CNA Report on Reducing US Oil Dependence

CNA issued a report in October 2011 (released in November 2011) entitled Ensuring America’s Freedom of Movement: A National Security Imperative to Reduce U.S. Oil Dependence which is signed by 13 retired three and four-star generals and admirals in it.

The report focuses on the national security implications associated with shifting the U.S. transportation sector to alternative fuels. CNAs previous reports on similar subjects analyses the connections between energy, the economy, climate change and security.

1.      National Security and the Threat of Climate Change (see my comments Climate Change National Security Fuzz)
2.      Powering America’s Defense
3.      Powering America’s Economy

Why so many top stars are so much interested in energy? Well, they believe that all roads lead to energy. They say “America must fundamentally reconsider its national approach to energy. Those of us expressing concern about America’s diplomatic hands being tied, in part by our need to retain access to global oil supplies, ended up seeing that this would stop only when we changed our approach to energy.”  They believe that overreliance on oil in the transportation sector is the Achilles heel of the US national security and hence reducing reliance on oil will make the US safer.

They suggest immediate and aggressive action to move transportation sector away from oil and toward alternative, domestically produced sources of energy. They add that the consequences of inaction, or even delayed action, are grave.

Here are their findings:

1.      America’s dependence on oil constitutes a significant national security threat: Overreliance on oil is a national vulnerability which also reduces the US foreign policy options. Therefore the US must have alternatives to oil for its transportation, by increasing domestic production, and simultaneously reducing overall demand for oil.

2.      A 30 percent reduction in use of petroleum would significantly improve the US national security. This can be done through greater efficiency (increasing the government’s fuel economy standards and by individual actions). This would lessen dramatically the impact of an oil supply shock to the US economy and to household incomes. Here they stress that “We can make dramatic reductions in our use of oil—and shame on us if we don’t.”

3.      Many promising alternatives to oil as a transport fuel—some available today, others on the horizon- if managed properly, can lower overall national security risks.

Their recommendations are:

1.      government must take action to promote the use of a more diverse mix of transportation fuels and to drive wider public acceptance of these alternatives.

2.      develop a comprehensive energy roadmap or strategic plan to enable consistent and strategic energy policies and investments.

3.      take swift and aggressive action to reduce our use of oil to reduce oil sue and increase the use of alternative fuels and vehicles

4.      The Department of Defense should continue to be a leader in advancing alternative transportation fuels while balancing mission effectiveness and overall efficiency. DOD must be provided the necessary resources so innovation and experimentation with alternative fuels is not traded for military capability and capacity. DOD should be provided with the necessary authority to establish long-term alternative fuel contracts as a way to assure markets and lower the alternative fuel price.

All these are good intentions even if they are because of the right or wrong reasons.

One of the wrong reasons is the way the authors see or interpret the world oil market and its functioning.

“We are held hostage to price fixing by a cartel that includes actors who would do our nation harm, and we are too often called upon to risk the lives of our sons and daughters to protect fragile oil supplies from this very cartel.” (p.xiv)

“OPEC can increase production and drive down gas prices, erasing market incentives for developing alternative fuels.” (p.xiv)

 “price of gasoline at the pump can too easily be manipulated by suppliers” (p. iv)

“Insulating ourselves from the impact of oil price swings….” (p.4)

“even with a 30 percent reduction in U.S. transportation oil use and oil imports, oil producing countries will still have growing markets for their oil, though the price of that oil may be less than it would be otherwise.” (p.7)

None of those claims make any sense. I was thinking about writing a few paragraphs on how the world oil markets functions and how oil prices are set. But I see that a reasonably good answer to those wrong arguments comes again from the report itself: “oil is a global commodity, priced on the global market. No matter how much more we produce here in the U.S., we can’t control the price of oil.” (p.24)

There are also arguments in the report that are simply not possible to believe:

“If ethanol comes to satisfy a more significant share of the U.S. fuel market, leading producers like Brazil would become closer strategic partners. We can envision scenarios, for example, in which U.S. strategic ties to Saudi Arabia and other oil producers in the Middle East loosen..” (p.7)

 “You could wake up tomorrow morning and hear that the Iranians sense an attack on their nuclear power plants. And so they preemptively take steps to shut off the flow of oil in the Gulf. The U.S. would likely view this as a threat to our economy, and we would take action. And there we are, drawn into it.” (Gen. Convay, p. xviii)

“it is clear that by reducing U.S. demand for oil, and thereby reducing U.S. economic vulnerability to supply and price shocks, the United States would increase its options in military presence, operations, and costs in that region.” (p.5) [something wrong with this sentence!]

In fact, even if the US reduced its oil import dependency substantially (or even if it did not import from the Persian Gulf) I cannot see a slight possibility in the reduction of the US presence in the Gulf.

One of the areas I am confused in the report is its treatment of alternative fuels. On the one hand it says that “The free market is vital to innovation and economic strength, but we must take steps to ensure that market incentives favor fuels and vehicles that enhance our national security. If these policies are broad and operate across the American economy, they will not result in government picking winners and losers among fuel types; they will, however, ensure that Americans are winners.” On the other hand it supports full government push.

Similarly on the one hand it indicates that some alternative fuels could be better to pursue now because of their advantaged, on the other hand it sounds as if it takes position in wrong choices (corn ethanol is clearly a wrong choice).

For instance it says rightly that propane is less dense than gasoline, so propane tanks must be filled more frequently than those in gasoline-powered engines in order to achieve the same range. But somehow they fail to mention that almost all drop-in biofuels have the same problem.

This means that the authors are kind of biased. Look at how they treat synthetic fuels derived from coal and gas: “While F-T is considered a mature and established technology, the production facilities are expensive to build, operate, and maintain.” But they argue that natural gas could be used as feedstock and can be competitive. Why then pass it in one sentence and not elaborate. A drop-in biofuels obsessed DOD must not discriminate any viable, sound, proven candidate. As Gen. Kern says (on p.24) everything should be on the table. Pushing some good alternatives to the edge of the table is a grave error.

Having said that I should also remark that sometimes the report is making bold and correct arguments: “we should not allow the few who may object to the prospect of energy being drawn from unconventional areas—the “not in my backyard” crowd—to stand in the way of national security and the reduction of our dependence on oil. From an energy standpoint, there will need to be shared sacrifices in ensuring our national security.” (p.10) [well said, bravo]

In short, the CNA report tackles the correct problems with right or wrong reasons, and (as usual) it is well written. What bothers me is the inconsistencies within the report. Some of those internal inconsistencies are minor but some others raise more question then answers.

Sometimes the reader thinks that the US has the resources but not the means of production and sometimes vice versa. The US can reduce its dependence on oil but this does not imply that it would make the oil prices cheaper or the US would be less involved in the Middle East. I personally do not believe that biofuels will be cost competitive in the current decade without subsidies, which are an indirect tax levied to consumers. How long should the tax-payers continue to subsidize fuels that are chosen by the government?