The IEA Report And Energy Independence

An International Energy Agency report has gotten a lot of press in the U.S. largely because it suggested that in a decade or two America would be a) the world’s largest oil producer; b) energy independent; and c) a net exporter of oil. While an increase in domestic production is likely and welcome, much of the reporting comes under the category of wishful thinking. At no time does the IEA report say we will produce enough oil in the U.S. to be self-sufficient. Unless we reduce consumption significantly we would still need a large fraction of imported oil, probably on the order of 6-8 million barrels per day, a large enough quantity so that even a North American Energy Community would not eliminate the need for imports from outside the continent.

Also, there are many mistaken notions about what such “independence” would mean. Perhaps foremost—and this was reflected in comments to recent articles of mine—independence is supposed to mean that unstable and unfriendly regimes won’t be able to sell their oil to us and so they would become poorer and less able to engage in mischief. While it might provide psychic satisfaction to know we had zero imports from, say, Saudi Arabia, as a practical matter it is meaningless. If the Saudis don’t sell us oil they’ll sell it to someone else (i.e. China). The same is true of Venezuela, Libya, etc. There’s no “Made In” label on the gas we pump. Most countries have little or no oil and so remain dependent on imports. The bad actors on the world stage will still get their money.

The second mistaken idea is that we would no longer pay world prices or be injured by world price shocks. But Canada and Mexico- and yes, also our own oil companies- do not sell to us at discount prices even now. Of course, it is true that a very big jump in U.S. production would put downward pressure on prices, but that could ultimately lead to an even higher level of imports. Saudi and Iraqi oil reserves (to give just two examples) are far cheaper to extract than Canadian oil sands or U.S. shale oil. Indeed, the Saudis could in theory put many oil sands producers and shale drillers out of business by ramping up production so that the world oil price fell below $50 per barrel.

It really is time to drop the energy independence theme. There’s no panacea out there that will make us happy and rich while impoverishing the bad guys.

One additional note of caution: In my book, U.S. Energy and the Pursuit of Failure, I note one wrong energy forecast after another. The IEA report extends to 2035; there is every likelihood that much of it will be wrong.


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