Energy Security

Since the early 1970s, the world oil market has experienced three major supply disruptions that harmed the U.S. economy. All three originated in the Persian Gulf. Concerned that growing dependence on low-priced imported oil, especially that from the Persian Gulf, increases the economy's vulnerability to oil supply disruptions and price shocks, the Clinton administration has adopted policies designed to reduce that vulnerability and its associated economic costs. This report assesses (1) the economic benefits of importing oil compared with the potential economic costs of vulnerability to oil shocks, (2) the extent to which the U.S. economy's vulnerability to oil shocks will likely change over time given the programs and policies contained in the administration's National Energy Policy Plan and other relevant factors, and (3) options for reducing the economy's vulnerability to oil shocks. GAO's analysis of the day-to-day economic benefits of U.S. reliance on low-priced imported oil shows that those benefits exceed the economic costs of occasional oil supply disruptions. Moreover, to the extent that imports might replace higher-cost domestic oil, the benefits of such imports would decline, but the cost of oil shocks would remain largely unchanged.

GAO found that: (1) the U.S. economy realizes hundreds of billions of dollars in benefits annually by using relatively low cost imported oil rather than relying on more expensive domestic sources of energy; (2) by comparison, oil shocks impose large but infrequent economic costs that, when annualized, are estimated to cost the U.S. economy tens of billions of dollars per year; (3) the economic costs of oil price shocks depend largely upon the rise in the price of oil coupled with the nation's level of oil consumption, rather than the level of imports; (4) as long as market forces prevail, world and domestic oil prices will be the same and will rise and fall with changes in world oil market conditions; (5) under these conditions, an incremental decrease in oil imports would reduce the benefits of such imports without substantially lowering the costs of oil price shocks; (6) oil supply disruptions impose significant economic costs, and reliance on imported oil imposes military and other costs that are not easily measured; (7) while adopting the NEPP's initiatives may keep the economy's vulnerability to oil supply disruptions below what it otherwise would be, the Energy Information Administration's forecasts indicate that by most measures the economy will not likely be significantly less vulnerable through 2015, primarily because the demand for oil is projected to increase; (8) only over a longer period do energy analysts anticipate significant improvement, and that depends on technological advances in such areas as energy efficiency and alternative fuels; (9) while their views varied, almost all of the experts GAO consulted about options for reducing the economy's vulnerability to oil supply disruptions said that, in the short run, the United States should rely on rapid and large releases of oil from the Strategic Petroleum Reserve to blunt price increases at the onset of an oil supply disruption; and (10) in the long run, the experts generally favored research to develop cost-competitive alternatives to petroleum.