Despite significant increases in U.S. crude oil production in recent years, roughly half of the 19.5 million barrels per day of liquids that we consume is still imported from other countries. Forecasts for oil prices are always precarious, but barring a prolonged global recession, prices will trend upward due to 1) rising demand, 2) higher production costs, 3) investment constraints due to resource nationalism, 4) fears over an imminent production peak (i.e., “Hubbert’s curve”), 5) greater instability in the Middle East, and 6) policies to limit the extraction and use of petroleum (e.g., caps on carbon emissions and carbon taxes).

The U.S. Energy Information Administration’s (EIA) National Energy Modeling System (NEMS) forecasts that prices could eventually surge to $200 a barrel. Now, some believe that a possible war between Israel and Iran would usher in $200 oil as early as this summer.

Rising oil prices and high import levels represent major headwinds for the recovering U.S. economy and threaten our national security. The oil trade now accounts for nearly 60% of the total annual U.S. trade deficit ($558 billion in 2011), meaning oil holds a greater share of the gap than our trade with any single bilateral or regional trade partner, such as China or the European Union.

Perhaps more worrisome, roughly half of U.S. crude oil imports come from members of the dominant Organization of the Petroleum Exporting Countries (OPEC), a risky relationship that makes us more vulnerable to supply disruptions and price volatility. Iran, OPEC’s second-highest producer, has used petrodollars to become the leading state sponsor of terrorism, and its nuclear ambitions are making the global supply chain even less predictable than usual.

Closer to home, U.S. environmental policy could send Canada’s heavier crude to China, and Mexico likely passed peak oil production in 2005. The International Energy Agency (IEA) estimates that the world’s oil supply system requires an improbable $10 trillion infusion from 2011 to 2035.

Oil, however, is entrenched in the American way of life, and a unique combination of desirable and useful characteristics (e.g., high energy density, ease of transportation and storage, and great versatility in end-use) will continue to make liquid fuels irreplaceable in the decades ahead. Despite a strong push to reduce demand, the EIA expects domestic consumption to increase by 5% to 20% by 2030.

Simply put, both the EIA’s NEMS and the IEA’s World Energy Model have confirmed that oil will remain the foundation of the $14-trillion U.S. economy under any foreseeable scenario. Without an enlarged domestic stockpile, we face the prospect of extended supply shortages, rising prices, worsening trade deficits, and continued national security vulnerabilities. Fortunately, we have far more liquid fuel options at our disposal than some would have us believe.

Forecasts suggest prices could eventually surge to $200 per barrel. That scenario could arrive as early as this summer if there is greater instability in the Middle East.

Domestic supply

According to BP, proven U.S. crude oil reserves have hovered around 30 billion barrels since 1980, despite the extraction of some 80 billion barrels. Reserve counts are just snapshots in time that gauge how much of the resource is technologically and economically feasible to produce under prevailing market conditions. These conditions are always in flux, however. Technological improvements and higher prices “prove up” our vast resource into reserves primed to be extracted and brought to market.

In fact, the assertion that the U.S. is running out of oil is obviously premature: 85% of U.S. coastal waters is off-limits to energy exploration. Rice University concludes that we could still have 2 trillion barrels of recoverable oil, or basically double the proven reserves of OPEC.

Rising oil prices since the mid-2000s have lured companies to increase spending on exploration and production. This has made the development of unconventional resources more economical, and the 2000s was the first decade where proven U.S. reserves grew since the 1950s. Looking forward, higher prices help to reduce our net imports by incentivizing production while curtailing demand.

From 2009 through 2011, the U.S. experienced three consecutive gains in domestic crude oil production—for the first time since 1985. The thriving shale-oil boom, centered in Texas’ Eagle Ford play and in North Dakota’s Bakken, has changed the picture. U.S. liquids imports fell from 60% of demand in 2008 to below 50% today.

Advances in drilling and production technologies are expected to eventually be applied to the Green River formation, where 800 billion barrels of oil shale (kerogen) await in Colorado, Utah, and Wyoming.

Demonstrating how drastically technology can extend the resource base, the U.S. Geological Survey (USGS) in 2008 upped its 1995 appraisal of the Bakken’s technically recoverable oil 25-fold, from 150 million to 3.7 billion barrels. And now, major Bakken player Continental Resources reports that the play could ultimately yield 20 billion barrels, or a staggering 133 times more than the original USGS assessment.

With enhanced oil recovery using carbon dioxide (CO2 ), the U.S. can go even further. CO2 -EOR has been commercial in the U.S. since the 1970s and now yields about 280,000 barrels per day. Advanced Resources International, a leading EOR research and consulting firm, estimates that we could have 3.6 million barrels a day from a CO2 -EOR industry by 2030. That’s enough to displace our combined current imports from the Persian Gulf, Venezuela and Nigeria.

The U.S. Department of Energy (DOE) has determined that there are at least 90 billion barrels of recoverable oil available for a national CO2 -EOR strategy.

Finally, the offshore oil industry is committed to revamping production practices because considerable amounts of petroleum are still available. The U.S. Outer Continental Shelf, for instance, holds between 67- and 115 billion barrels of undiscovered but technically recoverable crude oil, potentially enough to displace all our imports for the next 25 years.

Domestic market outlook

Those that advocate somehow “getting off oil” and not pursuing more domestic production are ignoring the reality: petroleum currently has no large-scale alternatives and demand will therefore stay salient. Moreover, the goal to incorporate more wind and solar power will not alleviate our fundamental need for more crude because petroleum-based electricity accounts for just 3% of total U.S. oil demand.

As for electric vehicles, President Obama’s fading goal to deploy a million plug-in hybrids by 2015 is the proverbial “drop in the bucket” anyway: the U.S. has more than 250 million petroleum-only vehicles. This lack of material substitutes defines the “price inelasticity of demand,” where higher oil prices have only a minor effect on consumption.

By 2030, for instance, the EIA forecasts that a near quadrupling in the price of a barrel of oil ($50 to $196) would lower demand by just 13%. More E&P investment at home and abroad will remain absolute for the long-term.

According to the EIA’s Annual Energy Outlook 2011, the U.S. now has a total light-duty vehicle (LDV) stock (passenger vehicles and light trucks) of 230 million petroleum-only vehicles. The LDV fleet alone is expected to soar past 300 million by 2035.

The U.S. puts between 10 and 16 million new conventional internal-combustion-engine vehicles on its roads nearly every year, each having an average lifespan of 17 years. In 2011, domestic sales of hybrids were around 250,000 units.

Economic and population growth are the main indicators of future energy use. The EIA projects that the U.S. will add over two Japans ($9.5 trillion) to its gross domestic product and one France (65 million people) to its population by 2030.

There is no historical evidence to conclude that the new standards for Corporate Average Fuel Economy (CAFE), from 27.5 to 54.5 miles per gallon by 2025, will reduce oil demand in the absolute sense claimed. In fact, efficiency gains tend to increase consumption because they 1) make the use of energy relatively cheaper (“Jevons Paradox”), and 2) spur economic growth for both the overall economy and the individual (“rebound effect”).

Higher prices help to reduce U.S. net imports by incentivizing production while curtailing demand.

Military demand

Higher oil prices and the urgency to reduce imports is also a concern when it comes to fueling the U.S. national security apparatus. Oil has long been vital to the daily operations of the U.S. military. The Department of Defense (DOD) consumes over 80% of all energy used by the federal government. Energy demand in warfare is a rising trend, so the goal to secure an affordable and reliable supply of liquid fuel has been a hallmark of U.S. defense policy. Some 40% of the military’s budget has been attributed to protecting the global oil trade.

The U.S. military is the largest single purchaser of oil in the world and needed over 300,000 barrels a day at the height of Operation Iraqi Freedom. In 2006, the roughly 600,000 U.S. troops in the Persian Gulf used more than twice as much oil on a daily basis as the entire two-million-man Allied Expeditionary Force that liberated Europe in World War II. In 2009, the U.S. Defense Logistics Agency delivered more than 170,000 barrels a day to the war theaters—at a cost of $9.6 billion.

But, in the Joint Operating Environment 2010 report, the U.S. Joint Forces Command, the military’s transformation leader, delineated the widening gap between global crude oil production and consumption. And because petroleum is a fungible global commodity, where the prices of the four main crude benchmarks are co-integrated, a supply disruption anywhere impacts consumers everywhere.

In contrast, the supply and cost of alternative liquid fuels derived from domestic sources is far more insulated from geopolitical pressures. After all, it was on the eve of World War I when Winston Churchill, then the First Lord of the British Admiralty, famously recognized that “safety and certainty in oil lie in variety and variety alone.”

The Air Force, the largest oil consumer within the DOD services, is well aware of the energy security benefits of F-T fuels in particular, which can be produced to military specifications. The Navy is also interested in alternative liquids for ships and aircraft, and in early December 2011, the Navy kicked off a three-year, $510-million plan to make long-term purchases of advanced biofuels. The Army, meanwhile, is testing alternatives in tactical vehicles and generators.

The Defense Energy Support Center is pursuing the Battlefield Use Fuel of the Future program to provide hundreds of millions of gallons of alternative fuels to the Air Force and Navy for testing on operational units.

The DOD and DOE have partnered with Syntroleum Corp. to produce F-T liquids from natural gas, which are further refined to create jet and diesel fuels. Syntroleum’s diesel fuels have been engine tested and produce very little particulates or pollutants, relative to petroleum-based products. Alternative liquids can be blended with existing DOD fuel types in a 50-50 ratio.

Syntroleum’s jet fuel, mixed 50-50 with conventional oil products, has been successfully tested by the Air Force in a flight of a B-52 jet with all eight of its engines fueled by the mixture. The Air Force wants to use biofuels for 50% of its domestic aviation needs by 2016. Established biofuels are favored since they already account for 90% of the world’s non-oil unconventional liquids production and generally release less greenhouse gases (GHGs).

The Energy Independence and Security Act of 2007 prohibits federal agencies, including the military, from procuring alternative liquids unless they have equal or lower life-cycle GHG emissions than conventional petroleum products. Looking forward, other options will continue to emerge as new technologies become available (e.g., carbon capture systems). The DOD wants to ultimately develop a single battle-space fuel for all of the services.

Conclusion

More U.S. liquid fuel production should be a pillar of any national energy strategy because domestic demand will stay high even if prices spike. Claims that we are rapidly “running out of oil” fail to appreciate oil as an economic commodity powered by the constant advance of technology. Its extraction becomes more feasible as market conditions change, and higher prices can diversify the supply mix by making alternatives even more cost-competitive.

More liquids production will minimize the transfer of our wealth abroad, create more local jobs, and help insulate us from an increasingly less predictable marketplace where hugely populated nations like China and India need to procure more crude oil. Thus, policies to expand, not impede, the domestic availability of irreplaceable liquid fuels are vital to national security—and to economic growth. Ongoing technological advances mean that we will be producing and using liquid fuels differently tomorrow than we do today.

To that end, policy should recognize that renewable energy systems will not be competing against other fuels as they are now, but as they will become.

Jude Clemente is an energy analyst and technical writer in the Homeland Security Department at San Diego State University. His research specialization is oil security at the national and international level. Clemente is principal at JTC Energy Research Associates LLC, and is an adviser to Penn State’s Research Project on North American Energy Supply.