ArticlePDF Available

The Effect of U.S. Energy Self-Sufficiency on Its Commitment to Secure Shipping Lanes in the Strait of Hormuz

Authors:

Abstract

Deemed as the "world's most important chokepoint" for oil and international shipping, the Strait of Hormuz is the main thoroughfare to and from the Gulf. In 2011, 17 million barrels of crude oil passed through the Strait each day, representing 20% of global oil trade. A disruption in shipping through the Strait of Hormuz would have severe consequences for the world economy. Currently, the U.S. guarantees security for this critical maritime route. Without American forces, oil tankers could be threatened by Iran or non-state actors such as pirates. Previously, U.S. commitment to the region was taken for granted as the country relied heavily on oil imports from the Gulf. However, recent forecasts by organizations such as the International Energy Agency (IEA) and BP have predicted that the U.S. will become energy self-sufficient within the next couple decades. It is now an open question whether the U.S. will continue to secure shipping lanes in the Strait of Hormuz. We argue that the U.S. has two overarching interests at stake in securing the Strait of Hormuz: energy security and geopolitics. A supply disruption in the Strait of Hormuz is currently not an existential threat to the survival of the U.S. Thus, energy security in this case can be thought of as economic vulnerability to a disruption in oil supplies. Geopolitical interests represent broader strategic concerns such as countering Iran in the Gulf. Analyzing how energy self-sufficiency affects these core interests is key to understanding future U.S. policy. Despite surging domestic production, the U.S. will still rely on imports to meet at least 30% of its oil consumption by 2035.
1
The Effect of U.S. Energy Self-Sufficiency on Its Commitment to Secure
Shipping Lanes in the Strait of Hormuz
1
Kenneth J. Whitea, Christine Jojarthb, and Saud M. Al-Fattahc
a Sr. Researcher Analyst, King Abdullah Petroleum Studies and Research Center (KAPSARC)
b Lecturer, International Policy Studies, Stanford University
c Former Director and Fellow at King Abdullah Petroleum Studies and Research Center (KAPSARC);
Now Consultant at Saudi Aramco
Executive Summary
Deemed as the “world’s most important chokepoint” for oil and international shipping, the Strait of
Hormuz is the main thoroughfare to and from the Gulf.
1
In 2011, 17 million barrels of crude oil
passed through the Strait each day, representing 20% of global oil trade.
2
A disruption in shipping
through the Strait of Hormuz would have severe consequences for the world economy. Currently, the
U.S. guarantees security for this critical maritime route. Without American forces, oil tankers could be
threatened by Iran or non-state actors such as pirates.
Previously, U.S. commitment to the region was taken for granted as the country relied heavily on oil
imports from the Gulf. However, recent forecasts by organizations such as the International Energy
Agency (IEA) and BP have predicted that the U.S. will become energy self-sufficient within the next
couple decades.
3
,
4
It is now an open question whether the U.S. will continue to secure shipping lanes
in the Strait of Hormuz.
We argue that the U.S. has two overarching interests at stake in securing the Strait of Hormuz: energy
security and geopolitics. A supply disruption in the Strait of Hormuz is currently not an existential
threat to the survival of the U.S. Thus, energy security in this case can be thought of as economic
vulnerability to a disruption in oil supplies. Geopolitical interests represent broader strategic concerns
such as countering Iran in the Gulf. Analyzing how energy self-sufficiency affects these core interests
is key to understanding future U.S. policy.
Despite surging domestic production, the U.S. will still rely on imports to meet at least 30% of its oil
consumption by 2035.
5
More importantly, 82% of the transport sector’s energy needs will be met by
oil-based fuels.
6
The U.S. economy will thus continue to be vulnerable to a disruption in shipping
1
White, Kenneth J. and Jojarth, Christine and Al-Fattah, Saud M., The Effect of U.S. Energy Self-Sufficiency on Its
Commitment to Secure Shipping Lanes in the Strait of Hormuz (May 1, 2013). Available at SSRN:
http://ssrn.com/abstract=2354418 or http://dx.doi.org/10.2139/ssrn.2354418
2
lanes through the Strait of Hormuz. Moreover, the global reliance on exports from the Gulf will
increase as oil transported through the Strait of Hormuz will rise from 35% of world oil exports in
2010 to 50% in 2035, according to the IEA. Any reduction to growth in the world economy caused
by a supply disruption will also reduce demand for U.S. goods and services. Regardless of domestic
oil production and consumption, in the foreseeable future the U.S. will never be fully insulated from
a disruption in shipping through the Strait of Hormuz.
Maintaining a presence in the Strait of Hormuz will continue to be a key part of America’s geopolitical
strategy. Military assets in the Gulf help the U.S. to counter Iran’s influence and deter aggression. Gulf
security will also be an integral part to the U.S. “Asia pivot” as oil exports through the Strait of Hormuz
represent a growing share of Asian oil consumption.
7
Because oil will be an extremely important
commodity for rising powers India and China, the U.S. cannot compromise security in Hormuz
without upsetting the international order and hastening its decline as the global super power.
Therefore, energy self-sufficiency will not have a significant impact on America’s desire to secure the
Strait of Hormuz; however, due to political and fiscal constraints, the U.S. may be forced to reduce its
military spending regardless. Political dysfunction in Washington has caused the Federal Government
to implement mandatory and arbitrary cuts to defense spending in what is known as the “Sequester”.
Over the longer term, rising costs of entitlements coupled with reluctance to raise tax revenue threaten
to crowd out defense spending.
Given the strategic importance of the Strait of Hormuz, it is unlikely that the U.S. will choose to
withdraw. Even if the U.S. must reduce its military spending in the Gulf, a growing partnership
between America and the Gulf Cooperation Council (GCC) countries may allow the U.S. to maintain
security in Hormuz with a smaller military footprint. Table 1 summarizes the main factors and their
effect on U.S. commitment to secure the Strait of Hormuz.
There are three potential scenarios for U.S. engagement in Hormuz outlined in this report. In the first
scenario, “Maintaining the Status Quo,” the U.S. sustains a large, unilateral force in the Gulf. In the
second scenario, “Strategic Partnerships,” the U.S. reduces its overall footprint but ensures security
through a close partnership with GCC countries. In the third scenario, “Limited Engagement,” the
U.S. withdraws from the Gulf and cedes leadership roles to a rising China. The most likely outcome
will be a combination of scenarios one and two.
Based on the analysis of this report, there are two main policy implications. First, policymakers in the
U.S. should emphasize the importance of shipping lanes in the Gulf and their continued relevance to
U.S. interests. Second, GCC states and U.S. policymakers should realize the importance of forging
stronger defense partnerships. Not only do their interests converge, but a partnership could allow the
U.S. to maintain security with a reduced budget.
3
Table 1: Summary of Key Factors
Factor
Components
Net-effect on
security in Hormuz
Relevance
Domestic energy security
Decreasing oil intensity
High
Decreasing oil imports
Low
Increasing domestic
energy production
Low
Geopolitics
Need to counter Iran
High
Asia pivot
Moderate
U.S. role as super power
High
Defense budget
Political dynamics
Moderate
Fiscal constraints
High
Ability to achieve security
with low costs
High
1
US Energy Information Administration (2012). “World Oil Transit Choke Points.” Accessed on
March 18, 2013. http://www.eia.gov/countries/regions-topics.cfm?fips=WOTC#hormuz
2
US Energy Information Administration (2012). “World Oil Transit Choke Points.” Accessed on
March 18, 2013. http://www.eia.gov/countries/regions-topics.cfm?fips=WOTC#hormuz
3
BP. BP Energy Outlook 2030. London, United Kingdom. BP, 2012.
4
International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy
Agency, 2012.
5
International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy
Agency, 2012.
6
BP. BP Energy Outlook 2030. London, United Kingdom. BP, 2012.
7
International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy
Agency, 2012.
4
Section I: Introduction
Deemed as the “world’s most important chokepoint” for oil and international shipping, the Strait of
Hormuz is the main thoroughfare to and from the Gulf.
1
In 2011, 17 million barrels of crude oil passed
through the Strait each day, representing 20% of global oil trade.
2
A disruption in shipping through the
Strait of Hormuz would have severe consequences for the world economy. Currently, the U.S.
guarantees security for this critical maritime route. Without American forces, oil tankers could be
threatened by Iran or non-state actors such as pirates. The presence of U.S. forces in the Gulf not only
safeguard the exports and imports of countries in the Gulf but also supports securing the exports from
Gulf states to other regions such as Europe and Asia.
Previously, U.S. commitment to the region was taken for granted as the country relied heavily on oil
imports from the Gulf. However, recent forecasts by organizations such as the International Energy
Agency (IEA) and BP have predicted that the U.S. will become energy self-sufficient within the next
couple decades.
3
,
4
The IEA foresees that rising domestic production from unconventional oil sources
coupled with improved fuel efficiency will cause oil’s import share of domestic consumption to fall
from nearly 50% in 2010 to less than 30% in 2035.
5
It is now an open question whether the U.S. will
continue to secure shipping lanes in the Strait of Hormuz. At the moment, the U.S. Navy’s Fifth Fleet
patrols the Gulf and provides an umbrella of security. But now that the wars in Iraq and Afghanistan
are coming to a close, the U.S. will have to reassess whether it needs to maintain such a large presence
in the region.
This report attempts to assess how energy self-sufficiency will impact U.S. commitment to securing
shipping lanes in the Strait of Hormuz. To answer this question, we will examine core U.S. interests
and analyze how they will be affected by energy self-sufficiency. To add context to the analysis, we will
also take into account the financial costs associated with maintaining the necessary military presence.
We will then analyze how future interests in Hormuz will ultimately impact U.S. policymaking. Lastly,
we shall offer tentative predictions for future U.S. commitment to secure the Strait of Hormuz.
Section II: Background
This section will give an overview of the security threats to shipping in the Gulf and analyze the impact
of a hypothetical U.S. withdrawal. It will conclude with an assessment of U.S. core strategic interests in
defending shipping lanes through the Strait of Hormuz.
Threats to Shipping in the Gulf
There are two main threats to shipping lanes in the Gulf: piracy and Iran. There has been a high
incidence of piracy off the Horn of Africa, which threatens vessels from the Gulf if they have to travel
through the Suez Canal. Thus far, these pirates have not threatened vessels in the Gulf itself, but there
have been isolated cases in the Gulf of Oman, just outside the Strait of Hormuz.
6
5
No matter how troublesome the pirates from the Horn become, they are a relatively minor threat in
comparison to Iran. Because Iran cannot match the U.S. and its allies in conventional warfare, Iran has
focused on developing asymmetrical capabilities that are designed to exploit enemies’ weaknesses.
7
The
Islamic Republic of Iran has built a large fleet of extremely fast speed boats that can quickly surround
targeted vessels. These boats and other capabilities allow Iran to launch surprise attacks and threaten
shipping throughout the Gulf but especially in the Strait of Hormuz.
8
These unconventional tactics also
make it difficult to plan war games against Iran because there is no historical precedent of fighting such
an unorthodox foe. Although Saudi Arabia and its allies within the Gulf Cooperation Council (GCC)
in many ways surpass Iran in terms of conventional weaponry (e.g., airpower), they are not capable of
matching Iran’s sea power let alone able cope with Iran’s asymmetric threats.
9
Thus, the GCC countries
rely on the U.S. to guarantee that shipping lanes are unimpeded and free from Iranian meddling.
If Iran wanted to completely disrupt shipping through the Strait of Hormuz, it could lay sea mines (see
Section III for historical precedent) and use its unconventional force to form a blockade. Such a tactic
would be incredibly disruptive if successful. However, it would carry tremendous risk for Iran because
Iranian oil exports also rely on the Strait of Hormuz to reach global markets. Additionally, the country
is more vulnerable to a blockade than fellow Gulf countries like Saudi Arabia because Iran does not
have the foreign reserves necessary to weather a blockade.
10
Such a large display of aggression would
also trigger strong retaliation from the U.S., which may use the incident as justification to bomb Iranian
military assets on the mainland. Because of these risks, an all-out blockade would be an act of
desperation where the Iranian regime has very little to lose. Essentially, a full-scale blockade of the Strait
of Hormuz is a threat to deter the U.S. or other actors hostile to the regime.
Iran need not completely disrupt shipping in the Strait of Hormuz. It can also selectively attack ships
in cases where there would be plausible deniability, which is when other countries are unable to prove
Iran was behind the abduction.
11
This tactic would allow Iran to keep their oil flowing and mitigate the
risk of U.S. retaliation. Thus, to be able to secure the shipping lanes in the Gulf, the U.S. must be able
to deal with an Iranian blockade and clandestine attacks against non-Iranian cargo ships.
In addition to Iran’s direct threats to shipping, the country’s nuclear program has the potential to
destabilize the region and escalate tensions as neighboring countries such as Israel and Saudi Arabia
feel increasingly threatened. The successful development of a nuclear weapon would also limit U.S.
ability to retaliate against Iran and use overpowering force as a deterrent. Although Iran’s nuclear
program does not directly target shipping lanes, it does worsen overall security in the Gulf region.
Alternate Oil Export Routes
There exist oil pipelines out of the Gulf that bypass the Strait of Hormuz. The U.S. Energy Information
Agency (EIA) estimates that in 2012 total capacity for these pipelines was 6.7 million barrels per day
(bbl/d) with 4.3 million bbl/d of excess capacity.
12
This spare capacity is equivalent to roughly 25% of
total exports by pipelines and tankers through the Strait of Hormuz. In principle, oil pipelines
connecting the Gulf to international markets are important because they mitigate the costs of supply
6
disruption in the Strait of Hormuz. However, currently available pipeline capacity is not enough to cope
with a severe supply disruption in the Gulf
13
and the economic damage to the U.S. would still be
substantial (see Section VI). More pipeline capacity could be developed but doing so would be
expensive and take time to construct. Pipelines would also be vulnerable to terrorists or Iranian land
forces and would carry their own set of security risks.
14
Unless GCC countries emphasize developing
and securing additional pipeline capacity, the Strait of Hormuz will remain a critical chokepoint for
world oil exports. Indeed, the International Energy Agency (IEA) forecasts that oil transported through
the Strait of Hormuz will increase to 50% of total world oil exports by 2035.
15
Effect U.S. Withdrawal on Security in the Strait of Hormuz
In order to predict whether the U.S. will reduce its security commitment in the Strait of Hormuz, it is
necessary to understand the consequences of a military withdrawal from the region. If there were no
U.S. presence in the Strait, the risk of piracy would increase although to some extent security forces of
GCC states would be able to mitigate the threat. More alarmingly, Iran would have greater leeway to
obstruct shipping. A complete blockade would still be unlikely, but doing so would be more feasible
and Iran’s threats more credible. Iran would also have much greater flexibility to abduct oil tankers and
other cargo ships. Countries such as Saudi Arabia could retaliate against Iran using its superior air force,
but that would risk escalation, which would be relatively more costly for Iran’s prosperous neighbors.
If the U.S. does not commit forces to secure the Strait of Hormuz, the balance of power will shift in
favor of Iran and the risk of an oil supply disruption would increase. Greater risk of withdrawing U.S.
forces from the Strait of Hormuz would have two consequences: 1) the risk premium for oil transported
through Hormuz would increase, which would be reflected in a higher price, larger insurance costs or
both; and 2) the potential severity of an oil supply shock would also increase. The security of a
significant portion of global oil supplies would thus be dictated by a hostile regime in a highly unstable
part of the world.
U.S. Core Interests in the Strait of Hormuz
We argue that the U.S. has two overarching interests at stake in securing the Strait of Hormuz: energy
security and geopolitics. As we will argue in Section VI, a supply disruption in the Strait of Hormuz is
currently not an existential threat to the survival of the U.S. Thus, energy security in this case can be
thought of as economic vulnerability to a disruption in the transport of oil through Hormuz. Section
VI, will also examine these costs more closely. The second overarching interest, geopolitics, captures
factors that go beyond energy security and take into account broader strategic concerns. Hormuz is a
vital chokepoint not only for the U.S. but also for the rest of the world. Section VIII, will explore these
geopolitical factors in more detail.
Section III: Historical U.S. Military Presence and Current Objectives
During the Cold War, the primary objective for the U.S. in the Gulf was to maintain secure oil trade in
the region and prevent Soviet influence.
16
Since then, the U.S. has been involved in several conflicts
7
and military operations in the Gulf. In 1988, the U.S. undertook Operation Praying Mantis in retaliation
to Iran’s laying of sea mines in Gulf shipping lanes during the Iran-Iraq war. After the end of the Cold
War, the next major U.S. campaign in the Gulf was Operation Desert Storm in which U.S., NATO,
and some GCC forces liberated Kuwait from an Iraqi invasion. Most recently, the U.S. invaded Iraq
and toppled Saddam Hussein’s Baathist regime during Operation Iraqi Freedom. Force projection from
the Gulf has also played a role in the war in Afghanistan.
17
Currently, U.S. responsibility for the Gulf falls under the U.S. Central Command (CENTCOM), the
major command center for the Middle East and West Asia. CENTCOM has been managing this theater
since its establishment in 1983. The largest component of U.S. military presence in the Gulf is the Fifth
Fleet of the U.S. Navy (one of six active U.S. fleets), which is stationed in Bahrain. Its original role in
the Gulf was to support U.S. operations in Iraq and Afghanistan but it has also been a strong deterrent
against Iran.
With the draw-down of U.S. forces from Iraq and Afghanistan and the strategic “pivot toward Asia,”
the U.S. is reevaluating its overall military strategy. According to the Defense Strategic Guidance, a
white paper from the Whitehouse and Department of Defense published in 2012, the U.S. policy will
continue to “emphasize Gulf security” and will collaborate with the Gulf Cooperation Council (GCC)
“when appropriate”.
18
The directive also states that the U.S. will “place a premium” on U.S. military
presence in the region. Although ultimate funding for the U.S. military will be decided by Congress, the
Defense Strategic Guidance indicates that top-level policymakers continue to regard security in the Gulf
as a high priority.
Section IV: Cost of Securing Shipping in the Gulf
A precise estimate of the cost of defending shipping lanes in the Gulf is impossible. The U.S. defense
budget is not itemized by region or strategic objective, and disaggregating costs is challenging. Many of
the military assets and capabilities needed to defend shipping lanes in the Gulf are also necessary for
other priorities such as supporting Israel, a key ally in the region. For these reasons, any cost estimate
should be viewed as a rough approximation. There have been several attempts to quantify the total
costs of protecting shipping lanes in the Gulf (see Table 2 for a summary) but the most pertinent and
compelling estimate was that put forward by RAND in 2009.
19
In the RAND study, the research team
attempted to answer the question, what are the “savings that the U.S. government would likely realize
if it were to entirely drop the mission of ensuring the secure production and transit of oil from the
Gulf” to international markets. The report found that the costs in 2009 ranged between $75.5 billion
and $91 billion. Their estimates are for the most part in line with the other studies except Stern (2010)
20
, which found that total expenditure of force projection in the Gulf in 2007 was between $351 billion
and $507 billion. The wide discrepancy between Stern (2010) and the other estimates is attributable to
the fact that Stern tried to analyze the total cost of operating in the Gulf instead of defending shipping
lanes per se. Although the RAND report is more pertinent to this paper, Stern’s analysis demonstrates
that defending shipping lanes is only part of overall U.S. defense spending in the Gulf.
8
To understand the implications of the security cost estimates, we need to examine them in the context
of past, present and future National Defense Budgets. For reasons provided above, comparisons to
overall spending will rely on the RAND (2009) estimate. In 2009, the year of the study, the estimate
represented between 12%-15% of the overall defense budget. This cost estimate is equivalent to 0.5-
0.6% of U.S. GDP in 2009.
21
In 2013, U.S. Defense spending is projected to be $700 billion.
22
Assuming no change in the cost-basis
and without adjusting for inflation, defending the Gulf shipping lanes will represent 11%-13% of the
overall budget. Using constant 2013 dollars, the Defense Budget in 2017 is projected to be $590
billion.
23
Defending Gulf shipping lanes will thus represent 13%-15% of total defense spending in 2017.
Maintaining the presence necessary to ensure maritime security in the region will be fiscally sustainable
assuming budgets and costs do not deviate from their expected values. Section IX will address the
implications and likelihood of drastically reduced military spending resulting from fiscal tightening by
the U.S. government.
Table 2: Summary of Military Cost Estimates to Secure Gulf Shipping Lanes
Estimate
Low (per
year)
High (per
year)
Notes
RAND (2009)
$75.5 billion
$91 billion
Estimates include $8 billion per
year average on other military
operations such as Desert Storm
Delucchi-Murphy
(2008)24
$29 billion
$75 billion
Stern (2010)
$351 billion
$507 billion
Estimates are for total 2007
spending on “force projection” in
The Gulf and not exclusively the
defense of shipping lanes.
Copulos (2003,
2007)25,26
$54 billion
$143 billion
Low estimate was from 2003, high
estimate from 2007
Section V: U.S. Energy Outlook and Projections
Thought to be impossible less than five years ago, there is now a growing consensus among energy
experts that the U.S. will soon be energy self-sufficient sometime in the next 15-25 years.
27
Currently,
only 80% of primary energy demand in the U.S. is met domestically, according to the IEA. BP forecasts
that U.S. energy production as a share of consumption will rise from 70% in 2011 to 99% in 2030.
Similarly, the IEA predicts that in net terms the U.S. will be 97% energy self-sufficient by 2035.
9
Domestic Energy Production and Consumption
According to the EIA, these striking changes will be caused by flat growth in energy demand and
booming domestic production of oil and natural gas. On the supply side, BP projects that domestic
energy production will rise by 23%, mostly from an increase in unconventional oil and natural gas.
However, because the technology to recover unconventional sources is relatively new, especially for oil,
these predictions are uncertain. In a 2013 medium term market report, the IEA found that oil
production in North America has increased faster than forecast, indicating that 2012 projections may
have been too conservative.
28
On the demand side, the EIA projects that oil consumption will grow only 0.3% per year from 2010 to
2035. In absolute terms, this means that total oil consumption will increase by less than 1 million bbl/d
to approximately 20 million bbl/d in 2035. Contrary to the EIA, BP forecasts that U.S. oil consumption
will actually decline by 19% over the same time period. This divergence in predictions is the result of
differing assumptions regarding vehicle fuel efficiencyBP assumes a renewal of Corporate Average
Fuel Economy (CAFE) standards while the EIA’s base projections do not.
Energy Imports and Exports
The combination of rapid supply growth and flat demand growth will eventually cause the U.S. to be a
net exporter of natural gas to Europe and Asia, according to BP. Domestically, natural gas will be used
primarily for electricity generation while oil will mainly be converted to liquid fuel for transportation.
Although the U.S. will soon be exporting natural gas, it will still have to rely on petroleum imports to
meet domestic demand. The EIA predicts that oil’s import share of domestic consumption will fall
from nearly 50% in 2010 to 36% in 2035. The IEA is more optimistic and foresees oil imports
comprising less than 30% of total consumption over the same time period. Initially, the fall in imports
will be caused by rising production, but after 2020 the IEA asserts that higher vehicle fuel efficiency
will spur further decreases. It should be noted that a decrease in oil imports will not lead to a direct
increase in exports of other U.S. goods and services. Although the U.S. will continue to rely on oil
imports, a medium-term report by the IEA found that the country is becoming a leading exporter of
refined petroleum products such as gasoline and naphtha, a trend that is set to gain more traction in
the future.
29
Oil Intensity
In the future, oil will play a less important but still vital role in the U.S. economy. According to BP’s
outlook for U.S. energy, oil’s share of the transport sector’s energy needs will fall from 94% in 2010 to
82% in 2030. Furthermore, total energy consumed by the transport sector will decrease by 16%. The
IEA and the EIA have similar outlooks although the EIA emphasizes that such an outcome is
dependent on renewed CAFE standards and the conversion of certain vehicles to run on natural gas.
If such conditions hold, as they likely will, the EIA projects that end-use expenditures on oil as a share
of GDP will fall from 5% to roughly 4% in 2035. Despite diminishing dependence on oil in the U.S.
10
economy and growing domestic production, all three agencies warned that the U.S. will still be tied to
international oil prices, as will be discussed in Section VI.
Geographic Implications
U.S. self-sufficiency will also lead to significant geographic changes in global trade patterns. The IEA
projects that North America will become a net oil exporter by 2030. Additionally, total oil from the
Middle East arriving in the U.S. will decrease by 70% from 2 million bbl/d to only 0.3 million bbl/d
over the same time period. In the near and medium term, however, imports from the Gulf will actually
gain in market share as tight domestic oil crowds out sweet crude imports from Africa.
30
,
31
Globally, all
three agencies note that demand for oil will continue to rise with India and China being key drivers of
demand in the coming decades. The IEA forecasts that oil flowing out of the Strait of Hormuz will
comprise 50% of total world oil exports in 2035, up from 35% in 2010. As a result of decreasing U.S.
demand for Middle East oil and growing consumption in Asia, the oil trade between Asia and the
Middle East, especially the portion traveling through the Strait of Hormuz, will grow in strategic and
economic importance.
Section VI: U.S. Economic Vulnerability to Oil Supply Shocks
As the 1973 Oil Embargo demonstrated, a severe supply shock can have serious consequences for the
U.S. economy. During this episode, petroleum exporting countries led by Saudi Arabia reduced oil
production by 4.4 million bbl/d.
32
Crude oil prices doubled the following year and the U.S. economy
slipped into recession.
33
The economic damage from the 1973 Embargo still looms large in the minds
of the American public and policymakers. This section will deconstruct how oil shocks affect the
economy and discuss empirical estimates of the economic costs. Building off this analysis, the next
section will examine how projected energy self-sufficiency will impact U.S. vulnerability to a disruption
in oil exports through the Strait of Hormuz.
How an Oil Supply Shock Affects the Economy
The primary channel of causation that a supply shock affects an economy is through an increase in
crude oil prices. As oil becomes scarcer in global markets and short term demand remains inelastic,
prices increase rapidly. Higher crude prices increase the price of downstream products such as
petrochemicals and fuel, incurring direct economic costs in addition to raising the rate of inflation. In
the U.S., oil is not widely used for electricity generation, thus an oil supply shock has little effect on
electricity generating costs.
34
There are two features of a supply shock that make it particularly costly
for the economy: the large magnitude of a price increase and the short time span over which prices
change. The substantial increase in prices worsens U.S.’ terms of trade and reduces purchasing power;
the suddenness of the increase causes structural inefficiencies as the economy cannot adapt in such a
short time span.
35
,
36
Higher prices for downstream commodities such as fuel curtail discretionary
income for consumers and reduces spending, especially on durable goods such as automobiles.
37
On
the supply-side, marginal costs for firms increases, which reduces profits and in the short term causes
firms to under-utilize capital investments and lay-off workers.
38
,
39
11
An oil shock can also affect the economy through international trade. Oil is a globally traded commodity
and an increase in U.S. crude oil prices will be reciprocated across the world. Downstream commodities
such as gasoline can also be traded internationally and shipped to wherever is most profitable. As world
prices for oil and downstream products rise, costs for key trading partners such as China and Japan will
likewise increase. Ultimately, increased costs in these countries will be reflected in their exports to the
U.S., making goods more expensive and reducing standards of living.
40
A supply shock will also decrease
purchasing power and reduce economic growth in all other oil dependent countries as well. Thus global
demand for U.S exports will fall. More generally, an unstable and disruptive world economy negatively
effects businesses and consumers in the U.S.
Import Dependence versus Oil Intensity
Many analysts assume that the volume of oil imports dictates a country’s economic vulnerability to a
supply shock. While such an assessment may hold in a worst-case scenario where all foreign supplies
are withheld over a sustained period of time, in a case where the supply-shock is temporary or there are
other sources of oil available on the international market, the level of imports will be irrelevant. A joint
study by the Government Accountability Office (GAO) and the EIA concluded that the volume of
imports and their country of origin make little difference in the modern economy because all countries
are subject to global shifts in supply and demand.
41
Because oil is a globally traded commodity, import
volume will have little effect on the price response during a supply shock. Therefore, import
dependency has little impact on a country’s vulnerability. Even in a worse case scenario, the U.S. and
its oil-importing allies in the IEA
42
maintain domestic petroleum reserves equal to 90 days worth of
imports. In the event of a temporary disruption in supplies, reserves can be used to alleviate the
shortage.
Instead, oil intensity is a far more decisive factor in determining a country’s vulnerability to a supply
shock.
43
What matters is how reliant consumers and firms are on liquid fuel for transportation or other
purposes and how quickly the economy can adjust to a rapid increase in prices. In general, the more
intensely the country relies on oil-based commodities, the more business costs will increase and the
more consumers’ purchasing power will decrease. The quicker the economy can adjust and substitute
away from oil products the less a supply shock will affect economic growth. Beyond domestic
dependency, global dependency on oil is also a contributing factor to U.S. vulnerability to a supply
shock. The more reliant major trading partners such as China are on oil for economic growth, the more
U.S. imports and exports will be negatively affected by a sudden increase in oil prices.
Empirical Estimates of Economic Costs
Aside from the usual endogeneity problems inherent in social science empirical work, estimating the
costs resulting from a supply shock are especially problematic because the economics underpinning the
international oil market are in constant flux. The estimates based on data from the 1970s and 1980s
may no longer be applicable to the modern U.S. economy. Some researchers even argue that supply
shocks no longer have any effect on economic growth,
44
although this claim is highly disputed.
45
A
12
survey of the literature done by RAND found that a rapid and sustained increase in oil prices of 100%
would result in a 1-5% reduction in year-on-year economic growth rate.
46
The RAND study also
estimated that a 10% reduction in supply would typically lead to a doubling in prices. Taking into
account the role of oil in the international economy, a study by the IMF found that doubling the price
of oil would reduce global economic growth rates by 1.4%.
47
Table 3: Economic Costs of a Disruption in the Strait of Hormuz
Estimate*
Percent GDP
loss -
Unmitigated
Percent GDP
loss Mitigated**
Costs -
Unmitigated
(2009 dollars)
Costs -
Mitigated** (2009
dollars)
EIA48
0.5%
0.2%
$70 billion
$27 billion
GAO49
1.2%
0.2%
$167 billion
$27 billion
*Estimates for one-month supply reduction spread over three months
**In the “mitigated” scenario, alternate export routes are employed and strategic stockpiles are leveraged
Note: cost of securing transit in the Gulf in 2009 was 0.5-0.6% of GDP, or $76 billion - $91 billion.50
The next relevant question is how vulnerable would the U.S. specifically be to a disruption in the Strait
of Hormuz. Estimates of the economic costs of a supply disruption in the Strait of Hormuz done by
the EIA and the GAO range from $27 billion to $167 billion in 2009 dollars, depending on assumptions
and methodology (see Table 3).
51
For comparison, the RAND study found that securing shipping lanes
in the Gulf costs between $76 billion and $91 billion each year.
52
Whether the economic benefits from
securing Hormuz outweigh the military costs depend on to what extent U.S. involvement reduces the
probability and severity of a supply disruption. Those parameters largely depend on the capabilities and
counter-factual behavior of Iran, which by their nature are difficult to estimate with any accuracy. Even
if military spending is larger than the expected value of averted costs, providing security may still be in
the economic best interest of the U.S. A stabilizing presence reduces the uncertainty surrounding oil
supplies in the Gulf, making it easier for firms and consumers to plan for the future. In that sense,
security costs are analogous to an insurance payment to mitigate the risk of a supply shock. In any case,
the static cost-benefit of defending the Strait of Hormuz is less relevant in the context of this analysis.
What matters more is the marginal effect energy self-sufficiency will have on the economics of securing
shipping lanes, which will be discussed in Section VII.
Section VII: Energy Forecasts and Their Implications for Vulnerability
This section will combine the energy forecasts and the analysis done in the previous two sections to
understand how vulnerable the U.S. will be to supply shocks in the future. Because there are multiple
factors contributing to future energy self-sufficiency, we will examine how each change in domestic
13
energy will affect future vulnerability to a supply shock. Then, we shall draw conclusions about how
the future U.S. economy would be affected by a disruption in the Strait of Hormuz.
Increased Domestic Production
An increase of U.S. domestic production is a factor that will have only a limited effect on vulnerability
to an oil shock. Even if production is enough to completely eliminate imports, which is contrary to
most predictions (see Section V), it will not reduce the costs stemming from rapidly increasing fuel
prices. However, domestic suppliers will realize higher profits from a price increase than previously.
These profits will only be enough to partially offset economic costs. Evidence suggests that even if the
U.S. becomes a net oil exporter, economic growth will still suffer a net-loss from a supply shock. A
study by the European Central Bank found that the U.K., which was a net oil exporter during the length
of the study, experienced a 2% reduction in growth rates from a 100% increase in oil prices.
53
Additionally, in 2012, 25% of U.S. oil companies’ supply was sourced from the Gulf.
54
Assuming this
ratio persists, any increase in domestic profits would have to offset losing one quarter of total
production.
Reduced Consumption and Increased Efficiency
The reduction of U.S. energy consumption and the increase of its energy efficiency will lead to the
largest reduction in vulnerability to an oil supply shock. Aggregate consumption will either remain flat
or decrease up to 20%, depending on the forecast. Oil consumption will almost certainly comprise a
smaller percentage of GDP. Without any changes in efficiency, reduced oil consumption will decrease
the economic cost of a supply shock because the price spike will not erode purchasing power to the
same degree. Increased fuel efficiency will also reduce the costs of a supply shock. Not only will it
reduce the change in transportation costs, it will add greater flexibility to the economy and mitigate
structural inefficiencies. Despite the benefits from lower consumption and greater efficiency, they will
not completely insulate the economy. According to BP, oil’s share of the transport sector’s energy needs
will remain above 80% in 2030. Although the U.S. will become less reliant on oil, it is currently at a
high level of dependency. The economy will continue to rely on oil for the foreseeable future and thus
continue to be vulnerable to a supply shock.
North America Becoming a Net Exporter
North America becoming a net exporter of oil will probably have little effect on vulnerability except in
worst-case scenarios. It is possible that during a time of crisis, the U.S. and its neighbors such as Canada
could engage in an energy sharing pact where Canada would exclusively sell to the U.S. and shield the
economy from price increases. This scenario is problematic because U.S. and Canadian oil producers
would likely be opposed since they would be forgoing higher prices on the world market. There are
currently restrictions on U.S. oil and natural gas exports;
55
however, as domestic production increases
these restrictions could be lifted. Indeed, access to U.S. oil and natural gas supplies can be used as
leverage in trade negotiations with Japan, which has extremely limited domestic supplies and heavily
relies on Gulf oil.
56
Even if the U.S. sourced all of its crude oil from North America and prices were
14
shielded from international markets, the economy may still be vulnerable to an increase in downstream
prices (see the following sub-section).
Increased Exports of Refined Products
Unlike suppliers of crude oil, refiners are free to ship their products overseas and as a result of growing
domestic oil production and flat demand, the U.S. is becoming one of the largest exporters of refined
oil products such as naphtha and gasoline, according to the IEA. The U.S. imports excess crude oil for
refining because costs are lower than in other countries. If prices for refined oil products in international
markets increase, domestic prices in the U.S. could likewise increase because U.S. consumers are in
effect competing with international demand. This relationship between domestic and international
prices for refined products would exist even if the U.S. sourced all its oil from North America and
domestic crude prices did not rise in the event of a supply shock (see the previous sub-section).
Additionally, during a supply disruption in the Gulf, there may no longer be enough spare oil supply
for the U.S. to maintain the excess imports necessary to export refined oil products. As long as domestic
refiners have the option of selling their product to international markets, U.S. consumers will be
competing with foreign buyers. Thus prices will still rise even if exports of downstream products
decrease. In the midst of a crisis, the U.S. could potentially institute a ban on exporting oil products,
which would dampen the rise of domestic prices. However, such “beggar-thy-neighbor” tactics would
negatively affect foreign relations and compromise U.S. international leadership. An export ban would
be unlikely unless the supply shock was especially severe and sustained over an extended period of time.
Oil’s Future Role in the World Economy
As global oil consumption rises, oil will become an even more critical input into the world economy.
This rise in consumption will be led by developing countries such as India and Chinacountries that
will be key drivers of economic growth. Thus, oil will not only become more important to the world
economy, but also critical to the growth of the world economy. The Strait of Hormuz will also become
an integral part of future oil trade as 50% of total oil exports will travel through its shipping lanes. A
majority of this oil will be sold to Asian markets. If these predictions hold true, then a disruption in the
Strait of Hormuz will cause even more damage to the world economy.
Analysis of Net Effects
There is little doubt that, ceteris paribus, energy self-sufficiency would reduce U.S. vulnerability to an oil
supply shock. Reduced consumption and improved efficiency in the transport sector will reduce the
economic costs while domestic suppliers’ profits will partially offset losses to the rest of society.
However, even in optimistic cases, the U.S. economy will still be dependent on oil consumption. Thus,
the U.S. will still be vulnerable and economic growth would still suffer from a supply shock. When
taking into account external factors it is unclear whether on-net the U.S. will in fact be less vulnerable
to a disruption in the Strait of Hormuz. As oil transported through Hormuz becomes more critical to
the world economy, global vulnerability will only increase. Furthermore, the U.S. economy will likely
become more globalized so a world-wide reduction in economic growth will have an even larger effect.
Benefits on the domestic side will be offset by global trends.
15
Although it is difficult to analyze what the net effect will be, Germany provides a useful corollary.
Germany has a large industrial economy that is more dependent on trade than the U.S. but also less
reliant on oil consumption. A study by the European Central Bank (ECB) found that given a 100%
increase in the price of oil, growth in Germany decreased by 0.9-2.8% over only one year.
57
Germany’s
example is a further evidence that the U.S. economic growth will remain vulnerable. Considering that
it costs the U.S. roughly 0.5% of GDP each year to defend the Strait of Hormuz according to a study
by RAND, the country will arguably have an economic incentive going forward to maintain its security
commitment. In any case, the marginal effect of energy self-sufficiency will probably not be significant.
Section VIII: Geopolitical Factors of U.S. Strategy in the Gulf
Energy security is the most prominent motivation for the U.S. to secure the Strait of Hormuz; however,
it is by no means the only reason. This section will outline geopolitical factors at play that are
independent of domestic energy security. Because these geopolitical motivations are unconnected to
domestic energy security, we argue that future energy self-sufficiency will have little effect on these
interests.
Countering Iranian Influence
Beyond compromising U.S. energy security, allowing Iran to disrupt shipping lanes in the Strait of
Hormuz will weaken America’s influence in the region. Iran is at odds with U.S. allies such as Israel and
is actively pursuing a nuclear program. The regime also sponsors terrorism through its proxies such as
Hezbollah and Hamas.
58
If Iran becomes the gate keeper to the Gulf, then the U.S. will have less
leverage in dealing with the regime. Additionally, many of America’s allies such as Japan depend on oil
transported through Hormuz. Abandoning its security commitment would threaten the energy security
of America’s allies and potentially cause them to reevaluate their dependence on the U.S. Moreover,
military assets needed to secure Hormuz are conducive to containing Iran. For example, a carrier strike
group based in Bahrain can also project force and be used as a deterrent to Iranian aggression.
59
For
these reasons, the U.S. would not end its commitment to secure the Strait of Hormuz unless it was also
willing to accommodate a more powerful and more dangerous Iran.
The “Asia Pivot”
The Obama Administration along with the State Department and the Defense Department has begun
to emphasize the strategic importance of East Asia.
60
On the surface, it may seem that a new focus on
Asia will cause the U.S. to shift away from the Middle East. Counter-intuitively, the “Asia pivot,” as it
is sometimes referred to, will actually increase the Gulf’s strategic importance. Gulf oil will remain
highly important to Asia and energy in general will become strained and more complex.
61
A report by
the CNA, a not-for-profit naval research and analysis organization, found that Japan and South Korea,
key allies in Asia were more vulnerable than the U.S. to a disruption in the Strait of Hormuz.
62
Irrespective of domestic vulnerabilities, allies will continue to rely on the U.S. to secure a critical supply
of oil. As Jon Alterman of the Center for Strategic and International Studies (CSIS) argues, in order to
16
secure Asia, we must also secure energy in the Gulf.
63
A whitepaper by the U.S. Defense Department
supports this conclusion. In the report, the first and second ranked defense priorities are Asian security
and energy security in the Gulf respectively.
64
Therefore, even if priorities such as countering Chinese
influence gain in relative importance, the U.S. will still need to secure shipping lanes in the Gulf. In an
increasingly interconnected world, a commodity as vital as oil cannot be neglected without
compromising security everywhere else.
International Order and U.S. Role as Leading Global Power
More broadly, reducing its security commitment in the Strait of Hormuz will undermine the U.S.’s
global influence and its role as the sole super power. The U.S. is responsible for the security guarantee
underpinning globalization and the current international system. Secure oil supplies from the Gulf are
also integral to the world economy. For as long as the U.S. maintains its role as guarantor of
international stability, it will necessarily need to ensure unmolested oil exports from the Gulf. Beyond
the Strait of Hormuz, the U.S. also is committed to securing international shipping lanes throughout
the world.
65
Leaving one of the world’s most critical trade routes undefended would undermine U.S.
credibility in the international community.
66
To illustrate the negative consequences of a withdrawal from the Strait of Hormuz, consider the
following thought experiment. Suppose there was no security guarantee for oil exports from the Gulf.
Currently, no other country has the capability to succeed America’s role in the Strait of Hormuz.
67
However, for countries such as China, India or Japan, crude oil is such a vital commodity that in order
to ensure energy security they would have no choice but to rapidly develop their naval capabilities. The
capabilities necessary to secure shipping lanes in the Gulf can also be used to project force more
generally and threaten the security of neighboring countries. Indeed, there is already tension between
India and China, and China and Japan. A rush to fill the void left behind by the U.S. would risk triggering
an arms race in Asia. More developed military capabilities in Asia will also erode America’s current
preponderance of military force and threaten domestic U.S. security. Therefore, ceding responsibility
in the Strait of Hormuz would be tantamount to discarding America’s role as the leading world power,
and renouncing the status quo that has persisted since the end of the Cold War.
Exactly how important are geopolitics to the U.S. commitment to secure Hormuz? According the
Walter Mead, Senior Fellow at the Council for Foreign Relations, its role as enforcer of the current
world order is the reason for its involvement in the Gulf.
68
In an article in Foreign Affairs, Stephen Brooks
et al argue that a more withdrawn U.S. will not only reduce America’s influence in world affairs but also
increase global uncertainty.
69
There are so many moving parts in the international system that it is
impossible to predict what would happen if the status quo abruptly changed. The bottom line is that
an America prepared to reduce its security commitment in the Strait of Hormuz must also be a country
prepared to live in an uncertain world it cannot control.
17
Effect of Energy Self-Sufficiency on Geopolitics
Containing Iran, securing Asia and maintaining the world economic order are each largely independent
of America’s energy security. Unless U.S. oil production can replace The Gulf exports in world markets,
energy self-sufficiency will have little effect on these strategic interests. In other words, these
geopolitical factors will continue to remain a large concern regardless of changes to domestic energy in
the U.S.
Section IX: Significance of the Defense Budget
The only remaining factor that could cause the U.S. to forgo its commitment to securing the Strait of
Hormuz is the size of the defense budget. Even though there are strong rationales for maintaining a
presence in the region, if there are no funds to support the military, then the U.S. will have to withdraw.
Because energy security and geopolitical considerations will compel the U.S. to have a robust military,
it is unlikely that a reduction will come to pass. The current budget has $590 billion allocated for defense
spending in the year 2017, which is roughly equivalent to the defense budget in 2009.
70
Based on the
analysis from Section IV, the cost of securing the Strait of Hormuz ought to be sustainable if spending
remains as forecasted. However, there are domestic forces outside of military or strategic
considerations that could have a significant effect on the defense budget. This section will analyze how
domestic forces might affect military spending and its implications for security in the Strait of Hormuz.
Political Dynamics
The U.S. has just ended two expensive wars in the Middle East and is still muddling through the largest
recession since the end of the Second World War. There is also political appetite to reduce government
spending, including the defense budget. At the very least, defense spending will probably not increase
in real terms over the next decade; however, because of political dysfunction in Washington, it is
impossible to predict by how much spending will be reduced. There are indicators that the military
budget may face severe cutbacks. Beginning in 2013, the U.S. Federal Government has been in the
process of cutting roughly 1.2 trillion dollars from its overall budget, with an emphasis on military
spending.
71
When this policy was initially proposed by the U.S. Congress, the mandatory cuts (known
as the Sequester) were intended to target vital programs and be politically unpalatable, forcing
Congress to seek compromise. However, compromise has proven to be elusive and drastic cuts in
Federal programs that were never intended to take effect have come to pass. The automatic cuts have
already prompted the U.S. to reduce its footprint in the Gulf from two carrier strike groups to one.
72
At best, the effects from the Sequester will be a temporary setback for the U.S. military; at worst, they
will lead to permanent policy changes that constrain capabilities well into the future. The ultimate
outcome will depend on the balance of power in Washington and possibly the 2014 mid-term election.
Fiscal Pressure
Even if political dysfunction is resolved, other domestic spending priorities may crowd out funds for
the military. A CSIS report found that the inability of the Federal Government to raise tax revenue
coupled with entitlement programs such as Medicarea national health insurance program for
18
seniorspose the largest threat to defense spending.
73
As the costs of entitlement programs, especially
Medicare, are forecasted to rise above 16% of GDP by 2035,
74
these costs may be too large a burden
to fund a globally operational military. According to a report by CNA, the U.S. could meet maritime
security objectives with a reduced budget if a higher proportion of spending is allocated to the Navy or
if significant cost efficiencies are realized.
75
The de facto rule for the U.S. Military since the end of
WWII has been that the Army, Navy and Air Force split the defense budget evenly. The CNA report
finds it unlikely that the Defense Department will break with precedent and allocate more funding to
the Navy. The report also found that even if the bureaucracy proved capable, there would be no
meaningful cost savings in the military budget. Realistically, the only way the U.S. will be able to
maintain its current level of spending to secure the Strait of Hormuz is if the Federal government can
raise more tax revenue and/or curtail the growth in entitlement spending. Higher economic growth
could ease the pressure for fiscal reform in the short and medium term as tax revenues would increase
but on its own growth will be insufficient to cover costs in the long term.
Potential for GCCU.S. Security Partnership
Even if spending allocated to Gulf security is curtailed by the U.S. government, overall security in the
Strait of Hormuz may not necessarily decrease. The U.S. could seek to involve GCC states to aid in
security operations and costs. These states have a strong incentive to ensure unobstructed
transportation of oil through the Strait of Hormuz because oil exports are fundamental to their
economies and political systems. GCC members also have the financial resources to support high
military spending. Indeed, in 2011 Saudi Arabia alone spent $46.2 billion on defense, four times larger
than Iran’s defense budget that year.
76
The U.S. could greatly improve the efficacy of military operations
without changing the cost-basis by working more closely with GCC allies.
77
If the U.S. continues to
arm and train GCC members, these regional allies could also shoulder more responsibilities and reduce
the need for a heavy U.S. footprint. The GCC could also directly bear more of the costs and in effect
subsidize U.S. operations. For example, the GCC could coordinate with the U.S. to impose a shipping
tariff on countries that benefit from the presence of U.S. forces. The revenues generated from the tariff
would then be used to cover the defense costs.
Current developments indicate that a close future partnership will be likely. In an official document
released by the Defense Department, the U.S. stated that it would collaborate with GCC countries
when appropriate in order to achieve its strategic objectives in the Gulf.
78
The U.S. already has major
security cooperation initiatives with GCC states.
79
For example, the U.S. Navy’s Fifth Fleet, which is
stationed in Bahrain, has conducted joint military exercises with GCC naval forces. The U.S. Combined
Air Operations Center is also located in Qatar and counts GCC states as key partners in the operation.
In recent years, U.S. arm sales to the region have increased over eight times from 2004-2007 while
European and Chinese exports have decreased.
80
Assuming that the U.S. can continue to strengthen
this military relationship, then even a shrinking defense budget will not necessarily result in reduced
security in the Strait of Hormuz.
19
Conclusion and Outlook
For the foreseeable future, the U.S. will remain vulnerable to a supply disruption in the Strait of Hormuz
because the country will continue to rely on oil. Oil prices are set on an international market so that in
the event of a supply shock, the U.S. will still suffer economically regardless of import dependence or
domestic production. Energy self-sufficiency will thus have little effect on America’s economic interest
in securing oil exports from the Gulf. Aside from energy security, maintaining a military presence in
the Gulf will be an integral part of U.S. geopolitical strategy, namely countering Iranian influence and
maintaining its role as the leading global power. Indeed, as long as oil is essential to the world economy,
the U.S. will need to continue safeguarding oil exports from the Gulf. Therefore, for foreseeable future, energy
self-sufficiency should have no significant effect on U.S. commitment to secure the Strait of Hormuz.
Table 4 summarizes the major factors discussed in the report and their impact on U.S. policy in the
Strait of Hormuz.
Table 4: Summary of Key Factors
Factor
Components
Net-effect on
security in Hormuz
Relevance
Domestic energy security
Decreasing oil intensity
High
Decreasing oil imports
Low
Increasing domestic
energy production
Low
Geopolitics
Need to counter Iran
High
Asia pivot
Moderate
U.S. role as super power
High
Defense budget
Political dynamics
Moderate
Fiscal constraints
High
Ability to achieve security
with light foot-print
High
For domestic reasons, both fiscal and political, the U.S. may reduce defense spending to the point where
the country will be unable to defend shipping lanes, even if doing so is not in the country’s best interests.
Given the strategic importance of Hormuz, such a reduction in defense spending is unlikely but the
risk cannot be ignored. Even then, a shrinking budget could be mitigated if the U.S. deepened its
strategic partnership with GCC states. Such a relationship may allow the U.S. to maintain a high level
of security in Hormuz at lower costs. There is evidence that closer military ties between the U.S. and
GCC states are already evolving. The assessment of this report is that all things considered, U.S. commitment to
securing shipping lanes in the Strait of Hormuz will probably remain unchanged.
20
Policy Implications
Based on the analysis in this report, there are two clear policy implications for both the U.S. and GCC
states. First, policymakers in the U.S. should emphasize the importance of shipping lanes in the Gulf
and their continued relevance to U.S. interests. They should not let fiscal constraints or energy self-
sufficiency forecasts prevent the U.S. from maintaining its security commitment. Until the U.S. no
longer relies on oil-based products such as gasoline for transportation, supply shocks in the Gulf will
continue to affect the domestic economy. Second, GCC states and U.S. policymakers should realize the
importance of forging stronger defense partnerships. Not only do their interests converge, but it could
allow the U.S. to maintain security with a reduced budget. Additionally, security and diplomatic relations
with the U.S. are one of the few factors GCC states have direct control over that could positively
influence U.S. behavior.
Potential Scenarios
There are many possible outcomes for future U.S. engagement in the Strait of Hormuz. This report
outlined three potential scenarios that try to capture the main alternatives. Below they are ordered from
highest to lowest level of involvement. The most likely outcome will feature elements from the first
and second scenarios; however, the third scenario is still a possibility.
Scenario 1: “Maintaining the Status Quo” moderate likelihood
The U.S. maintains a strong and primarily unilateral military force in the Gulf centered around the Fifth
Fleet. Oil intensity remains high and the U.S. has fully resolved fiscal and political constraints on its
military spending.
Scenario 2: “Strategic Partnerships” – high to moderate likelihood
The U.S. forms a close partnership with GCC states in order to secure shipping lanes in the Gulf. U.S.
naval power and military expertise form the backbone of the joint force while GCC partners play key
supporting roles. Cost sharing policies are also adopted. The U.S. economy is still oil intensive but fiscal
pressures have caused the country to reduce military spending.
Scenario 3: “Limited Engagement” – low likelihood
In this scenario, the U.S. has only a small footprint in the Gulf and occasionally sends a carrier strike
group to help diffuse tension between Iran and other Gulf states or Israel. Political and fiscal pressures
have dramatically reduced military spending as the U.S. withdraws from international affairs and
concedes leadership roles to rising powers such as China. Substantially reduced oil intensity would
increase the likelihood of this scenario but political pressure and fiscal pressure on their own may be
sufficient.
21
References
1
US Energy Information Administration. World Oil Transit Chokepoints. Last modified on August 22,
2012. http://www.eia.gov/countries/regions-topics.cfm?fips=WOTC#hormuz
2
US Energy Information Administration. World Oil Transit Chokepoints. Last modified on August 22,
2012. http://www.eia.gov/countries/regions-topics.cfm?fips=WOTC#hormuz
3
BP. BP Energy Outlook 2030. London, United Kingdom. BP, 2012.
4
International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy Agency,
2012.
5
International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy Agency,
2012.
6
Archer, John. “Maersk vessel attacked by pirates in Gulf of Oman.” Reuters, May 23, 2012. Accessed
on May 13, 2013. http://www.reuters.com/article/2012/05/23/us-vessel-pirates-maersk-
idUSBRE84M13Z20120523
7
Himes, Joshua. CSIS Middle East Program: Gulf Analysis Paper. “Iran’s Maritime Evolution.” Center
for Strategic and International Studies (2009).
8
Himes, Joshua (2009).
9
Cordesman, Anthony. “Securing the Gulf: Key Threats and Options for Enhanced Cooperation.”
Center for Strategic and International Studies (Feb, 2013).
10
Cordesman, Anthony (Feb, 2013).
11
Cordesman, Anthony (Feb, 2013).
12
US Energy Information Administration. World Oil Transit Chokepoints. Last modified on August 22,
2012. http://www.eia.gov/countries/regions-topics.cfm?fips=WOTC#hormuz
13
Aissaoui, Ali. Economic Commentary Volume 7 No 11. “Strait of Hormuz : Alternate Oil Routes
Not Enough.” Middle East Economic Survey (2012).
14
Cordesman, Anthony and Robert Shelala. “US and Iranian Strategic Competition: The Gulf and the
Arabian Peninsula, 3rd Edition.” Center for Strategic and International Studies (Jan, 2013)
15
International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy
Agency, 2012.
16
Alterman, Jon. CSIS Middle East Program: Middle East Notes and Comment. “Paradigm Shift.”
Center for Strategic and International Studies. (Feb, 2013).
17
Stern, Roger. “United States cost of military force projection in the Persian Gulf, 1976–2007.”
Energy Policy (2010): doi:10.1016/j.enpol.2010.01.013.
18
United States Defense Department. Sustaining Global Leadership: Priorities for 21st Century Defense. US
Defense Department, 2012. Available at:
http://www.defense.gov/news/defense_strategic_guidance.pdf
19
Crane, Keith et al. Imported Oil and National Security. Santa Monica: RAND Corporation, 2009.
20
Stern, Roger (2010).
21
Estimate based on 2009 GDP from U.S. Bureau of Economic Analysis
22
Office for the Secretary of Defense: Comptroller. “National Defense Budget Estimates for 2013.”
US Defense Department, 2012.
23
Office for the Secretary of Defense: Comptroller. “National Defense Budget Estimates for 2013.”
US Defense Department, 2012.
24
Delucchi, Mark and James Murphy. “US Military Expenditures to Protect the Use of Persian Gulf
Oil for Motor Vehicles.” Energy Policy 36 (2008) 2253 2264.
25
Copulos, Milton. America’s Achilles Heel: The Hidden Costs of Imported Oil. Washington, D.C.: National
Defense Council Foundation (2003).
22
26
Copulos, Milton. The Hidden Cost of Oil: An Update, Washington, D.C.: National Defense Council
Foundation, 2007.
27
Unless otherwise specified, estimates in this section will be based on the following three sources:
1) BP. BP Energy Outlook 2030. London, United Kingdom. BP, 2012
2) International Energy Agency. World Energy Outlook 2012. Paris, France. International Energy
Agency, 2012.
3) US Energy Information Administration. Annual Energy Outlook 2012 with Projections to 2035.
Washington, DC. US Energy Information Administration, 2012.
http://www.eia.gov/forecasts/aeo/pdf/0383(2012).pdf
28
International Energy Agency. Oil Medium Term Market Report: 2013. Paris, France. International
Energy Agency, 2013.
29
International Energy Agency (2013).
30
International Energy Agency (2013).
31
Krauss, Clifford. “U.S. Reliance on Oil From Saudi Arabia Is Growing Again.” The New York Times,
August 16, 2012. http://www.nytimes.com/2012/08/17/business/energy-environment/us-reliance-
on-saudi-oil-is-growing-again.html?pagewanted=all&_r=0
32
Hamilton, James. “Historical Oil Shocks.” In Handbook of Major Events in Economic History, edited by
Randall Parker and Rober Whaples. New York, NY: Routledge (2013).
33
Hamilton, James (2013).
34
US Energy Information Administration. Annual Energy Outlook 2012 with Projections to 2035.
Washington, DC. US Energy Information Administration, 2012.
35
Crane, Keith et al. (2009).
36
Leiby, Paul. Estimating the Energy Security Benefits of Reduced U.S. Oil Imports. Oak Ridge, Tenn.: Oak
Ridge National Laboratory (2007). http://www.epa.gov/otaq/renewablefuels/ornl-tm-2007-028.pdf
37
Kilian, Lutz. “The Economic Effects of Energy Price Shocks.” The Journal of Economic Literature, 46.4
(2008): 871-909
38
Crane, Keith et al. (2009).
39
Leiby, Paul (2007).
40
Alterman, Jon. CSIS Middle East Program: Middle East Notes and Comment. “The Asia Pivot.”
Center for Strategic and International Studies. (Jan, 2013).
41
Joint Economic Committee. The Strait of Hormuz and the Threat of an Oil Shock. Washington, DC:
Joint Economic Committee: United States Congress, 2007.
http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=6c23d7fa-5988-4f13-9457-
84955b31d706
42
IEA member countries include: Australia, Austria, Belgium, Canada, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, New
Zealand, Norway, Poland, Portugal, Republic of Korea, Slovak Republic, Spain, Sweden, Switzerland,
Turkey, United Kingdom and the United States.
43
Nivola, Pietro and Erin Carter. “Making Sense of Energy Independence.” In Energy Security:
Economics, Politics, Strategies and Implications, edited by Carlos Pascual and Jonathan Elkind. Washington
DC: Brookings Institution Press, 2010.
44
Dhawan, Rajeev and Karsten Jeske. “How Resilient is the Modern Economy to Energy Price
Shocks.” Atlanta: Federal Reserve Bank of Atlanta (2006).
http://www.frbatlanta.org/filelegacydocs/erq306_jeske.pdf
45
Hamilton, James. Brookings Papers on Economic Activity. “Causes and Consequences of the Oil
Shock of 2007-08.” Washington DC: Brookings Institution (2009).
http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009a
_bpea_hamilton.pdf
23
46
Crane, Keith et al. (2009).
47
International Monetary Fund. World Economic Outlook: Spillovers and Cycles in the Global Economy.
Washington, DC: International Monetary Fund, 2007.
48
Joint Economic Committee. The Strait of Hormuz and the Threat of an Oil Shock. Washington, DC:
Joint Economic Committee: United States Congress, 2007.
49
Joint Economic Committee. The Strait of Hormuz and the Threat of an Oil Shock. Washington, DC:
Joint Economic Committee: United States Congress, 2007.
50
Crane, Keith et al. (2009).
51
Joint Economic Committee. The Strait of Hormuz and the Threat of an Oil Shock. Washington, DC:
Joint Economic Committee: United States Congress, 2007.
52
Crane, Keith et al. (2009).
53
Jimenez-Rodriguez, Jessica and Marcelo Sanchez. Oil Price Shocks and Real GDP Growth: Empirical
Evidence from OECD Countries. Germany: The European Central Bank, 2004.
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp362.pdf
54
US Energy Information Administration. “Crude Oil Imports From Persian Gulf.” Updated Feb 27,
2013. http://www.eia.gov/petroleum/imports/companylevel/summary.cfm
55
International Energy Agency (2013).
56
US Energy Information Administration. Country Analysis Briefs: Japan. Last updated on June 4, 2012.
http://www.eia.gov/EMEU/cabs/Japan/pdf.pdf
57
Jimenez-Rodriguez, Jessica (2004).
58
The Iran Project. Weighing Benefits and Costs of Military Action Against Iran. New York: The Iran
Project, 2012. http://www.wilsoncenter.org/sites/default/files/IranReport_091112_FINAL.pdf
59
Cordesman, Anthony et al. “Iran and the Gulf Military Balance: the Conventional and Asymmetric
Dimensions.” Center for Strategic and International Studies (2012).
http://csis.org/files/publication/121010_Iran_Gulf%20Military_Balance.pdf
60
United States Defense Department. Sustaining Global Leadership: Priorities for 21st Century Defense.
Washington DC. US Defense Department, 2012.
http://www.defense.gov/news/defense_strategic_guidance.pdf
61
Marten, Ivan and Philip Whittaker. BCG Perspectives: “The New Landscape of Global Energy.”
The Boston Consulting Group (2012).
62
Komiss, William and LaVar Huntzinger. “The Economic Implications of Disruptions to Maritime
Oil Chokepoints.” CNA (2011).
63
Alterman, Jon (Jan, 2013).
64
United States Defense Department. Sustaining Global Leadership: Priorities for 21st Century Defense.
Washington DC. US Defense Department, 2012.
65
United States Defense Department. Sustaining Global Leadership: Priorities for 21st Century Defense.
Washington DC. US Defense Department, 2012.
66
Alterman, Jon. CSIS Middle East Program: Middle East Notes and Comment. “Brother, Can You
Spare a Carrier?” Center for Strategic and International Studies. (2012).
67
Cordesman, Anthony (Feb, 2013).
68
Mead, Walter. “Why We’re In the Gulf.” Council on Foreign Relations, December 27, 2007.
http://www.cfr.org/energy-security/why-were-gulf/p15139
69
Brooks, Stephen et al. “Lean Forward: in Defense of American Engagement.” Foreign Affairs,
November 30, 2012. http://www.foreignaffairs.com/articles/138468/stephen-g-brooks-g-john-
ikenberry-and-william-c-wohlforth/lean-forward
70
Office for the Secretary of Defense (Comptroller). “National Defense Budget Estimates for 2013.”
US Defense Department, 2012.
24
71
Office of Management and Budget. OMB Report Pursuant to the Sequestration Transparency Act of 2012.
Washington DC. The Office of Management and Budget, 2012.
http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf
72
Baldor, Lolita. “Cash-Strapped US Military to Cut Persian Gulf Fleet.” The Times of Israel, February
7, 2013. http://www.timesofisrael.com/cash-strapped-us-military-to-cut-persian-gulf-fleet/
73
Cordesman, Anthony and Robert Shelala. “US Strategy, Sequestration in March, and the Growing
Strategy- Reality Gap.” Center for Strategic and International Studies (Feb 2013).
74
Congressional Budget Office. The 2012 Long-Term Budget Outlook. Washington, DC: The United
States Congress: Congressional Budget Office, 2012.
75
Whiteneck, Daniel et al. “The Navy at a Tipping Point: Maritime Dominance at Stake?” CNA
(2010).
http://www.cna.org/sites/default/files/research/the%20navy%20at%20a%20tipping%20point%20d
0022262.a3.pdf
76
International Institute for International Studies. “Chapter Seven: Middle East and North Africa,” in
The Military Balance: 2012, International Institute for Strategic Studies, 2012.
77
Cordesman, Anthony and Robert Shelala (Jan, 2013).
78
United States Defense Department. Sustaining Global Leadership: Priorities for 21st Century Defense.
Washington DC. US Defense Department, 2012.
79
Cordesman, Anthony and Robert Shelala (Jan, 2013).
80
Cordesman, Anthony and Robert Shelala (Jan, 2013).
ResearchGate has not been able to resolve any citations for this publication.
Article
Full-text available
This paper explores similarities and differences between the run-up of oil prices in 2007-08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.
Article
This paper was a quick response to an OPNAV Quadrennial Integration Group (QIG) question as to how Navy could be postured, deployed and structured to maintain dominance and influence (the ability to deter and reassure on a global scale) as a "global navy."
Article
This paper presents the first estimate of United States military cost for Persian Gulf force (CPGfp) derived entirely by a quantitative method. An activity-based cost (ABC) model uses geographic distribution of aircraft carriers as a proxy allocator of Department of Defense (DoD) baseline cost to regional operations. Allocation follows simply from DoD data that since 1990 no less than one aircraft carrier has been continuously on-station in the Persian Gulf; that eight are required to keep one on-station there; that the Navy has had eleven–fifteen carriers since 1990; and that Army and Air Force units are virtually never deployed to combat operations without Navy units. For 1976–2007 CPGfp is estimated to be $6.8×1012 and for 2007 $0.5×1012 (2008$). This substantial military investment is not a remedy for the market failure at the heart of regional security problem, which is oil market power. When CPGfp is added to economic losses attributed to market power in another recent study (Greene, 2010), the severity of this market failure becomes more apparent.