How Private Oil Companies Took Over U.S. Energy Security

In the wake of Russia’s invasion of Ukraine, concerns over energy security have surged. The price of crude oil soared past $120 per barrel, while the average price of a gallon of gasoline in the United States exceeded $4. Despite the looming threat of climate change and the need to decarbonize the economy, Sen. Joe Manchin and other congressional lawmakers argue that the best way for Washington to address the current crisis is to increase domestic oil and gas production.

On the surface, that appears to make sense. Fossil fuel production is intimately linked to energy security—that is, a nation’s ability to meet its energy needs with steady supplies at manageable prices. The more oil a nation produces, the less vulnerable it is to outside supply shocks.

But unlike other major oil-producing nations such as Saudi Arabia or large consumers such as China, the United States depends on private companies—rather than state-owned entities—to execute the exploration, production, refining, transportation, and marketing of its energy products. And unlike those state-owned entities, which pursue commercial opportunities in service of national priorities, private oil companies are motivated only by profit.

Though the partnership of public interest and private capital has worked to meet U.S. energy needs in the past, Washington’s traditional approach may not be enough for its current dilemma. The United States faces a triple problem: how to supply the country with energy, meet the energy needs of its allies in Europe, and take action to mitigate global climate change, all without causing negative economic repercussions. History suggests that expecting corporate actors to meet public needs will not be sufficient for tackling these problems—and could even endanger U.S. national security by subordinating it to the narrow commercial interests of a single industry.

In the wake of World War I, as U.S. oil production experienced a brief decline after years of high wartime demand, U.S. officials encouraged private companies to expand their activities internationally while searching for more oil at home, facilitating a major increase in domestic oil production.

During World War II, U.S. companies received backing from the State Department to develop their holdings in the Middle East. Cheap oil from the Persian Gulf was a critical component of the Marshall Plan, which reconstructed war-torn Western Europe. To support their operations, the U.S. Treasury allowed the companies to deduct taxes paid to Middle Eastern governments.

As a result of this public-private partnership, cheap oil flowed to the industrial West, fueling a dramatic postwar economic boom. The State Department saw the companies as effective tools for furthering the national interest and strengthening energy security.

But differing commercial priorities among the companies frequently produced conflict that threatened national security or warped policy to serve commercial interests.

After World War II, the large “majors,” such as Exxon, Mobil, and Chevron, began importing oil into the United States from their cheap reserves in the Middle East. Smaller U.S.-based oil companies, such as Sinclair Oil, Marathon, and Atlantic Richfield, sought protection from these imports, which could outcompete oil produced at home.

In the early 1950s, these “independents” lobbied Congress for an import ban. Rather than make commercial arguments, though, the companies argued that imports undermined national security by hurting the domestic oil industry and making the United States dependent on “foreign oil.”

They claimed the United States could be made self-sufficient—“energy independent,” as it would later be known—provided the domestic industry received sufficient support and prices stayed high enough to sustain investment in new production. What the independents wanted, in effect, was federal policy to subsidize domestic drilling, protecting their operations from competition with imported oil.

The federal government was pulled in two directions. President Dwight Eisenhower’s special energy committee concluded that it would be necessary to restrict imports “in the interest of national defense,” since domestic production would be needed in the event of a war against the Soviet Union, which would likely make overseas oil unobtainable. But relying on domestic supplies in the short term would drain U.S. reserves and leave Washington more vulnerable to outside pressure once domestic output was maximized. It would also harm consumers by keeping the price of oil at home artificially high.

Whether the companies could protect national security came under heavy scrutiny during the 1970s energy crisis.

The State Department was irate, complaining that “domestic political pressures” were now dictating foreign policy “under the guise of a narrow concept of national security.”

Ultimately, pressure from the companies won out. Eisenhower initiated voluntary import quotas in 1957. Representatives from the Independent Petroleum Association of America, a lobbying group for the smaller companies, appeared before Congress in 1958 calling for mandatory quotas. The domestic industry, they argued, “must be protected from open competition,” as accepting more imports would devastate U.S. production and “lay the free world helpless at Russia’s feet.” Eisenhower made import quotas mandatory the following year.

Whether the companies could actually protect national security came under heavy scrutiny during the 1970s energy crisis. As domestic consumption increased, production declined and domestic reserves were drained, due in part to the protections put in place by Eisenhower’s import quotas. Those quotas had not kept the industry competitive, and in 1973 they were abandoned, facilitating a flood of imports to meet rising domestic demand. That October, major U.S. companies lost control of Middle Eastern oil fields as Arab governments cut production and placed an embargo on the United States while raising the price of oil by 400 percent.

The oil companies became deeply unpopular and were subjected to extensive congressional investigations, where powerful Democrats like Sen. Henry M. Jackson accused them of price gouging. Secretary of State Henry Kissinger regarded oil company executives as “idiots” and preferred to forge closer relationships with the king of Saudi Arabia and the Shah of Iran. In 1973, President Richard Nixon called for gaining independence from oil by developing alternative energy sources and increasing efficiency; his successor, Gerald Ford, passed sweeping legislation in late 1975 that created the Strategic Petroleum Reserve and gave the U.S. government the power to intervene in oil markets in an emergency. Public anger at the companies culminated in windfall profit taxes that cut into their earnings.

Yet at the same time, the embargo and the ever-rising price of oil pushed policymakers to support proposals that would boost domestic production, such as expanding offshore drilling and opening up Alaska’s North Slope. After years of price controls that protected consumers from the global price shock, President Jimmy Carter, a progressive Democrat, carried out the “decontrol” of oil prices in 1979. This policy benefited oil companies, allowing them to charge more at the pump as an incentive to invest in domestic exploration.

While deregulating the oil industry at home, Carter laid the foundation for a permanent U.S. military presence in the Middle East through the declaration of the Carter Doctrine and the creation of the Rapid Deployment Force (what would later become U.S. Central Command). Carter’s policy and that of subsequent administrations aimed at “securing” Middle East oil through military power, ensuring that producing states like Saudi Arabia continued to pump oil in adequate quantities to guarantee acceptable prices back in the United States.

Energy security now looked like deregulating energy at home while using the U.S. military to secure it abroad.

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This new status as an energy exporter has brought private companies back to the forefront of U.S. national security thinking. As the European Union seeks to end its decades-long dependence on Russian energy, the Biden administration wants to help fill the gap, pledging to increase shipments of liquified natural gas to Europe by 15 billion cubic meters by the end of 2022, with the goal of 50 billion additional cubic meters per year by 2030. Such supplies would require increased investment in U.S. production.

Like their predecessors in the 1950s, however, private U.S. oil and gas companies are putting their commercial interests ahead of national security. Drilling in the United States has been a perilous business, with price collapses from 2015 to 2016 and again in 2020. The oil and gas industry is more interested in offering stock buybacks and maximizing dividends, focusing on restoring profitability and rewarding shareholders, rather than growing supply.

Industry leaders want unequivocal support from the federal government—including looser environmental regulations and fewer restrictions on pipeline construction—before they’ll agree to invest in more production.

As private companies make these demands, the Biden administration, like its predecessors, is being pulled in different directions. The Democratic Party is committed to policies that combat climate change. But high gas prices, the threat of a global supply crisis, and pressure from industry allies within the party such as Manchin have pushed the administration toward a policy more openly supportive of boosting domestic production.

The United States should take the initiative and define national security on its own terms.

Even after Russia’s invasion of Ukraine, Biden has said he hopes to reduce the United States’ dependence on oil, both to minimize the danger of climate change and to improve energy security. A good first step is the plan he announced on March 31 to inject oil into the market via the Strategic Petroleum Reserve, while using the Defense Production Act to accelerate the development of batteries used in electric cars and renewable energy systems.

But the administration could go further by expanding its authority to oversee energy development.

The most extreme course would be the so-called public option put forward by Sen. Jackson during the 1970s: in effect, nationalizing the oil and gas industry so that it can better serve the public good. Such action may be necessary if Washington wants to avoid the worst effects of climate change, though it is certain to be unpopular with most Democrats and an absolute nonstarter for Republicans. However, Washington can still do much through regulatory and legislative action to encourage private investment along channels that meet the country’s real national security needs, and not the parochial views of fossil fuel executives.

If the Biden administration wants to augment oil production in the short term, it could adopt a plan put forward by advocacy organization Employ America and use the Defense Production Act and other methods to reduce oil price volatility by easing supply chain bottlenecks, particularly for equipment and raw materials needed to expand domestic production.

Limiting energy exports while expanding waivers for the Jones Act—which would allow domestic producers to ship energy products between U.S. cities much more easily—and freeing domestic energy to meet domestic needs would strengthen energy security while still allowing private companies to market their products. At the same time, tougher regulations on emissions, particularly methane leaks at production sites and in midstream operations, would help clean up U.S. fossil fuel production.

Washington should also reduce fossil fuel consumption by expanding funding for renewable energy. Biden’s now-stalled Build Back Better plan included billions of dollars in support for clean energy, and there is currently limited progress toward a new bipartisan energy bill in the Senate that would include provisions supporting carbon capture technology and nuclear energy. Immediate cuts to consumption could be achieved by championing efficiency measures such as heat pumps. The European Union may soon require its members to implement such conservation and efficiency measures to reduce its dependence on Russian energy. The United States should do the same while helping NATO allies meet their needs in the absence of Russian imports.

The current strategy assumes that greater fossil fuel production is ultimately conducive to U.S. security. Both history and the encroaching threats of climate change suggest this is a risky course for the United States to take. Instead of allowing the oil and gas industry to dictate energy policy, the United States should take the initiative and define national security on its own terms.