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Baker Institute report proposes strategies to ensure global energy security

A new policy report released by Rice University's Baker Institute for Public Policy suggests strategies to deal with the current turmoil in the global energy markets, including the role of petrodollars in the U.S. credit bubble.

"Sharp changes in energy prices are having dramatic effects on the stability of the global economy," the report states. "Threats to the global energy market could have dangerous corresponding impacts on the world financial system."

The report, titled "The Global Energy Market: Comprehensive Strategies to Meet Geopolitical and Financial Risksthe G-8, Energy Security and Global Climate Issues," is available at

"Petrodollar flows play a major role in the current credit-bubble dilemma," according to the report. Mahmoud El-Gamal, Rice professor of economics and a scholar at the Baker Institute who helped write the report, said the excess liquidity that resulted from the run-up in oil prices after 2003 partly fueled the subprime mortgage crisis. While the money coming from East Asia also played a role, El-Gamal noted that the outflow from Saudi Arabia and Kuwait now rivals that from China.

The Baker Institute report calls for international coordination to avoid a "global meltdown." "Countries with dollar-denominated assets," it says, "need to cooperate to find a transition path that weans the United States from foreign credit and foreign oil while, at the same time, moves emerging economies away from excessive export-oriented dependence on U.S. consumption." Asian consumers need to reduce their savings rates while U.S. consumers need to increase theirs, according to the report. In addition, "it also will require expanded effort to find additional options to increase the capacities of Middle East energy-exporting countries to absorb petrodollar inflows through investment in appropriate forms of human and physical capital."

The report also weighs threats to the global energy market. It analyzes several of the leading risks that have contributed to the recent dramatic rise in fuel prices, including the debate over Iran's nuclear program, Europe's heavy dependence on Russian natural gas, the rise of resource nationalism in Latin America and the effect of international terrorism or climatic events on oil facilities, among others.

It argues that, taken individually, many of the risks that have contributed to higher energy prices may be less catastrophic than they seem at first glance and have, in some cases, actually eased over the last year. It concludes that dire predictions that markets cannot alone allocate the costs of these risks in a manner that would avoid wars among major nations are unfounded.

Another study contained in the Baker Institute report focuses on U.S. energy policy and transportation. Co-authored by Kenneth Medlock III, a Baker Institute fellow in energy studies and adjunct professor of economics, and Amy Myers Jaffe, the Wallace S. Wilson Fellow in Energy Studies at the Baker Institute, it finds that "strong U.S. import demand not only enhances OPEC's monopoly power, it also has a deleterious long-term impact on the U.S. economy."

With U.S. oil imports expected to hit $400 billion this year, the import bill accounts for a huge -- and growing -- chunk of the nation's trade deficit. That may lead to higher inflation and other challenges for the U.S. economy, the report says. Any effort to limit U.S. oil imports, however, may have the unwanted effect of accelerating climate change, the report adds.

Finally, the Baker Institute report suggests several approaches to deal with the challenges posed by today's world energy market. It calls for diversification of energy sources, greater energy efficiency -- especially higher automobile fuel-efficiency standards and greater refinery capacity. Strategic stocks of petroleum fuels could counter OPEC's ability to set prices and inoculate the U.S. economy from the effects of a major supply disruption. Higher taxes on fuel would discourage wasteful energy use. The U.S. government should also work with international lending institutions to persuade other nations to ease fuel subsidies. And the development of alternative energy sources, including nuclear power, holds the promise of less dependence on fossil fuels while improving the environment.


Contact: David Ruth
Rice University

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