Because we live in a global energy marketplace, the Geopolitical Sub-Index also incorporates measures of the reliability and concentration of oil, natural gas, and coal supplies worldwide. For reliability, we use measures of civil and political liberties developed by Freedom House, reasoning that political volatility can lead to supply volatility and that politically free countries are more likely to be politically stable and less likely to join cartels.5
To measure supply diversity, a concept from competition law and antitrust analysis—the Herfindahl-Hirschman Index (HHI), which measures market concentration—was adopted. Greater diversity of supply leads to enhanced competition and reduced volatility, both of which help lessen security risks. Even if a set of oil producing countries fares poorly on a measure of freedom, our energy security still is enhanced when supplies are more evenly spread among them. When energy supplies are concentrated among a handful of countries, there are not only increased risks of supply interruptions, but also greater exposure to potential producer cartels.
Oil accounts for about 35% of world primary energy use, and its status as a globally traded commodity and its primacy as a transportation fuel confers on it a strategic importance other fuels do not share. Its reserves and production largely are concentrated in small number of countries, primarily in the Middle East. Many large oil-producing countries also are politically unstable. The geopolitical disposition of oil supplies creates increased risks of supply interruptions. These risks are exacerbated by the oilproducer cartels. The 12 members of the Organization of Petroleum Exporting Countries (OPEC) hold over two-thirds of the world’s reserves.
Oil accounts for about 35% of world primary energy use, and its status as a globally traded commodity and its primacy as a transportation fuel confers on it a strategic importance other fuels do not share.
In contrast, in 2011 North America held about 14% of world reserves. This may seem a small amount compared to OPEC reserves, but in 2000, North American reserves were just 5% of the world total. The difference is attributable to the addition of about 175 billion barrels of proved reserves from Canada’s oil sands in 2003.
While the security of world oil reserves has been getting better progressively because of these developments, the security of world production has been getting worse since the early 2000s. Two factors have been at play. The first is that production in higher-risk countries has been growing, and the second is that production in lower-risk countries like Norway has been shrinking.
Projections suggest that unconventional oil reserves in countries outside of OPEC will gain in importance as a source of supply over the coming decades. U.S. unconventional oil resources are potentially enormous, perhaps as high as 2 trillion barrels, and exploration and development can lead to great increases in domestic and secure reserves.
Exploration and development of these resources would have a beneficial impact on the security of global crude oil supplies. It was noted above how increased oil production from the Bakken, Eagle Ford, and other shale formations has contributed to increased domestic production, which in 2011 was over 700 thousand barrels per day more than in 2008. Most of this added production, however, has come from state and private lands, and production from others areas, most notably Alaska, is declining. Many of our largest resources are on federal lands, and many of these lands have been placed off limits to exploration and production. The degree to which access to these resources is allowed could have a large impact on the country’s future energy security.
U.S. unconventional oil resources are potentially enormous, perhaps as high as 2 trillion barrels, and exploration and development can lead to great increases in domestic and secure reserves.
Natural gas also is highly concentrated geographically, with reserves currently dominated by the Russian Federation, Iran, and Qatar, which together account for over half of global reserves. U.S. reserves rank fifth in size, 4% of the world total.
5 Recent political upheaval in the Middle Eastern countries whose Freedom House rankings are very poor bears out the relationship between political freedoms and political stability.