No man is an island, not even a man who has grown his oil and gas production exponentially.
Case in point: the US, which in the past five years has boosted oil production by around 35%, changing the discussion of its “energy independence” from a “what if” to a “when” scenario.
If that’s the case, then why should the country care so much about peace and stability in the Middle East and the protection of global energy supplies and maritime transit corridors?
“We absolutely have to care,” said Carlos Pascual, the US State Department’s special envoy and coordinator for international energy affairs.
There is a “fundamental point” the US takes into account when looking at its global energy priorities: “Oil and increasingly gas are global commodities,” Pascual said this week at an event sponsored by Columbia University’s Center on Global Energy Policy.
That means the price of oil outside the US impacts the price of oil within the US, and that can have a knock-on economic effect.
“When we see disruptions in [global] markets, when we see disruptions in maritime transit, it has a direct impact on the price that we pay in the US for energy, the price that we pay at the pump, it has a direct impact on our economic productivity,” he said.
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Pascual noted the “inelastic” nature of oil supply and demand: “If you have a major disruption, the potential for a huge price increase is huge.”
The key is to keep enough spare capacity around. That’s the amount of production that can come online within 30 days and sustained for 90 days.
“You have to work with those countries that are the big producers because if they don’t sustain the production it has an impact on the vulnerabilities in the overall marketplace,” said Pascual.
In addition, “we have to work with those countries which are the potential big new suppliers coming into the market,” he said. “Countries like Iraq become absolutely essential swing factors that can go on the one side to very sharp increases of production or if they have disruptions bring the market down. If you can’t maintain stability in that base production, then you’re putting pressure on that spare capacity.”
He noted China’s growing importance to US oil price interests. In the past, US diplomats would say China was not on their priority list, but times have changed.
“Today we have a changing environment where we have to take that into account,” said Pascual. “It puts us into an interesting situation, that China’s ability to satisfy its demand becomes in the national security economic interest of the US.”
“There is no one stop shop in assuring energy security and price stability,” said Pascual. “You have to work across the range of these markets.”