ety of issues that relate to energy markets in all their manifestations. There is a person who does climate,
there is a person who does nuclear. We tend to be or-ganized both by fuel and by markets. So if you scratch us, sometimes one person knows a lot more about the nuclear market than he/she does about the oil and gas market, while others know a lot more about the fuel side of the equation than they do about the markets.
So we are not psychotic, but certainly multitasking.
The year 1973 was a watershed year for the United States because the Saudis embargoed oil shipments to our country. The reason they did that was that Is-rael and Egypt were at war. IsIs-rael had lost many of its tanks. It had come to the United States to ask for replacements and got them. The tanks were drawn from the stocks in Europe. Recall that in 1973 the tanks were the main weapons that the U.S. Army was going to use to hold the (Fulda) gap. At that time, I was in the embassy in Bonn, Germany, and I can say that the junior officers thought this was a terrible idea. They thought they were being denuded of their equipment and were worried about what would happen if the Soviets decided to attack. Anyway, the tanks went to Israel, and the Saudis decided to embargo the United States.
The embargo failed, and the Saudis were essen-tially isolated. Given this experience, they will likely never attempt something like this again. So I am not particularly concerned about an embargo in the oil market. The disruption in 1979, which had to do with the Iranian revolution, was much more severe. As those readers who lived through it probably remem-ber, prices became extremely high, rising automati-cally. There were also many problems with gas lines.
In those days my family lived near a gas station, and my kids were young and went into business selling coffee to people standing in line waiting to pump gas.
The United States resorted to odd-even-day and other kinds of gas rationing to ensure that we didn’t over-draw our supply.
At the same time, the U.S. administration took a lot of different steps to deal with the crisis, some of which were really quite important because they influence the market to this day. First, it created the Strategic Petro-leum Reserve. This is a supply of crude oil stored in caverns on the Gulf Coast. There are some 700 million barrels’ worth to be found in Louisiana and Texas.
This can be used to supply the market in the event of a major crisis. Second, it took the lead in the creation of the International Energy Agency (IEA) in 1974. It did so to ensure that there would be a collective response to politically-inspired disruption of oil supplies. There have been some 20 disruptions over the last 30 years, most of them small, virtually none of them politically motivated, some of them having to do with changes of governments in a particular producing country.
The Strategic Petroleum Reserve has been used incrementally every so often to dampen down prices.
During the invasion of Iraq there was a partial draw-down because the administration rightly feared that the invasion of an oil-producing country would other-wise have driven prices through the ceiling. The ceil-ing was a lot lower than it otherwise would have been.
In fact, the strategic reserve is not something that is used to manipulate the market; it is used for strategic issues.
The IEA is an organization of countries working within the framework of the Organisation for Eco-nomic Co-operation and Development (OECD). The organization has a mechanism for sharing oil in the event that there is a crisis. That will probably never be used. The oil to be shared would not be domestically
produced oil but rather oil on the high seas. Oil on the high seas has been diverted individually by countries.
The United States has done it several times. Individual IEA countries have said that they were having trouble getting oil, and the President and the department have called in companies and asked them if they could di-vert oil to the country in question. Japan faced the most serious threat after the collapse of Iran because Japan was—and still is—heavily dependent upon Ira-nian oil imports. Asia in general is also heavily depen-dent on the Organization of the Petroleum Exporting Countries (OPEC) oil exports.
Also worth noting is the fact that U.S. demand for oil is flattening off. This is because of the greater en-ergy efficiency of our transportation fleet—we now get more miles per gallon. The change in the fuel com-position at the gas station is also significant. Ethanol is now being added to the fuel mix, and this is lowering the demand for crude oil. There have also been some structural changes in the energy market in the United States. We are moving toward a service or nonheavy industry economy. That accounts for a fair amount of these changes in demand. I suspect that we will continue the trend we have seen over the past decade and, as we become still more efficient, will see lower energy use per capita.
Let us now review the last 30 years and see where the United States stands vis-à-vis the countries from whom it imports the most oil and natural gas. Of course, the major oil and major natural gas exporter is Canada. Canada is tied by pipeline to the U.S. en-ergy economy. The arguments we have had with the Canadians in the past were over the border price of imports. Today the price is set by the spot market—so the price is whatever the people engaged in the mar-ket decide it is going to be.
The U.S. Government is now out of the business of price regulation but was heavily involved in that busi-ness 25 years ago. At the time it was trying to dampen down price increases due to price speculation. The emergence of markets—the spot market and the for-ward market for natural gas and for oil—was the work of President Jimmy Carter. His most important decision was to deregulate oil prices in this country.
Allow me to relate a story on this subject. President Carter made the decision. The oil price deregulation in the U.S. economy took place over the course of 22 months. At the end of this period, President Carter was defeated by President Ronald Reagan, but there was an interim period between the November elec-tions and the January inauguration. I remember sit-ting in a meesit-ting when President Carter decided to ask President Reagan if he, Carter, could deregulate the remaining 15 percent or so of oil prices that were still being regulated. President Reagan turned him down. Then, of course, as soon as he was inaugurated President, Reagan’s first speech was about deregulat-ing oil prices, which he proceeded to do.
But in fact, all the heavy lifting had been done by Jimmy Carter, and all the credit went to Reagan. Presi-dent Bill Clinton learned from this—after the end of his second term, just before the new government took office, he pardoned a number of people in jail and was roundly criticized for it. I am not taking a stand on whether it was right or wrong to pardon them. The point is that President George Bush could not undo the pardons. In short, if a President wants to do some-thing in this lame duck period, he should do so. As Henry Kissinger would say, don’t ask for permission now, ask for forgiveness later. Carter’s failure to act on his own explains why Reagan got all the credit.