Economic Costs of Major Oil Supply Disruption Poses Risk to U.S. National Security

While on a net basis the United States imports nearly 60 percent of the oil it consumes, this reliance on imported oil is not by itself a major national security threat, according to a RAND Corporation study issued today.

May 13th, 2009: This RAND Corporation Study finds that the economic costs of a major disruption in global oil supplies—including higher prices for American consumers—pose the greatest risk to the United States.

“The fact that the United States imports nearly three-fifths of its oil does not pose a national security threat,” said Keith Crane, the study’s lead author and senior economist at RAND, a nonprofit research organization. “There is an integrated world oil market, and embargoes do not work. But a large, extended drop in the global supply of oil would trigger a sharp rise in oil prices and significantly affect the United States, no matter how much or how little oil the United States imports.”

The RAND study evaluates commonly suggested links between oil imports and U.S. national security, and assesses the economic, political and military costs and benefits of potential policies to address threats to U.S. national security associated with imported oil. The work was sponsored by U.S. Institute for 21st Century Energy, an affiliate of the U.S. Chamber of Commerce. As with all of RAND’s work, the study’s conclusions were reached independently.

The report finds that the two most serious threats to U.S. economic security are a large disruption in global oil supplies and higher consumer costs associated with the disruption.

Higher oil revenues for "rogue" oil exporters, such as Iran and Venezuela, higher revenues that finance Hamas and Hizballah, and U.S. costs associated with protecting Persian Gulf oil supplies constitute moderate risks.

Oil revenues that finance small terrorist groups, competition for oil supplies among other consuming nations and the use of energy exports to coerce or influence other countries in ways detrimental to U.S. interests are considered minimal risks to U.S. national security, according to researchers.

The study finds that the United States would benefit from policies that diminish the sensitivity of the U.S. economy to a sudden decline in the supply of oil, whether or not the oil is imported. By reducing demand or increasing competitive alternative energy supplies, the United States would place downward pressure on world oil prices and ease risks to U.S. national security.

Researchers recommend four policies that would effectively reduce the costs to U.S. national security of importing oil:

•Support well-functioning oil markets and refrain from imposing price controls or rationing during times of severe disruptions in supply.
•Initiate a high-level review of prohibitions on exploring and developing new oil fields in restricted areas in order to provide policymakers and stakeholders with up-to-date and unbiased information on both economic benefits and environmental risks from relaxing those restrictions.
•Ensure that licensing and permitting procedures and environmental standards for developing and producing oil and oil substitutes are clear, efficient, balanced in addressing both costs and benefits, and are transparent.
•Impose an excise tax on oil to increase incentives to drivers and manufacturers to economize on fuel use and soften growth in demand for oil.

Other authors of the study are Andreas Goldthau, Michael Toman, Thomas Light, Stuart E. Johnon, Alireza Nader, Angel Rabasa and Harun Dogo.

Access the RAND Corporation Report entitled Imported Oil and U.S. National Security by clicking HERE

About the RAND Corporation

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