Posted by: bmeverett | September 19, 2012

Energy Independence Revisited

It’s election time again and both candidates are beating the drum about energy independence. I’ve addressed this topic before (see, for example, “Obama’s New Year’s Resolution” from April 1, 2011), but it’s appropriate to revisit it at this time of partisan fever.

The concept of energy independence is based on a series of popular misconceptions. Let’s see if we can straighten some of them out.

Incorrect statement: There is a limited supply of oil in the world and countries compete for access. If the US fails to secure our oil, other countries will take it.
Correct statement: There is a single, integrated global oil market where supply always equals demand at the current price. Countries do not “secure” their oil supply through political or military means; oil refiners buy it on the open market.

Incorrect statement: The US has a rigid set of oil supply sources determined by US government policy.
Correct statement: Dozens of US oil refiners buy oil on a daily basis based on price, quality and logistics. The US supply slate is nothing more than the set of recent purchases. The US government does not purchase oil.

Incorrect statement: The US intervenes politically and militarily in the Middle East to ensure that oil from Middle Eastern countries flows to the US rather than to other consumers. If we were to stop doing this, we would lose access to our oil supplies.
Correct statement: It is critical to US economic and political interests that the main sources of global oil supply, particularly in the Middle East and Africa, not fall into the hands of hostile powers who will curtail oil supply to world markets. The US has an interest in a healthy world oil market, not in where American refiners buy their oil.

Incorrect statement: If world oil supplies suddenly decline, there will be a shortage and American consumers will be back waiting in long lines at gas stations.
Correct statement: If world oil supplies suddenly decline, prices will rise. The gas lines in 1973-74 and 1979-80 were caused by a conscious US government decision to impose price controls, thus creating more demand than supply. If the US government had not intervened, gasoline prices would have risen more steeply, but consumers could have bought all they wanted without waiting in line.

Incorrect statement: If the US buys 25% of our oil from the Middle East, 25% of our supply is at risk if the Middle Eastern countries decide not to sell oil to us.
Correct statement: Oil is sold to the highest bidder with prices set on a daily basis. If Middle Eastern countries refuse to sell their oil to the US, they will have to sell that oil to someone else. The overall supply/demand balance would remain unchanged.

Incorrect statement: Oil from Canada is more secure than oil from Saudi Arabia.
Correct statement: Oil from Canada is more secure physically, but that’s not our real problem. If Saudi Arabia cuts production, all oil prices will increase, including the price of Canadian oil.

Incorrect statement: The less oil the US imports, the less vulnerable we are to volatility in world oil prices.
Correct statement: The US is an open economy, and American consumers pay world prices for everything we consume. The US is, for example, a major exporter of agricultural products, but American consumers pay world prices for food. Even if the US imported no oil, American consumers would still face price increases at the pump if global crude oil supplies were disrupted.

Once these misconceptions have been corrected, the whole idea of energy independence comes into question. The United States has a strong economic reason to develop our own hydrocarbon resources – oil, gas and coal – to the extent that such development is economically viable. In other words, we should use the cheapest energy we can find, and the government should facilitate and not impede that process. Crude oil produced in the US will be sold at the world price, but the economic benefits of that development, including the jobs, local services and taxes, will go to the US not other countries. We gain nothing, however, by producing energy that is more expensive than imported crude oil. When we subsidize ethanol, for example, farmers and ethanol producers (and the communities in which they operate) gain, while the rest of the economy suffers from higher energy costs, higher taxes or both.
Even if the US consumes no oil at all, the global economy and our major trading partners are still dependent on a stable supply of petroleum, and the US would still have a strong interest in ensuring that stability. Furthermore, if the US decides to consume very expensive energy sources in preference to imported oil, our economy will suffer compared to our economic and political competitors, such as China. Expensive energy cannot bring national security.

Every politician since Richard Nixon has promised the American people progress toward energy independence. None has delivered – not because we can’t but because the cost is too high and the benefits trivial.


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