NATIONAL DEFENSE, OIL IMPORTS, AND BIO‐ENERGY TECHNOLOGY

Robert M. Ames, Anthony Corridore and Paul W. MacAvoy

Journal of Applied Corporate Finance, 2004, vol. 16, issue 1, 38-50

Abstract: Terrorist disruptions of crude oil supplies anywhere in the world now pose a serious threat to the U.S. economy. Price shocks from terrorist acts could have a pervasive negative effect on producer costs and consumer behavior, with the potential to derail the current eco‐nomic recovery. The authors pro‐pose insulating U.S. energy prices from world price volatility by gradu‐ally eliminating imports of crude oil from non‐Western Hemisphere sources. The U.S. now operates with half of its crude supply from offshore sources. As much as half of these imports could be replaced by ex‐panded production from projects that have been shelved for political reasons or because prices are cur‐rently too low. The remainder could come from an extensive and cur‐rently untapped supply of crude oil substitutes, particularly bio‐energy sources such as ethanol from corn and switchgrass. These sources would be much less vulnerable to terrorist disruption. The authors also argue that the expected costs of pursuing a strat‐egy of eliminating imports would not be nearly as large as the con‐ventional wisdom suggests. Even though crude prices would be some‐what higher than current levels, they would also be much more stable, and this price stability would help promote a stronger and more secure economy in the long run.

Date: 2004
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