From all sides of the political spectrum, we hear calls for decreasing or eliminating America's "dependence on foreign oil." To assess the validity of these calls, one must first understand the history of U.S. energy policy with respect to oil.
During the Gilded Age of American industry, John D. Rockefeller founded what was to become Standard Oil in 1860. Rockefeller's innovative and competitive approach led Standard Oil to own upwards of 90 percent of the oil refining market (a fact which is often used to accuse Standard Oil of having become an abusive monopoly), but also dramatically lowered the price to consumers from 58 cents to eight cents a gallon (a fact which is often played down or entirely left out).
But by the 1920s, oil prices had peaked causing many to believe that oil would soon run out. This prompted Congress to put in place generous tax allowances for producers, which prompted further investments and ultimately led to the discovery of large, new oil reserves.
But then, with prices dropping, demands for price supports and restricted competition emerged. Consequently, President Roosevelt, in 1933, created the "Petroleum Code", handing the Secretary of the Interior vast powers to fix prices, dictate wages and hours, limit production, and control the importation of oil. The Code enabled what is known as "pro-rationing" whereby the Interior Department, through local agencies, restricted production. With production curtailed, prices rose again.
Meanwhile, oil production elsewhere, particularly in the Middle East, took off. A combination of high demand and rising domestic oil costs ushered in a willingness to purchase oil from outside the United States: In 1948 the U.S. officially became a net importer of oil.
As imports of lower cost oil surged, domestic producers lobbied Congress to impose oil import quotas, which President Dwight Eisenhower established in 1959. The government quotas dictated how much crude oil and refined products would gain entry into the country and gave preference to imports from Canada and Mexico.
Excluding players of the Persian Gulf from an open exchange depressed Middle Eastern oil prices. As a response, four Persian Gulf countries—Iran, Iraq, Kuwait, and Saudi Arabia—along with Venezuela, founded Organization of Petroleum Exporting Countries (OPEC) in September of 1960. By 1973, Algeria, Ecuador, Gabon, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates had joined, although Ecuador and Gabon withdrew in the 1990s.
In 1973 OPEC caused a sharp increase in oil prices, which many believe was the result of OPEC embargoing the U.S. for its support of Israel in the 1973 "Yom Kippur" War. But the price increase was actually achieved by a reduction in crude oil output in order to raise profits. In essence, this has been OPEC's agenda ever since.
The resulting shortages and long gas lines in the U.S. were a consequence of wage and price controls brought on by President Nixon in 1971 as a part of the Economic Stabilization Act. Such price controls prevented the price of crude oil from reaching market-based levels. When the amount of oil people sought to consume exceeded the amount available at government-approved prices, shortages were the logical outcome. In response to a tumbling economy, President Carter and later Reagan worked to repeal the price controls.
Today, the concerns over the role of oil in the U.S. economy continue. The Left focuses mainly on the environmental consequences of abundant use of and continued demand for oil, the rising profits from oil to producers, the role of speculators, and the price increases to consumers. The Right warns of the security risk associated with purchasing oil from politically unstable or outright hostile regimes and thus pushes for relaxation of domestic drilling restrictions. And both assert that oil's heyday as a cheap and plentiful fuel has ended, as the earth's natural oil supply is running out and rising economies across the world ramp up their oil demands.
Those skeptical of the idea that dependency on oil, foreign or domestic, is a major problem argue that claims of "dependency" fundamentally misconstrue the matter. Oil has raised our standard of living enormously and being "independent" would likely mean a drastic reduction in economic progress and well-being. Apart from that, higher prices and dwindling reserves (if real) will make exploration and significant investment in alternative energy sources ultimately more profitable, provided that such market incentives are not distorted by government intervention. As for security, the skeptics contend, while the Middle East accounts for about a third of the planet's oil production and oversees the majority of its known reserves, the U.S. actually only receives about 17 percent of its imported oil from the Persian Gulf region.
Critics of the dependency notion also consider attacks against OPEC to be overblown. Though OPEC is in many respects a voluntary cartel, it faces the age-old problem of collusion: the temptation for cartel members to cheat. Moreover, oil is a "fungible" commodity, meaning it can be resold among buyers, which means OPEC states have no control over where their oil is ultimately delivered once sold. And, while OPEC's composition of governments that either own outright or heavily regulate oil production does distort oil prices, U.S. politicians complaining about this fact might be considered disingenuous if they support U.S. government policy that is, albeit different in degree, essentially the same in nature.
This topic page will provide you with information on the history of American oil production and consumption, on the development and effects of American energy policy, as well as on many issues pertaining to the economics and politics of oil.
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