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The Chimera of Energy Independence

…how much are Americans willing to pay for independence?…
Planet Money has a nice segment today [Oct 26] arguing that Energy Independence Wouldn’t Make Gasoline Any Cheaper. They use interviews in Canada, a net energy exporter, to make the case: prices there are neither cheap nor stable.
A simple Econ 101 framework helps. Why would a country be a net exporter (such as Saudi Arabia or Iran) rather than a net importer such as the United States? The obvious answer is because we’re not the low-cost provider. Ergo we buy from people who are.
So first, the only way we can obtain “independence” is if we are willing to pay more for energy. Listening to the presidential debates, however, the framing clearly equates independence with low prices. That can’t happen, barring a technological breakthrough that can be quickly commercialized. Solar power? Well, Arizona has plenty of sunshine days and lots of comparatively empty land. But getting power from there to the rest of the US would be a challenge. And Saudi Arabia? — they’ve even more empty land and more days of sunshine. Shipping the energy would remain the issue. But we might still not be the low-cost provider.
Second, how about price volatility? Well, unless we add layers of regulation – above all, prohibiting exports and imports – we remain linked to a global market for energy. If global prices go up, then so will US domestic prices unless we pass legislation prohibiting exports. If global prices fall, then we have to prohibit imports lest firms turn to cheaper sources. Neither presidential candidate proposes such policies, nor would Congress pass such measures.
Then there’s tje red herring of regulation. We have anecdotal evidence that domestic rules err on the side of minimalism: remember BP Horizon? More generally, you’d have to make the case that we are stricter than other countries, and that such regulations are what keep us from drilling. Yet what I hear from local geologists is that firms know of reserves in really, really deep water and in the far Arctic. Neither would be low-cost sources, both because of the difficulty of drilling in such locations and the additional challenge of getting oil from wellhead to refinery. The barrier to greater supply – greater “independence” – remains low prices.
Of course neither candidate approaches a 50% grade because they make no mention of demand-side policies. Even the American public understands that means higher prices. So they stick to indirect supply-side nostrums.
So how much are Americans willing to pay for independence? My guess: not one penny.
…mike smitka…
Indeed, how much are we willing to pay for sanctions on Iran? – after all, production there is down over 1 million barrels a day, enough to move the price we pay at the pump. If the public understood that, I don’t think we’d be hearing about sanctions from either candidate.


  1. Margaret Womble Margaret Womble

    Americans do tend to think that the President has absolute power over the price of gasoline. One argument in favor of American energy independence not mentioned above, however, would be that such independence would provide further social benefits. Albeit higher gasoline prices, American energy independence would allow the US to move away from our reliance on politically unstable countries in the Middle East. The question would be if Americans would be willing to pay higher gasoline prices in exchange for the social benefits of independence from oil-producing countries in the Middle East.

    • No, my argument is that we will remain interdependent, independence is illusory as long as markets are global. Until such time as the Middle East produces only a modest trickle of oil, what they do will continue to affect us. Saudia Arabia now relies on secondary recovery, and so we will see gradual reductions in the region’s importance, but emphasize gradual.
      Now we might see domestic politics working out differently, despite continued interdependence, because it might make it harder to sell the idea of keeping a large military presence in the Persian Gulf region.
  2. poetzsch poetzsch

    How do you feel about natural gas as an avenue for U.S. energy independence? I remember Romney saying that the U.S has 100 years worth of natural gas in the ground waiting to be used. Of course this too would take a revolution in energy transportation for us to be able to transport it across the country and even to export it, but I have read several sources that suggest we are getting close to that breakthrough. At the current price of natural gas (around 3.50$/MMBTU) it is not profitable for energy companies to produce large quantities. It would take a price increase in the short term for firms to start producing large amounts. But in the long run, increased natural gas use and demand would decrease the demand for oil and could reduce prices paid at the pump. Do you buy into this story?

    • Natural gas is currently both less expensive and less polluting than coal. But it is still linked to global energy prices, and in some regions pipelines are at capacity. But contrary to what your note suggests, there is a national pipeline, it’s rather than demand is seasonal and (say) having gas available in winter in Virginia requires that it be stored because long-distance pipelines from Canada can’t carry enough during the heating season. So there are bottlenecks.
      However, the availability of natural gas in the US would have only a modest impact on global energy supply and demand. Because oil is linked to global markets, I don’t see the local availability of natural gas as having much impact, particularly if building new pipelines remains a barrier (expense and NIMBY issues, especially NIMBY). So over a period of years — well beyond the presidential election cycle — it could have an impact, ceteris paribus. Supply however is pretty inelastic in the short run. The only assured way to lower prices in the short run is to trash the economy. The Fiscal Cliff and Euro may succeed in doing that, cutting both global and US demand simultaneously. So maybe we’d rather not see lower prices?!

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