Oil prices climbed to $111.14 a barrel on Monday following new Iranian threats to cut off oil supply to world markets by shutting down the Straits of Hormuz, a key transit route for nearly 20% of globally-traded oil. Last year’s unrest in Libya led to market shaking price spikes in the cost of petroleum. Both events demonstrate how turmoil in the Middle East and other unforeseeable global events can drive up oil prices. These unpredictable price spikes and supply shocks have a negative impact on the American economy and on our national security.
According to the IMF, a $10 increase in the price of a barrel of oil reduces U.S. GDP growth by half of a percent. While the most visible economic effect may be seen at the pump, there are many other second order effects that lead to financial slowdown, such as higher food prices, increases in airline ticket prices, and increased costs for shipping goods.
For the U.S. military, a $1 rise in the cost of a barrel of oil equals $130 million of budget shortfall. Last year’s increase of $38 per barrel translates into $3 billion of budget uncertainty which in most cases means that flying, sailing, and training hours are cut short, decreasing the readiness of our armed forces.
A commonly offered solution to this problem is to drill for more domestic oil. “The Gulf [of Mexico] is ready to get back to work to help create jobs and lower gasoline prices,” said Washington Republican Doc Hastings, head of the House Natural Resources Committee following the oil price spikes seen during the Libyan unrest.
What he didn’t say is that the amount of oil the U.S. could drill would be small compared to world demand and that it would not make a dent in the market price of oil. In fact, whatever impact it might have would likely be offset by decreases in OPEC production. Clearly, it is not possible for the U.S. to drill its way out of the economic and security impacts of price and supply shocks. The answer is to decrease consumption of oil through efficiency and electric vehicles and to replace petroleum with alternative fuels — all approaches that the Obama administration has embraced.
Late last year, the Obama administration took a major step toward increased vehicle efficiency with its proposal to double auto fuel efficiency to 54.5 miles per gallon by 2025.
Current requirements dictate that automakers raise efficiency from 27 mpg today to 35.4 mpg by 2016. Beginning in 2017, automakers would be required to meet a 5% annual fuel efficiency improvement for cars and annual gains of 3.5-5% for light trucks (SUVs, pickups, and vans). Thirteen automakers have signed onto this landmark deal including General Motors, Ford, Chrysler, Toyota, and Honda.
The Obama administration has also taken an aggressive position on electric vehicles setting the goal of one million electric vehicles on the road by 2015.
In the March 2011 Blueprint for a Secure Energy Future, the Obama administration also set important goals on alternative fuels. The blueprint committed to breaking ground on at least four commercial-scale cellulosic or advanced bio-refineries over the next two years and challenged the Secretaries of Agriculture, Energy, and the Navy to investigate how they might work together to speed the development of “drop-in” biofuels substitutes for diesel and jet fuels for both commercial and military applications.
With these measures, the Obama administration is putting the nation on the path to decreasing the risk that volatile oil prices pose to our economy and nationally security.
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