Over the past few years, the United States has experienced a boom in oil and gas production. And that’s led a few commentators to declare that the country is on the verge of ending its dependence on foreign energy and supply disruptions. But, alas, that’s not really possible.
Over at the Council of Foreign Relations, Michael Levi takes issue with some of the recent hyperbole about U.S. energy independence. He points out that even if the United States does become the world’s biggest producer of oil, natural gas and biofuels by 2020 — an impressive achievement, for sure — we’d still be importing 22 percent of our foreign oil and gas from places like the Middle East. And to put that in perspective, that would still leave the U.S. more dependent on foreign energy than it was back in 1973, when OPEC oil shocks were kneecapping the economy.
And here’s the kicker: Even if the United States somehow managed to produce every last drop of the oil and gas it needed to run its economy, the country would still be quite vulnerable to events in the Middle East, tensions in Iran, strikes in Venezuela and other disruptions in the oil markets.
To see that, here’s a striking chart from a new report out of the Congressional Budget Office on energy security. It looks at how gasoline prices have moved in Japan, Canada and the United States in the past decade:
Note that these three countries are all in very different oil situations. Canada is a net exporter of oil — it’s achieved the dream of “independence.” The United States, by contrast, still imports around 60 percent of its oil. And Japan imports nearly all of its oil. Yet gasoline prices still followed the same pattern for all countries, rising and falling as global events dictate. (The absolute levels are a bit different among the different countries because of taxes and fees.)
That shouldn’t be surprising. As the CBO explains, oil prices are set by the worldwide oil market. “Disruptions in oil production in one country will cause the world oil market to readjust so that all countries and firms continue to receive oil at the new prevailing price.” Even if the United States produced 100 percent of its own oil, the price would still go up if rising demand from China outstripped the ability of supplies to keep up. The price would still go up if Iran threatened to close the Strait of Hormuz. The U.S. would be vulnerable to all of these forces.
The only way the United States could completely isolate itself from oil shocks, the CBO notes, is by cutting itself off from the global oil markets and preventing its domestic producers from selling abroad. Even then, CBO notes, this could only work if the United States kept discovering large new domestic fields and could somehow force multinational oil companies to keep investing in the United States even if they found it unprofitable to do so. In other words, it’s an unrealistic goal.
Now, it is true that more production in the United States could, potentially, increase the overall supply of oil, lowering the absolute price of oil a bit. But even here, the CBO is doubtful that more U.S. production would have a large impact on global prices — most likely, producers in other countries would cut back on planned production in response, “diminishing or eliminating the effect.” (This does happen: Saudi Arabia recently announced that it would reduce a planned drilling expansion because of increased production in Brazil and Iraq.)
Now, this doesn’t mean that boosting U.S. oil production is pointless. Importing less oil from abroad could help shrink the U.S. trade deficit. But according to the CBO, it likely wouldn’t do very much to buffer the United States from the sorts of wild and harmful swings in the oil market that seem to be increasingly common. The only real protection against that, the CBO concludes, is to become more fuel-efficient and find alternatives to oil.
Source: Ezra Klein