Energy independence? No thanks
August 29th, 2012
02:22 PM ET

Energy independence? No thanks

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.

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Topics: Energy • Environment • Oil • United States • Venezuela

soundoff (32 Responses)
  1. deniz boro

    Society is build around it. What if energy was for free? People of our age are not tuned to living their own lives or making their own decissions. They still need a 'kind'ow father figure to protect them.....and well; MAKE THE DECİSİON FOR THEM. So the Shephard figure persist

    August 29, 2012 at 2:44 pm | Reply
    • Sean B.

      What a load of crap.

      August 29, 2012 at 6:54 pm | Reply
    • deniz boro

      Sorry for insufficient summary. Please look up into the history of energy (starting from hunting and gathering age, whale oil, charcoal, etc). Than you have to look up the religious versus social revolution of people. To make it a fun reading try to start with Asimov "Foundation". But as a desert you may try "Fear of Flying" by Eric Fromm.

      August 30, 2012 at 1:13 pm | Reply
  2. Iva Tomova

    what about natural gas??? we have plenty of it here!

    August 29, 2012 at 5:08 pm | Reply
    • Ferhat Balkan

      On my last trip to Eastern Europe, I noticed many of their cars running on natural gas. Interestingly, the cars were actually converted from gasoline to gas which seems to be an easy thing to do. I'm not sure why this has not even considered in the Western world. Natural gas is certainly more abundant and cheaper to boot.

      August 29, 2012 at 8:26 pm | Reply
      • Justin

        Because the oil giants in the U.S. won't have it... the $$$$ they give to politicians is astronomical

        September 3, 2012 at 10:04 pm |
      • Shaggydog

        Compressed natural gas is popular in Europe because they tax gasoline much more heavily. The price difference is large enough that the expense of converting a car to run on CNG can be paid for, but it still takes many years to do so. In eastern Europe the cost for natural gas may be even lower due to the proximity to Russia, which is a very large exporter of very cheap natural gas. In the US the lower cost of Gasoline makes the payoff period for natural gas conversion much longer, so it's not worth it for almost anyone. It's not some secret the Western hemisphere doesn't know about, it's just basic economics due to tax policy.

        September 19, 2012 at 12:52 pm |
  3. Roy Dane

    A couple of points.
    1.) The author is right about the price of oil driving (or "hindering") the production of oil in the US. I live in southern Michigan, not exactly an area well known as being an "Oil patch" but they have been drilling like crazy around here for the last year or two. From 1989 to 1993 I worked for a Surveyor who did most of the survey work for the the oil companies in Michigan. Normally we would survey (on average) one or two oil well locations per week. The morning after Iraq invaded Kuwait in 1990, the "Jobs to be done" table (roughly 4' x 6') was completely covered with oil well location survey requests. We were staking oil well locations like crazy for the next year or so. After the Kuwaiti oil fields came back on-line and the price of oil dropped, the amount of oil work dropped as well.
    2.) Regarding Natural Gas: I don't claim to be an expert, but I have noticed that most of the oil wells here in Southern Michigan seem to have "flare stacks" used to burn off any Natural Gas that is mixed in with the oil. I guess it just isn't cost effective to separate, store, ship and sell it here in Michigan. Keep in mind that most of Western Europe's Natural Gas is imported from Russia if I remember correctly, so they try to get the best use out of every drop.

    August 29, 2012 at 10:52 pm | Reply
  4. micol

    The authors make good points. The other points to recall are, 1) almost every "optimist" on independence includes Canadian tar sands as "North American production", as if Canada were part of the US, 2) the price of oil will have to stay high – official numbers are $70 or more, probably too low and estimate – for "unconventional" oil to stay viable, and 3) Bakken and other shale oils have high initial production, and presumed long tail life – the problem with this assumption is that no one actually knows what the average well life is going to be on thousands of wells – it may turn out to be much shorter than on the first (best) structures drilled, so the period of even quasi independence could prove to be short, and the US could be, in ten years, back in the import dependence mode, but even more dependent than before.

    August 30, 2012 at 2:04 am | Reply
  5. Smart Monkey

    The authors are morons.

    August 30, 2012 at 3:04 am | Reply
    • DG

      That's real mature point added to the conversation. Thanks for your views

      August 31, 2012 at 5:41 pm | Reply
  6. imapopulistnow

    Domestic oil production is costly. What are those costs? Equipment, materials, services, transportation and labor. What makes the equipment and materials, provides the services, distributes the goods? Labor.

    Yes domestic oil production is costly and the preponderance of these costs are domestic jobs. Yes, the authors are morons.

    August 30, 2012 at 7:00 am | Reply
  7. j. von hettlingen

    Despite the abundant deposits of natural resources, it's important for make the general public aware of unnecessary wastes. By being frugal the wealth can be passed on to later generations.

    August 30, 2012 at 7:55 am | Reply
  8. James

    Interesting perspective, but one thing that needs to be considered is continued support for alternative energy solutions. The U.S. can become more energy independent if we make a stronger commitment to funding renewable energy such as solar, wind, biomass, and geothermal. While it will take time to develop, renewable energy will be the driving force behind American energy independence. Check out what the Department of Defense is currently doing to ensure energy and national security: http://www.everblue.edu/blog/promoting-energy-and-national-security. We can and will be more energy independent.

    August 30, 2012 at 8:42 am | Reply
  9. ThePlainsman

    You guys are only right on the premise. Why in the world would we want to use up all of our reserves as long as we can buy them cheaply from the rest of the world? The marginal cost of the remaining barrels will ever be higher. People are short-sighted and only worry about themselves these days. Energy "independence" is really a silly idea when taken in a global context. Like I said, let's use everyone else's reserves at these cheap prices.

    August 30, 2012 at 9:30 am | Reply
    • Airandee

      Maybe it is a good idea to not be dependent on countries that do not like us or their own people? Maybe it is a good idea to create domestic jobs and stop sending our money overseas to fund terrorists. Maybe if we focus on domestic energy American companies will fund alternatives without rely on stimulus money from tax payers.

      August 30, 2012 at 7:51 pm | Reply
  10. BillB

    This article is junk. And it comes to that point by imposing the rigor that all imports and exports be cut off to declare energy independence. If you must, consider the goal that the US be a net exporter. Nobody says we need to divorce ourselves from the global markets as is stated in this article. We simply need to be less susceptible to foreign influences. As long as we're a large importer we'll always be at the end of someone else's leash. If you once waited for hours in line at a gas station in the 70's you know what I mean.

    August 30, 2012 at 11:33 am | Reply
    • DG

      Even if the US becomes a net exporter, the domestic oil prices will remain in tandem with the global prices under that premise. Note the authors do not say that it will ever happen or is the goal, but that would have to be the goal to achieve 'energy independence' in it's true sense. The article tries to demystify the concept as it is not realistic.

      August 31, 2012 at 5:46 pm | Reply
    • Derek

      Didn't read much of it did you? We, as in the people, don't own the oil. Corporations do. If we open up to exporting the oil and the price of oil in the rest of the world was $120, then those corporations are not going to sell it to American's for $50. Therefore the cost of oil in the US will end up being $120.

      September 17, 2012 at 12:24 pm | Reply
  11. Mr Green

    This article is bias. I'm assuming the authors are talking about the Romney campaign and their "energy Independence" campaign but the article only addresses "oil independence" and not the what the campaign really promises. Romney not only talks about oil independence from other countries, but he also talks about using all of our resources to produce energy as well (such as coal, gas, water, and nuclear). I'm sorry but the publisher and editor of this article should have took a look at both sides of the story before publishing a really bias article. I am an 18 year old highschool student, Its kinda sad that I'm more politically aware then a Dr. and a high ranking economist.

    August 30, 2012 at 1:22 pm | Reply
    • Derek

      He addresses this in the article. Romney can claim all he wants, but it is about oil. It will always be about oil and it will always be about the cost of a gallon of gas for our vehicles.

      September 17, 2012 at 12:28 pm | Reply
  12. obama IS a muslim sympathizer...he cant help it

    he doesnt want energy independance, he wants to bow to the saudis and khuweitis...he is a dangerous man dressed in a western style suit, educated in elitism at the snobfactory known as harvard

    August 30, 2012 at 2:25 pm | Reply
    • FRAMING_THE_QUESTION_INCORRECTLY

      Are you the world's most ill-informed person, or are you just from Al Queda and trying to stir-up trouble? ("Dress in a westernized style" ) – What american would use such a phrase? Not an American is the most likely answer. *Obama* is pushing for *more non-oil based solutions* than any other president in the *history of the world*, let alone the United States! You sir, are as uneducated as the protesters ranting in muslim countries about a 14 minute film no one would have ever heard of.

      September 17, 2012 at 10:29 am | Reply
  13. joe anon 1

    oil independence, like ethanol additive, is a scam.

    iranian/arab/mexican/venezuelan oil all fine. no problems.

    how about labor independence. keep the jobs here.

    export our bankers and politicians and pundits.

    September 1, 2012 at 1:25 pm | Reply
  14. joebuwana

    Energy independence does not mean a prohibition to export and import of energy supplies. It implies a buffer to disruption of domestic economic activity by a breakdown in the international supply of energy. If the US is energy independent it implies that we produce enough energy to provide for 100% of the energy needed by the country. Whether we sell 50% and turn around and import 50% the net effect is we can accommodate 100% of our own energy if required. This allows us to manage our resources to maximize efficiency. Currently we spend $1B per day for the purchase of oil above what we produce domestically. This is money that leaves the US funding who knows what over seas. If this $1B were spent at home producing domestic energy or just being spent in the local economy it would translates into 20K-40K jobs. This means 7-14M jobs at home just by being energy independent. It also means less money in the hands of those who would do us harm!

    September 11, 2012 at 10:25 pm | Reply
  15. William Aguero

    On a trip to Peru I noticed that almost all the taxis had a metal container in the trunk,when I asked about it they explained that it was for the natural gas used to run the vehicles when higher prices of gasoline warranted it. On a run from El Callao to Lima our taxi ran out of gas, subsequently the driver just flipped a switch and finished the trip running on natural gas. Simple & convenient. Eventhough there's a slight difference in the vehicle's performance -when switched to natural gas there's an almost unnoticeable reduction in power- the savings and flexibility of such a system is simply outstanding

    September 15, 2012 at 10:49 am | Reply
  16. FRAMING_THE_QUESTION_INCORRECTLY

    INCORRECT ASSUMPTION OF WHAT ENERGY INDEPENDENCE MEANS! You've got to wonder how the world oil producers get to write articles on CNN. ENERGY INDEPENDENCE means NOTHING of what this article is trying to imply! We educated understand macro-economics just fine, we don't need it refined with oil. "Energy Independence" refers to weening ourselves FROM OIL – ANYWHERE. Here's an economic lesson for *you* fake journalist: It's called economy of scale. If there's a grand push, into solar and natural gas (just like the Obama administration is pushing for), our goal is to ween off oil completely. Simple economics, less demand = lower prices. We ween off Carbon pollution and huge oil disasters, we stop giving 3rd world nations big cash – many with the moral compass of the 9th century – we create MORE jobs domestically, (we lose a few here, but we create many many many more in the fields of natural gas, solar, etc.), we save a precious resource for when we really need it (we have to assume we'll be on earth at thousands of years if not tens, hundreds or more thousands), and we push technology further into cleaner solutions. Oil will play a part for many years, but the sooner we get off it, the bigger the push into other technology. The grander the push, the more prices come down in those other areas with new tech breakthroughs and - *economies of scale*. This will in turn make it as affordable as oil, and with the eye to lower it far beyond the price of oil in the future. This lowers nuclear threats against us or risk of other attacks by punishing countries monetarily who haven't educated themselves into the modern age, one where they are forced to compete in a market of global intelligence to enjoy the benefits of it, or wither and die.

    September 17, 2012 at 10:20 am | Reply
  17. UNDERSTAND THE IDEA FIRST!

    Kevin Massy and Govinda Avasarala take out of context words to create a mythical problem resulting in an absurd solution.

    Problem statment: Stable trade in is good for USA and the world as it efficientyly balances supply and demand. Problem comes when "Oil shocks" dramatically raise or lower the price of oil in a timeframe which Americans and the overall American economy can not respond to at reasonable cost. This should be totally obvious to all concerned simply by monitoring the volume of the political discourse around "Oil independence". People are simply frustrated that they get unplanned, unpleasant shocks at the pump due to foreign political events.

    Give the above problem solutions are varied and most contain some combination of increased domestic supply and decreased domestic demand so that in case there is a crisis oil can be supplied from domestic sources. In normal times will it always be supplied by domestic sources, NO, no need to "forgo all trade in oil". However the ability to supply domestic needs gives the nation options that we do not have today when we are billions of barrels short of demand.

    September 23, 2012 at 4:47 am | Reply
  18. alexismixx

    Holding actual gold bars will have a much higher worth in the long run. But with the same token it can we 4 times more expensive to hold gold bars rather than to just invest in the gold itsself.
    A few options i have been looking into lately have been.
    *Bonds
    *Gold 401k rollover
    *Ira
    *Roth Ira

    Just to name a few.

    the dollar is loosing value fast and its best to have gold and silver on hand as a backup.

    January 8, 2013 at 6:34 pm | Reply

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