I would like to return to last week’s discussion on energy independence to question our urgency in seeking energy independence, as if it is a goal to be desired in its entirety. Such a goal seems very noble but has deep repercussions upon closer examination. I would like to highlight a simple cost-benefit analysis regarding energy independence in hopes of our collective reassessment of its exigency toward nation building. Let's look at the form of energy that many Americans want independence: oil.
Currently, the United States imports about 60% of its oil and petroleum products. Had the dreams of our leaders been realized, the United States could be self-sufficient in oil production by the time aforementioned. I have a naïve perspective on oil self-sufficiency but I believe that it is not a trying task. Banning imports or imposing a stiff tariff on oil can greatly reduce imports closer to zero. The resulting reduction in domestic supply will increase prices. Americans would end up paying a much higher-than- world market price for oil.
Energy “dependence” appears to be a much more cost-effective option. Why would we want to pay more for oil than we need to? We can apportion our income toward the consumption of other goods. “Dependence” is not a one-way street—Americans become reliant on foreign oil and foreign countries need the earned income from oil. It is a matter of comparative advantage. The oil market is a mutual trade in which both parties end up better off.
Sure, there is the risk of dependency and poor relations coming to blows. We worry that foreigners will cut off ties with us and impose an embargo on oil. If this oil-supplier nation decides to sell oil to another country, the other country’s old suppliers would seek alternative channels for provision. The U.S. has just found itself a new supplier.
Energy independence has its appeal in driving innovation and job creation, national security and domestic GDP, among others. However, it is a pricey ambition worth the wait and further deliberation.
- Susan Chen
Hi Susan,
ReplyDeleteThis is a thoughtful post, but I disagree with a couple of your premises. I'll try to take themone at a time:
You write that if we were to ban oil imports,
"Americans would end up paying a much higher-than-world market price for oil. Energy “dependence” appears to be a much more cost-effective option. "
First off, I don't think anyone's proposed immediately banning oil imports. That would clearly cause sharp short-term pain and throw us into all sorts of economic trouble. I would argue that the long-term solution of ending our importation of oil is to reduce our consumption of it. For well-established environmental reasons along with clear national security and humanitarian implications, the focus of the Obama administration is to develop alternative fuels by increasing investment in new energy sources (they may be doing less of this than I'd like, but that's the stated path they're on).
Similarly, many climate scientists and economists have documented the trouble with the short term "cost-effective" argument. While $2 gas is certainly cheaper than $4 gas, the environmental costs of not acting to curb climate change will be astronomical. These costs largely will be borne by future generations, which is one of the reasons I believe we have such trouble dealing with this problem (what long term problem do we deal with well?). I think that an additional carbon tax comes close to finding the "real price" of consuming oil, taking into account all of the externalities that we currently ignore.
A smaller point that I'd quibble with is this one:
"The oil market is a mutual trade in which both parties end up better off."
The "Curse of Natural Resources" is a pretty well-documented phenomenon, where countries rich in resources tend to suffer from poor governance, corruption, and insanely skewed income distributions. Examples often cited include Nigeria, Iraq, Iran, Saudi Arabia, Congo, etc. etc. While it's true that there is some mutual benefit, and that our enjoyment of cheap oil sends plenty of money to other countries, I wouldn't be sorry about sending a little less money into the pockets of well-connected, corrupt politicians in any of the countries listed above. If the population of these places were benefiting a bit more as a whole , it'd be a tougher call, but the current oil-controlling classes do little to promote higher living standards or good governance.
I'd love to hear what you think about all this!
Daniel
I agree with you, in the short term. As I understand it, cheaper oil depends on both a high volume of imports from other countries, where the resource is more plentiful abroad than domestically, and (it is argued), from government subsidies that keep prices artificially low. Keeping with the status quo is the cheaper option.
ReplyDeleteIn the long term, however, it is quite plausible (and in many quarters, generally agreed "inescapable") that the world's oil reserves will be depleted, if not within our lifetime, then soon after. As this product becomes more and more scarce, the United States will find itself dependent on a shrinking resource which it has little control over.
Just as tariffs and import regulations can negatively impact prices, so can a fall in supply as demand ever creeps upward.
The push toward energy independence, therefore, is usually married to the concept of green energy. In this scenario, the United States develops new sources of energy which it can control. Solar, wind, and wave power, biofuels, etc. All of these sources of energy generated from resources located domestically, not overseas, would (ideally) rely on domestic labor and domestic authority. Obviously the initial investment in R&D, not to mention the aforementioned government subsides which green energy companies also rely on, presents an expensive hurdle which make many an investor blush. But in the long term, the United States will need to develop non-oil solutions for their energy needs.
It is my intention to avoid the environmental defense, as your post had nothing to do with that. From an economic perspective, however, I think it is vital that we account for future supply shortages and work to create new substitute goods that cab adequately satisfy our future demand for both quantity and price.