Reader Dan on: Demand inelasticity of oil and SAFE

Reader Dan thinks about Bob Hormats’ comments last week, and pays a visit to Securing America’s Future Energy (SAFE). I’ve edited the post he sent me, slightly.


The recommendations that many people for massive spending on defense appear to rest on three ideas mentioned by SAFE, which of course is partly metaphor because these are estimates and other factors might be in play. I’ve looked over some of the documetns on their website – they’re short and worth a read. Here is how I would summarize them:

A sharp drop of 4% of supply in a year could bring a price of $177/bbl. for the US. Since we are at a negative savings rate the resulting impact on consumers’ inability to spend on things other than oil/gas etc. could be large enough to derail our growing economy.

There are many countries that are in areas of unrest and instability and need protection (eg. Centcom in the Middle East). Areas of supply vulnerabilities are mapped around the world with US military commands. Very curiously they use unstable and undemocratic in the same description, yet show Saudi Arabia as a major player friend and Venezuela as hostile.

There is the very real issue that US military is absolutely dependent on oil products to function, and needs to guarantee its own supply as well. Currently, the military could not be effective in another theater of any scale so an actual military intervention would not be possible if concerted effort was made to sabotage oil supply.

In this document we read:

The following document outlines a new direction for energy policy. The suggested initiatives are aggressive while being balanced and credible. The Council calls for achievable and verifiable targets. The false hope of domestic energy independence is replaced by strategies for better managing the reality of global energy interdependence. Where the market has failed to provide solutions, government has been asked to apply workable standards capable of spurring the needed private sector response.

Please note the argument for government intervention, which continues the tradition of big spending Republicans.

The frame that SAFE uses is the war on terror, but at one point suggests that oil dependency may be more important than terrorism. The whole set of documents cries out alarm because of the lag over the next ten years for alternatives. Hence billions is recommended to be spent right away as part of a plan to counter a possible threat that has yet to be defined except in an unclear and murky way as Mr. Hormats himself described.