PrintJuly 14, 2007
'Energy Independence' is a Pipedream
With the House considering a variety of controversial energy proposals, the Senate approving a watered-down energy bill, and presidential campaigns heating up, it seems that the only thing every significant figure inside the Beltway has in common is passionate support for "energy independence." While Congress is abuzz with talk of alternative fuels, energy efficiency, price-gouging, and fuel economy standards, disdain for imported oil is the only aspect of this new energy policy backed by widespread agreement. From President George W. Bush and Charles Krauthammer to John Edwards and Arianna Huffington, the outline of a bipartisan consensus opposed to foreign energy dependence has emerged. The Senate has already utilized the independence mantra to rationalize a market-distorting and pork-laden energy bill.
Unfortunately, it appears that nearly all of Capitol Hill is now congregated around the altar of "energy independence," lured by the promise of economic half-truths and optimistic pipedreams.
"Energy independence" has become political shorthand for reducing our reliance on oil imports from the Middle East and Latin America. Consumption of imported coal and natural gas is not the problem. The U.S. is a leading producer of both fuels, and the only substantial imports come from our benign northern neighbor, Canada. Supporters of energy independence are correct to point out that we are increasingly reliant on imported oil. Petroleum imports currently represent around 59% of total U.S. oil consumption, as compared with 35% in 1973. It does not follow, however, that a reduction in domestic consumption will have an appreciable or positive impact on our dependence on foreign oil.
Every single proposal to achieve energy independence (from the currently fashionable ethanol incentives and fuel efficiency standards to an increase in domestic oil production) will have a negligible effect on the amount of oil imported from abroad. The reason for this is simple: U.S. oil producers face substantially higher production costs than their foreign competitors. As of 1999, finding costs (the largest portion of total production costs) in the United States were nearly twice that of Middle Eastern exporters. Non-American producers have access to more plentiful and easily-extractable petroleum.
As we reduce domestic consumption through comprehensive energy reform, the oil displaced will be from high-cost American producers, not those in Saudi Arabia or Venezuela. Absent a draconian prohibition on petroleum imports, market forces ensure that the lower cost foreign producers will continue to provide most of the United States' oil, regardless of any undesirable political baggage. The end result of such a policy would be twofold: U.S. producers will be priced out of the market, and foreign imports will end up providing for greater percentage of total domestic petroleum consumption.
As we reduce domestic consumption through comprehensive energy reform, the oil displaced will be from high-cost American producers, not those in Saudi Arabia or Venezuela. Absent a draconian prohibition on petroleum imports, market forces ensure that the lower cost foreign producers will continue to provide most of the United States' oil, regardless of any undesirable political baggage. The end result of such a policy would be twofold: U.S. producers will be priced out of the market, and foreign imports will end up providing for greater percentage of total domestic petroleum consumption.
The facts, however, never seem to get in the way of political opportunism. While pushing for an increase in Corporate Average Fuel Economy (CAFE) standards, Senator Dianne Feinstein explicitly justified her support for the measure in terms of energy independence, disingenuously arguing that higher fuel efficiency "would save nearly the amount of oil we currently import from the Persian Gulf." William Laffer III of the Heritage Foundation dispensed with this argument as early as 1991, when he explained that "since American oil producers face substantially higher costs per barrel that producers in other parts of the world, the Americans would be forced to stop selling oil" if more stringent CAFE standards were enacted.
Attempts to achieve oil self-sufficiency also will do nothing to insulate the U.S. from energy price fluctuations. Our increasingly globalized economy guarantees that U.S. oil prices are at the mercy of even the smallest blip in international petroleum markets. Even if we were completely energy self-sufficient, global supply disruptions would still drive up the price of oil through increased demand.
The only way the U.S. could eliminate foreign oil dependency would be to ban the importation of oil (a sure-fire way to devastate U.S. growth overnight) or to completely eliminate our petroleum-based economy. As mentioned above, neither of these strategies will protect us from price shocks resulting from international crises, and an "Apollo Project" to completely shift away from imported oil in the next few decades is nothing but wishful thinking. Fossil fuels are not only inexpensive; our entire economic infrastructure is geared toward their consumption. The inability for alternative energy sources to compete (despite being awash in Washington's largess) demonstrates that energy independence is a fantasy. Even if Congress authorizes new domestic drilling, it is unlikely that these initiatives will provide reserves that are cheap enough or large enough to offset Saudi and Venezuelan shipments.
There are a number of alternative justifications for energy reform that are entirely separate from the United States' perceived dependence on foreign oil. Countering climate change, lowering the price of oil and gas, achieving energy diversification, and the creation of domestic jobs are all goals that may necessitate government intervention. To justify new programs on the grounds of "energy independence," however, is both economically ignorant and politically dishonest.
Clinton J. Woods is a legislative analyst in the transportation industry and William F. Collins is a freelance political writer.
