U.S. oil supplies are not art risk: it is past time for political and ecological alarmists to stop spreading unfounded fears that America's energy security somehow is endangered.

• Author: Gholz, Eric
• Position: National Affairs

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MANY AMERICANS have lost confidence in their country s "energy security" over the past several years. Oil prices already were high by historic standards in 2005 when Hurricane Katrina ravaged the Gulf Coast and temporarily shut down the refineries, pipelines, and offload terminals at that large port complex, highlighting the apparent vulnerability of U.S. oil infrastructure. Furthermore, growing chaos in Iraq reminds Americans of their country's limited ability to control events in the oil-rich Persian Gulf region. Finally, the reliability of even America's domestic oil supplies was called into question last year when poor maintenance temporarily closed the pipelines that carry oil from Alaska to the contiguous 48 states. That a foreign company (British Petroleum) manages the Alaska pipeline only reinforces the overarching feeling that the U.S. has little control over the energy supplies it vitally needs.

Because the U.S. is a net oil importer, and a substantial one at that, concerns about energy security naturally raise foreign policy questions. One set of arguments is based on fears about dwindling global oil reserves and their increasing concentration in politically unstable regions. Those so-called peak oil worries have led some foreign policy analysts to call for increased U.S. efforts to stabilize--or, alternatively, democratize--the politically tumultuous oil-producing regions. A second concern focuses on the rise of China and Beijing's alleged strategy for "locking up" the world's remaining oil supplies through long-term purchase agreements and aggressive diplomacy. According to a number of analysts, the U.S. must respond to China's energy policy, outmaneuvering Beijing in the "geopolitics of oil," or else American consumers will find themselves shut out from global energy markets. Finally, many analysts suggest that even the "normal" political disruptions that sometimes occur in oil-producing regions--occasional wars and revolutions--hurt Americans by disrupting supply and creating price spikes. U.S. military forces, those analysts claim, are needed to enhance peace and stability in crucial oil-producing regions, particularly the Persian Gulf.

Each of those fears about oil supplies is exaggerated. Peak oil predictions about the impending decline in global rates of oil production are based on scant evidence and dubious models of how the oil market responds to scarcity. In fact, even though oil supplies increasingly will come from unstable regions, the ongoing investments designed to reduce the costs of finding and extracting oil are a more effective response to that instability than trying to fix the political problems of faraway countries. Furthermore, fears of China are overstated as well. Chinese efforts to lock up supplies with long-term contracts will, at worst, be economically neutral for the U.S. and even may be advantageous. The main danger stemming from China's energy policy is that current U.S. fears may create a self-fulfilling prophecy of Sino-U.S. conflict. Finally, instability in the Persian Gulf poses surprisingly few energy security dangers, and the U.S. military presence there actually exacerbates problems rather than helping to solve them.

Those arguments do not mean that the U.S. can ignore energy concerns. Global demand for energy is soaring and shows no sign of relenting. Furthermore, oil supplies, though currently abundant, eventually will begin to run low, and the world will need to develop other energy sources. Yet, neither of those problems requires the sort of activist military policies that many foreign policy analysts suggest.

Oil markets appear more mysterious than they are. The details of the oil business are very complex--the various grades of oil, the complicated contracts used to buy oil and hedge against volatility, and the benchmarks that are used to negotiate prices--but few of those details matter for a discussion of the links between oil and foreign policy. Oil companies care about those details because they are trying to earn a profit on each individual contract, but national policy depends only on the general availability and overall price of oil. Because of the market's complexity, media accounts often suggest that oil markets move without a clear connection to economic fundamentals and that irrational fears or the actions of shadowy governments drive price and product availability. Although consumers' fears and suppliers' political decisions surely matter, their effects can be understood within a fairly traditional market framework. Two main processes determine oil prices: the forces of supply and demand and constraints on those forces created by political risk and cartel behavior.

Geologic features determine the location and quantity of oil deposits, but they do not determine "oil supply" in any meaningful sense. Supply depends on the difficulty (and hence cost) of oil exploration and production and on companies' economic decisions about how much money to spend looking for new oil fields, developing pumping capacity from the fields they find, and filling pipelines with oil. In any given region, geologic factors, such as the porosity of the rock, determine whether meaningful oil deposits exist and how expensive they are to discover and tap. However, geology merely creates the playing field for oil exploration and extraction. The amount of oil that actually can be "produced" at any given time, that is, extracted from the ground, transported to refineries, refined, and then transported in various forms to end users, depends on how much money oil companies have invested in a given field.

Prices drive fluctuations in oil supply High prices encourage producers to pump their working fields at a higher rate to maximize profits before prices drop; lower prices lead them to reduce production. Companies with large inventories of oil generally respond to high prices by selling their stocks, unless they expect prices to rise even higher in the future. Price troughs encourage them to hold (or expand) their inventories, reducing supply in the short term.

Similarly, expectations about future petroleum prices...