RAND says cost of oil supply disruption worst threat

HOUSTON Mon May 11, 2009 2:12pm EDT

HOUSTON (Reuters) - The greatest threat to the United States from crude oil imports is a long-term disruption of world supply and the higher costs associated with that loss of imports, according to a RAND Corp study issued Monday.

"The fact that the United States imports nearly three-fifths of its oil does not pose a national security threat," said Keith Crane, the study's lead author and senior economist at RAND, a nonprofit research organization.

"There is an integrated world oil market, and embargoes do not work. But a large, extended drop in the global supply of oil would trigger a sharp rise in oil prices and significantly affect the United States, no matter how much or how little oil the United States imports," Crane said in a statement.

The study, commissioned by the U.S. Institute for 21st Century Energy, an affiliate of the U.S. Chamber of Commerce, recommended steps be taken to reduce the vulnerability of the U.S. economy to sudden drops in world oil supplies.

"By reducing demand or increasing competitive alternative energy supplies, the United States would place downward pressure on world oil prices and ease risks to U.S. national security," according to the study.

Among the steps recommended in the study:

- Maintenance of well-functioning oil markets;

- Do not impose price controls or rationing during disruptions;

- A top-level review by government and business of economic benefits and environmental hazards of removing restrictions on drilling for new oil fields;

- Clear environmental and other rules for developing new oil fields and producing oil substitutes;

- Impose an excise tax on oil to increase incentives to drivers and manufacturers to economize on fuel use and soften growth in demand for oil.

The study found minimal risks to U.S. national security from the use of oil as a political weapon to influence foreign policy as was attempted during the oil embargo of 1973-1974.

Among other lessor risks are oil revenues funding terrorist groups and competition from other major national consumers for crude oil on the world market.

Reducing U.S. dependence on foreign oil would not reduce costs associated with military operations to protect that supply, the study found.

"The effect on military cost from such changes in petroleum use would be minimal," according to the study.

(Editing by Christian Wiessner)

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