By Kevin Massy and Govinda Avasarala, Special to CNN
Editor’s note: Kevin Massy is associate director of the Energy Security Initiative at the Brookings Institution in Washington, D.C. Govinda Avasarala is senior research assistant with the Energy Security Initiative. The views expressed are their own.
“Energy Independence” has been the rallying cry of politicians since the administration of Richard Nixon and an object of ridicule among cynical energy wonks for about as long. The truth is that the United States can rid itself of that pesky dependency on unreliable international markets. But maybe it isn’t such a good idea.
First, let’s establish what we’re talking about. When politicians rhapsodize about “energy independence” they are nearly always referring to oil. “Energy independence” suggests a scenario in which the United States supplies its own needs, islanded from international oil markets and unaffected by international disruptions to oil supply; a scenario in which unrest in Dhahran will not affect John Doe in Des Moines. To achieve this, the U.S. simply has to make sure that oil consumption always meets domestic oil production, and that all exports and imports are prohibited. But this is not as straightforward as it sounds.
Start with the production-consumption equation. Today, the U.S. is about ten million barrels a day away from this goal. To close this gap, measures would have to be taken either to reduce demand, increase supply, or some combination of both. Such efforts are already underway. President Barack Obama has proposed improvements in vehicle efficiency and both the White House and Congress have promoted strategies to move the country’s vehicle fleet toward gasoline substitutes including natural gas, electricity, or biofuels.
The supply story is also promising: U.S. oil production is soaring, thanks to the prodigious growth of tight oil production in states like North Dakota. And if offshore blocks increase oil production (currently a point of dispute between Democrats and Republicans), then the domestic supply picture might look even rosier. In fact, as demonstrated by Ed Morse and his colleagues at Citi, North America may very well be on a track to theoretical self-sufficiency – a scenario in which the country produces as many barrels of oil as it consumes. In any case, the path to theoretical self-sufficiency is likely to be a long and possibly costly one: new production will take years to come in sufficient volumes to bring supply up to the level of demand. Efforts to shorten the time frame by demand-reduction measures such as higher fuel-efficiency standards and new transportation technologies are likely to increase costs in the near term relative to gasoline-powered cars, especially in the absence of a regime that recognizes the costs of carbon. Even then, the prospect of self-sufficiency in the near-term is unlikely: new production is growing, but demand remains stubbornly high.
But “energy independence” goes further than theoretical self sufficiency by eliminating our exposure to the global oil market. Such exposure can have its down sides. In the case of imports, foreign barrels are purchased at a price that reflects the marginal cost of oil in the global market. Any disruption in oil markets is reflected in the imported price of oil. The export picture is a little more complex. If we are allowed to export crude (which is, in effect, prohibited today) or petroleum products (which is not), then domestic consumers are also exposed to the global price as producers will export if they can earn a higher price internationally than they can at home. To truly insulate Americans from global oil markets, making us “independent,” the U.S. must forgo all oil trade.
However, while such a move would insulate the country from external shocks, it would come at a very high price. When imports of oil are allowed as they currently are, the U.S. produces oil to the point at which the marginal cost of domestic production reaches that of imported oil; after that, it is more economical to import, leaving the U.S. exposed to any disruption to the global market, but paying the lowest price it has to. In a truly “energy independent” scenario, in which imports are cut off, U.S. consumers would have to pay prices high enough to justify domestic production to cover all domestic demand – prices likely to be far higher than those in the global market. Regarding exports, with the U.S. likely to produce more and more oil in the coming years, the existing restrictions on exports may start to negatively affect producers and their shareholders. If producers can obtain a higher price internationally, they will sell there instead of at home. If not, it may become uneconomic to produce at the margin, limiting domestic production and producer profits, and causing a potential net cost to the overall economy.
Beyond basic comparative advantage, the technical complexities of the oil market make “energy independence” even less economically appealing. Not all oil is created equal: crude from North Dakota’s Bakken field is not same as crude from California or Canada, let alone from Venezuela. Different crudes are used to produce different petroleum products: higher quality crudes tend to produce gasoline and jet fuel while lower quality crudes are generally used for diesel, fuel oil, and other middle and heavy distillates. The reason that the United States both imports and exports petroleum products is that the country has diverse demand needs that depend on regional characteristics and requirements. For instance, the northeast, which does not have easy access to light, sweet crude for gasoline, depends on oil imports from Nigeria. Complex refineries in the Gulf Coast need heavy oil from countries like Canada or Saudi Arabia to produce diesel and other middle distillates.
If the move towards theoretical self-sufficiency will be costly, the costs of “energy independence” would be far higher. By eliminating competing imports, the cost of domestic fuels would skyrocket. And, because refineries and pipeline networks would need to serve all parts of the country, expensive infrastructure would need to be built, further raising prices. Global oil trade, contrary to public opinion, is a net benefit to consumers. We can, technically, achieve “energy independence.” But if we’re worried about prices at the pump and the strength of the U.S. economy, we shouldn’t want to.