Gasbags

No one envies BP’s top brass this week. The company’s executives have a full schedule of hearings on Capitol Hill over the next several days, as well as a meeting with U.S. President Barack Obama, at which they are sure to be asked a great many questions about the still-ongoing Gulf of Mexico oil spill that BP simply can’t answer. Faced with the prospect of penalties and drilling moratoriums on its U.S. operations, the company is reportedly planning to tell Obama that, in the Financial Times‘ words, "crippling the company would not be in the interests of the U.S. or its future energy security."

That two-word phrase — "energy security" — is an idea invoked frequently by everyone from oil company executives to green-energy proponents, and one that has taken center stage in the United States since the Gulf spill. Last week, Interior Secretary Ken Salazar cited energy security in explaining the need to continue drilling in the outer continental shelf. Senators John Kerry and Joseph Lieberman have argued that their new clean energy and climate bill will help the United States achieve energy security. Obama’s new National Security Strategy, published last month, invokes energy security no fewer than four times.

Yet when I brought together a diverse group of 36 experts in April to take stock of what we know about how oil affects U.S. national security (a detailed summary of the discussions and their conclusions is here), the conclusion was unmistakable and troubling: We know a lot less about what energy security is than our confident rhetoric suggests.

Those who talk about energy security usually focus on two vulnerabilities: the impact of oil markets on the U.S. economy and the ways in which oil empowers the countries that produce it. Let’s start with the economic argument, which arises from the seemingly strong relationship between oil spikes and recessions. University of California San Diego economist James D. Hamilton has famously argued that almost every U.S. recession since World War II has been caused by a spike in oil prices. Others have disagreed: Federal Reserve Chairman Ben Bernanke, when he was an academic, contended that high interest rates, rather than soaring oil prices, were what did the economy in.

The current recession has rekindled the debate, but in truth, our understanding of how oil affects the U.S. economy is shockingly limited. We hear often, for example, that Americans send a billion dollars abroad every day to pay for oil. But what matters is not only how much Americans spend on oil, or who reaps the profits, but also what they do with them — something about which we know very little. If oil producers spend the money on U.S. exports, the impact on the U.S. economy might be minimal. If they park it in bank accounts, or use it to fund sketchy home loans, the consequences are likely far graver.

When it comes to the ways that oil empowers countries that produce it, we’re equally ill informed. We’re often told that oil funds terrorism, but we’re actually fairly clueless about how and how much. Different terrorist organizations rely on oil profits to varying degrees, which aren’t at all commensurate with the threat they pose to the United States. Hezbollah, for example, is an expensive enterprise to run, and oil money is a critical source of funding, according to a recent Rand study. But al Qaeda is much cheaper to operate, according to the same study, and the group’s much-vaunted Saudi oil connection may be relatively unimportant to its survival. Our understanding of how oil empowers hostile states themselves is equally poor. It is hard to tell, for example, whether Iran was able to charge ahead with its nuclear program during the last decade because of high oil revenues, or because of unrelated technical breakthroughs.

Nor do we have a good idea of how much geopolitical leverage oil-producing countries gain from their supplies. Our instincts about oil’s potential as an economic and political weapon stem from the 1970s, when hostile Arab producers slashed shipments to the West, causing widespread havoc. Things have changed mightily in the intervening 30 years, however. Global oil markets now buffer oil supply disruptions, while strategic petroleum reserves (large stocks of oil controlled by Western governments, including the United States) provide an additional cushion of safety. Yet we still do not understand the system’s limits. Security experts still debate, for example, whether Iran could close the Strait of Hormuz for an extended period, and if it could, what the consequences for global markets would be. They also spend little time trying to understand the conditions under which global oil markets might collapse, or what the consequences of such a development would be.

And while we focus on how oil empowers those who produce it, we know far less about its negative effects on the same countries. Much has been written about the resource curse, which appears to cruelly consign many oil-rich countries (Nigeria is a poster child) to permanent poverty, dictatorship, and strife. Whether smart policy interventions can forestall such consequences, though, is far from understood. Similarly, while much ink has been spilled on the hazards of expensive oil, far less attention has been paid to the dangers of cheap oil. Mexico, for example, gets about 40 percent of its government revenues from oil. A sudden drop in the price of crude could spur unrest and drain the Mexican government of the money it needs to fight security threats that often spill over into the United States. Saudi Arabia, meanwhile, is an enigma on this front: No one knows exactly what plummeting oil prices would do to the country’s stability, and few spend much time trying to find out. Yet policymakers rarely, if ever, raise these issues as matters of national concern.

Our confusion about energy security is not just an academic problem — it has important consequences for U.S. policy. Is BP’s financial health really essential to U.S. energy security? That depends on how vulnerable the United States would be to a clumsy sale of the company’s assets. And does Obama’s new National Security Strategy effectively address the big problems that the United States faces where oil and national security meet? Until we understand that nexus much better, we won’t truly know.