The Connection Between Iran’s Threat To Close The Straits Of Hormuz And The TransCanada Keystone XL Pipeline Is US Energy Security – Get Oil From Canada, Not From The Gulf

By Paolo von Schirach

January 4, 2011

WASHINGTON – Is there a connection between Iranian bluster and threats that the Tehran regime may close down the Straits of Hormuz, (essentially preventing Gulf oil from getting to customers around the world), on one side and the proposed TransCanada Keystone XL pipeline, US shale oil and gas, plus the “Pickens Plans” on the other? Yes, there is connection. Perhaps a bit flimsy at this point; but nonetheless real and increasingly significant. It is all about energy security for America.

Closing the Straits of Hormuz

Let me explain. The Iranian regime may not be serious about military actions that may lead to closing down the Straits of Hormuz to oil supertankers. But the very fact that the Tehran regime made threats about such actions, while holding naval exercise in the area, sent oil prices up. And the reasons are obvious. While countries get oil from all sorts of sources, including Russia, Norway, Canada, Colombia, Angola and Nigeria, the Persian Gulf is still a major source of supplies for oil thirsty countries, including the US that gets about 18% of its imports from that region.

If, for whatever reason, oil produced by Gulf countries cannot get to its customers, this would be an unmitigated global economic disaster. Importing countries would scramble to make up for the missing Gulf oil. They would outbid each other to offer whatever prices to other suppliers. Oil prices could easily go up to 300 dollars or more, with horrible economic consequences for all importing nations.

US can reduce dependence on Gulf oil

Having said that, all incremental steps leading to diminished US reliance on Gulf oil would alleviate the consequences of any supply interruption from that region. It should be US policy to hasten this process through whatever sensible means may b available. And luckily now America has options. Nonetheless the president should push hard to get America more energy secure. But he never discusses energy security and we can do about it. In fact, some of his actions undermine this very goal. (It is true that even with improved energy security the US cannot make itself invulnerable to the consequences of major energy flow disruptions. America would still suffer the economic consequences of a world crisis caused by interrupted oil flows. But if America could rely on its own supplies, it would be in a much stronger position while dealing with a global economic meltdown).

Let’s make this clear: today the US is in no position to fend off the blow of interrupted supplies of Persian Gulf oil. But the good news is that a combination of very positive developments can lead to diminished reliance on those supplies and eventually to something very close to energy self-sufficiency, based on increased domestic oil and gas production, plus more oil imports from Canada.

Oil from Canada

Let’s start with Canada. Canada is already our biggest oil supplier. It sends us about 25% of all our oil imports. And the good news is that Canada has plenty more. The proposed TransCanada Keystone XL oil pipeline linking Alberta oil to Texas refineries would increase Canadian supplies by about 800,000 barrels a day, may be more. Now, that is significant. That would be 800,000 barrels we no longer need to get from the Persian Gulf. It is really a shame that the whole Keystone XL project has been shelved for at least another year, because of domestic political calculations on the part of president Obama, as the benefits of getting more oil from a friendly neighbor are truly self-evident. (More on this later).

North Dakota oil, and more

Then we have increased domestic production, thanks to new technologies that allow energy companies to get oil from shale formations. North Dakota, from practically zero until a few years ago, now produces about 460,000 barrels a day, and it will get to 1 million in a few years. Estimates about its reserves vary; but they shot from about 4 billion barrels to as much as 18 or even 24 billion. If we add to this incredibel North Dakota bonanza new supplies from shale oil deposits in other states, the picture of US oil production of all of a sudden becomes very bright. Until recently America used to import about 60% of its total consumption. Now we cut this amount to 49%. Again, this is new oil that we get at home and we do not need to import.

US shale gas

And then there is plenty of cheap US shale gas, now economically viable thanks to hydraulic fracturing. Gas is used mostly for electrical power generation and as feed stock for the chemical and plastics industries. But much of this natural gas additional supply, as T. Boone Pickens has been advocating through his “Pickens Plan”, can also be used as transportation fuel. As he points out, it would be most cost effective to use US natural gas for heavy trucks as opposed to diesel made with imported oil. By switching over to natural gas as fuel for US heavy trucks, companies would save money, (gas is much cheaper than diesel), and at the end of the transition America could stop importing 2 or may be even 3 million barrels a day.

It all adds up

As you can see, it all dds up. Increased domestic production, more oil from Canada and using natural gas to power trucks will enable America to cut down total oil imports and in particular imports from the Persian Gulf region that represent after all only 18% of our total imports. And the beauty of all this is that getting there is not exceedingly complicated, while it would make economic sense, even without considering the extraordinary bonus of enhanced energy security.

Getting more of our own oil is obviously better than importing it. We pay US producers and we do not send money abroad. Getting oil from Canada is better than getting it from the Gulf (or from Venezuela for that matter) because Canada is close by and because the US dollars are sent to a friendly country with which we have important economic relations.

Moving to natural gas to power trucks is more complicated because there are significant up front capital investments (buying new trucks, constructing the refueling infrastructure). But it would be cost effective since lower fuel prices mean lower operating costs for fleet operators, and so they justify the initial investments.

Start the Keystone XL pipeline project

The new Keystone XL oil pipeline from Alberta to Texas should also be built –and fast. Even though there are legitimate concerns expressed by environmentalist, the project has been reviewed several times and it looks quite safe. The only reason why the Obama White House did not give the green light is because this is an election year and the Democratic president is afraid of upsetting the environmentalists, one of his key constituencies.

And, so, because of this political delay, we are further delaying the time in which Iranian sabre rattling would be far less consequential to us. I know that More Alberta oil flowing south to the US would not solve all energy security problems. But, from the above it is clear that, in combination with increased domestic supplies, it would reduce their size.

Politics more important than energy security

Energy security is national security, since energy is a vital resource for our economy and for our military. And so energy should be right at the top of a president’s concerns. President Obama should advocate and help pass all measures that would help America reach the goal of energy security and eventually energy independence. But this president is more preoccupied with getting re-elected. Energy security apparently can wait, even as we have to deal with a bizarre customer like Iran; a country whose semi-unhinged leaders may actually do crazy things sooner or later. What a shame that at a time in which clear guidance is needed so that we can move faster, we have such timid leadership.

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