Arnold Kling  

Inconvenient Truth about Energy

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Robert Bryce writes,


Fans of energy independence argue that if the United States stops buying foreign energy, it will deny funds to petro-states such as Iran, Saudi Arabia and Hugo Ch¿vez's Venezuela. But the world marketplace doesn't work like that. Oil is a global commodity. Its price is set globally, not locally. Oil buyers are always seeking the lowest-cost supplier. So any Saudi crude being loaded at the Red Sea port of Yanbu that doesn't get purchased by a refinery in Corpus Christi or Houston will instead wind up in Singapore or Shanghai.

It's Oil Econ 101. It's sound. And politicians, along with most of the public, refuse to believe it.


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COMMENTS (14 to date)
mgroves writes:

I cringe whenever a politician throws in a "foreign" between "dependence on" and "oil".

Bill Woolsey writes:

The U.S. can become energy independant by increasing supply or reducing demand. Either will tend to reduce the price of oil, and so reduce the amount of money made from oil by Iran, Venezuela, and Saudi Arabia.

Admittedly, there is nothing special about point of "energy independence," but moving from where we are today in that direction, or going further and exporting oil, would reduce money going to these states.

I don't advocate this policy.

JimC writes:

Bill,

Since energy is incredibly useful and so many people are still cooking with wood, becoming more efficient at using it won't reduce demand, it will increase it. We keep getting better and better at using semiconductors, does that reduce the demand for them? Of course not, people are practically wallpapering their homes with LCDs. Who are the people, besides well-off poseurs, who drive the most efficient cars? The ones with the longest commutes.

The only things that will reduce the flow of money to oil states is if they actually run out or if we find something better, which is unfortunately just not the case with any existing "alternative."

Dr. T writes:

With politicians, it often is difficult to tell whether they are economically ignorant or just pandering to voters who are, mostly, economically ignorant. It also is difficult to decide which is worse: a stupid politician or a manipulative politician. Both types seem to do equal harm.

Morgan writes:

Before we get too congratulatory on our skin-deep analysis, let's actually put a little thought into the argument.

Those arguing for 'energy independence' do so for a number of reasons. One method to achieve energy independence is to reduce our demand through conservation or gains in efficiency. A second method is to increase our domestic production to fully meet domestic demand. Or a combination of the two.

Now let's revisit Econ 101. What happens to the equilibrium price of oil on the world market if by far the largest net importer of oil is removed from the equation?

I seem to be coming up with a different conclusion than the one given. Is it just possible that the oil market responds to demand and supply? Will reduced demand reduce the market price? Or is this conclusion 'inconvenient' to those who will use any over-simplified argument to preserve the status quo in the oil industry?

A better question, one an economist might ask, is would the increased energy prices in the domestic market be worth the reduced revenues for our enemies? And yes, Russia, Iran, Saudi Arabia and Venezuela are our enemies.

diz writes:

Now let's revisit Econ 101. What happens to the equilibrium price of oil on the world market if by far the largest net importer of oil is removed from the equation?

Let's say we ban oil imports. The immediate effect is a massive shortage in domestic oil, which would no doubt cause a huge price increase to the American public.

On the other hand, there would be a world-wide glut of oil and prices outside the US would crash down.

For illustrative purposes, let's say there'd be $200 oil domestically and $20 oil worldwide. Over time the two would equilibrate somewhat, but the US would always have significantly higher oil prices than the rest of the world (we know that our ability to produce oil cheaply is less than that of OPEC by virtue of the fact we import so much now.)

US consumers would suffer greatly. US competitiveness in theworld would suffer greatly.

This is quite a lot of suffering to inflict upon ourselves for the dubious "benefit" of further impoverishing and destabilizing already relatively poor countries like Venezuela and Saudi Arabia.

Chuck writes:

Willful ignorance on the march!!

This isn't hard - if we don't use oil, it will cost less than it would have otherwise, but for all oil producers, not just our favorite bogeymen.

Energy independence won't happen by banning oil imports in advance of finding a substitute.

Independence of foreign oil gives us latitude in how we deal with foreign powers, since we won't need them for a commodity that is vital to our economic well being. There is lots of legitimate reasons to want that.

Energy independence won't be achieved by producing oil domestically, we simply haven't got enough. It would require changing our energy infrastructure to things like nuclear, coal, thermal/semi solar, wind, or any other number of options known and unknown.

Switching won't necessarily be a net loser, it could be viewed as an investment, with a payoff over time, like when you spend money to buy a stock or insulate your attic, but are richer in the long run.

Dan Weber writes:
Let's say we ban oil imports.
Let's say we build a giant man out of straw and light him on fire.

Seriously, there's a big difference between "energy independence" and "banning import of oil."

If the US were to decide to get off the pot and finally build a new generation of fission plants, it could dramatically reduce the energy it imports. Surely this would reduce the price of oil on the world market. (And, yes, it would probably lead to increased use with the lower price, and while it's conceivable that this would lead to Saudi Arabia taking in more money than if the US kept on importing, it's not the likely scenario.)

Michael Sullivan writes:

If we either make more oil ourselves or use less of it, that will reduce the price of oil (ceterus paribus) and absolutely keep some money out of the hands of oil producing states we don't like. It will also keep it out of the hands of oil producers we *do* like, but there are probably fewer of them.

Realistically, what could we do to use less foreign oil that does not have this effect?

I strongly doubt that US oil producers are selling any significant amounts of oil outside the US.

John S. writes:

Eliminate dependence on foreign oil, yes! But why stop there? We import most of our coffee too. Although global warming is helping out, the climate in most regions of the US is unsuitable for growing coffee. Thus I propose a grand, taxpayer-funded scheme to develop coffee alternatives.

Garrett Schmitt writes:

The most interesting thing about the whole energy independence debate is how much the currently popular policy solution parallels the system the US has in place for sugar.

We use high-fructose corn syrup instead of sugar, because domestic sugar production is insufficient and uncompetitive in the face of foreign production. Also, it's a popular policy with corn farmers, whom we subsidize already.

We plan on using ethanol instead of petroleum, because domestic oil production is insufficient and uncompetitive in the face of foreign production. Also, it's a popular policy with corn farmers, whom we subsidize already.

The parallels imply for me that "energy independence" (we'll just be dependent on midwestern corn farmers) is all too politically practical a policy. We'll just end up with more expensive fuel than in the rest of world and happier corn farmers. Authorities don't have to ban imports, they just have to cap them and tax them as with sugar. All that is necessary is this politically feasibility; the benefitting constituencies can carry it through regardless of whatever comes of the foolish promises (lower gas prices, world peace) made to the general public.

Richard Pointer writes:

This was posted at Andrewsullivan.com after you. Almost word for word. What is plagiarism in a world of blogs?

http://andrewsullivan.theatlantic.com/the_daily_dish/2008/01/the-chimera-of.html

Jarrod Coomer writes:

I love the idea of energy indepence, but I'm afraid this is a pipe dream. I agree with Chuck...banning the import of foreign oil is not a viable option and energy independence can not happen before we find a reasonable domestic substitute. It is my expectation however that finding a substitution will not happen until absolutely rediculous oil prices force us as a country to actively seek other options.

Sure...imported oil is expensive, but as a consumer, what other options do I have? It continues to be cheapest for me to put gas in my truck than any other reasonable option available to me. I assume most are in the same boat. Although I am seeing an increased number of concerned individuals starting to become proactive about reducing their fuel consumption, at this time the majority continue to drive just as much as they once did while paying the higher prices at the pumps. My belief (as doom and gloom as it may be)...we won't see any viable option until gas gets too expensive to purchase. Then, and only then, will business have enough reason (business opportunity) to pursue and offer the public some other options.

Michelle writes:

The only way that the United States will be able to become energy independent is to find enough energy sources to support our needs. Obviously the United States does not have an oil source to support our nation. The majority of our energy needs requires the use of oil. It is how we get around and how we stay warm. If the United States wants to become independent, it will need to find a substitute that everyone can afford. I would love to go out and buy a Hybrid vehicle, but they cost so much more than the regular vehicle. There is no way that I could come up with the extra money to buy one. Also, if it were to break down, they cost a fortune to fix. Since it is a relatively new idea, there are still only a handful of people who could fix the vehicle. Since not a lot of people can fix it, the mechanics can charge extra to fix it. Until the U.S. finds an extra oil reserve on its property or an affordable alternate source, the U.S. is never going to be independent.

In order to become energy independent, the U.S. will need to come up with an incentive for people to be more energy efficient or make it more affordable to use alternate sources. The government could focus more on how to utilize solar or water power to make it cheaper to use. The government could also give people some sort of tax write-off for purchasing hybrid vehicles or using solar power. Even though oil prices have tripled, I am still willing to pay the extra money because I don't have any other options. I could ride my bike, but it would take me hours to get to school and work, and that does not seem practical. If I had the option of using an alternate source that I could afford, I would be more than glad to use it. I think that it would benefit the U.S. to become energy independent because that means that we would stop giving our money to other countries and keep it within the U.S. I think that in the long run, this could substantially improve our economy because we would be supporting ourselves.

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