The folly of energy independence

I recently published an op-ed on presidential campaign rhetoric on energy in the Cleveland Plain Dealer (link in the “Articles on Energy” tab) and the Providence (RI) Journal. I wrote it after I had read a speech Mitt Romney gave promising that if he were elected, the US would achieve energy independence by 2021 (later changed in a position paper to 2020). Since Richard Nixon made the first energy independence promise in 1973, just about every US politician has called for American energy independence usually suggesting a ten-year plan to that goal. The idea is clearly popular and on the surface appears wise. It would seem to make our energy supply more secure, protect us from OPEC blackmail, and free the economy from disruptive oil price shocks.
But in reality none of this makes any sense. Any attempt at energy independence would make us less secure, would protect us from a problem that exists only in our minds, and actually make it more likely that we would suffer disruptive economic shocks.
It should be noted at the outset there is no single definition of energy independence. It has become an amorphous, if not meaningless, slogan. To politicians, it has meant anything from complete separation from world energy markets (Nixon’s first idea) to just having diverse sources of supply (independence according to Nixon’s Treasury Secretary William Simon). By Simon’s definition we already are energy independent, as we import oil from around 60 different countries. Mitt Romney defines energy independence as importing oil only from Canada and Mexico and none from Venezuela or Middle East. President Barack Obama seems to define it as having electric cars that charge up on juice provided by solar panels and windmills.
But energy independence, except perhaps as Simon defined it, is a bad idea. Let’s start with energy security: why would we be more secure if we depended on fewer sources? Sure, Canada is a friendly country and likely to remain so. Mexico is a generally good neighbor, too. But project ten years from now when we are getting massive amounts of oil—say a third of total consumption—from the friendly north through something like the Keystone pipeline. That line will go through hundreds of miles of wilderness. A major break in the line would leave us far short of the oil we’d need to meet US demand. In fact, the more oil we import from one source the more vulnerable we become. A pipeline through wilderness not only could break down, it would also be an inviting target for terrorists. In Mexico, meanwhile, the entire oil industry is in the hands of one government-controlled company. What happens if there is, to take one possibility, labor unrest? Suddenly another major source is cut off with nothing to take its place.
At present, the US does not face this kind of vulnerability. During the past few years, oil supplies from Libya, Iraq and other countries have been disrupted by strife of various kinds. In some cases it has led to higher prices but there have been no major problems for US energy consumers. When one source of supply is shut down, refiners can go to the world oil market and buy from someone else.
But what about OPEC blackmail? One comment on the Plain Dealer website said the US had to free itself from OPEC. My reaction is: huh? The notion of OPEC blackmail is an artifact of the 1973 Arab oil embargo. After its imposition the US faced gasoline and other oil product shortages although in fact none of that was due to the embargo; it was the result of ill-conceived and genuinely harmful US price and allocation controls (which I discuss in my forthcoming book, US Energy Policy and the Pursuit of Failure). Still the embargo was blamed, and in its aftermath, many people including politicians and pundits argued that all OPEC countries (not just the Arab nations) would use the “oil weapon” to get the US and other western nations to do their bidding.
But it didn’t happen. That first embargo was the last because in fact it backfired. US public opinion became more pro-Israel, not less. And because Arab OPEC nations had cut oil production, oil prices soared briefly but so abruptly that the world economy slipped into recession, which meant less demand for oil and falling oil prices. By the mid-1980s, when OPEC was projected to own most of the world, oil exporting states were instead in bad economic shape, some so desperate, they needed emergency loans from the IMF. Iraq saw per capita income fall to a level not seen since the 1940s. Americans who lived through the embargo have never quite gotten it out of their minds that there is this danger of political blackmail, but people should ask themselves: if there is such a danger, why haven’t we seen anyone try it for nearly 40 years?
As for economically disruptive price spikes, well, we certainly have those but there’s every reason to believe we would have them anyway, no matter how energy independence is defined. The price of oil is a world price set in world markets. If there is a major disruption—say a war in the Persian Gulf area—and world prices skyrocket, will the Canadians and the Mexicans simply ignore it and keep our prices low? Indeed our own oil companies will want to charge the world price and no doubt any attempts to prevent oil prices from rising or oil supplies from leaving North America would fail. We’d be back in the days of price controls, facing lines of cars at the gas pump. As long as we are engaged in the world energy markets our prices will be affected by events wherever they occur.
It might seem then that we would be wise to separate ourselves totally from all players—even Canada—in world energy markets. But this would actually be the worst outcome in terms of disruptive price fluctuations. Consider a world we produced all of our own transportation fuels: gasoline augmented by ethanol and maybe some greater use of compressed natural gas. Prices would swing anytime there was a poor crop (such as the drought-affected corn crop of 2012), hurricanes in the Gulf of Mexico that knocked refineries off line, breaks in domestic gas pipelines, etc. etc. And to make matters worse, in all likelihood our energy would be much more expensive than that of the rest of the world. Domestic US oil is more costly to produce than oil in Saudi Arabia or Iraq. In other words, we could expect prices here to be higher than they would be elsewhere, putting US manufacturers at a competitive disadvantage in world markets.
Prices might be more predictable but would be extremely high if we pursued the Obama administration’s fantasy of mostly renewable energy sources, notably biofuels in place of gasoline, and solar and wind in place of coal, natural gas and nuclear to generate electricity. The Department of Energy’s own analysis suggests that the price of electricity would rise substantially if we relied on intermittent sources like solar and wind. European countries that have pursued renewable energy goals are cutting back in the face of economic reality. And the administration’s commitment to biofuels, despite all sorts of evidence, both scientific and economic, that say it’s a bad idea, shows mainly that politics trumps all else with respect to energy.
But of course the most common political idea is energy independence. So the Obama campaign has joined the Romney campaign in calling for it. If both candidates would actually sit down and think through what the slogan “energy independence” actually means, they might realize that it’s a very bad idea.


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