True oil independence is an unrealistic dream

at 12:05 PM ET, 05/10/2012

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. Alas, that’s never fully possible.


Got oil? (Todd Korol/Reuters)
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 oil and gas from abroad. 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.

But here’s the kicker: Even if the United States goes further and somehow manages to produce every last drop of the oil and gas it needs to run its economy, the country would still be vulnerable to events in the Middle East, tensions in Iran, strikes in Venezuela and other disruptions in the oil markets.

To see why, here’s an interesting 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:

These three countries are all in very different oil situations. Canada is a net exporter of oil — it’s achieved the dream of “oil independence.” The United States, by contrast, still imports around 60 percent of its crude. And Japan imports just about all of its crude. Yet gasoline prices have 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 global 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. And so on.

The only way the United States could completely shield itself from global swings in price, the CBO notes, is by cutting itself off from the world oil markets and preventing its domestic producers from ever selling crude 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’s true that more production in the United States could, potentially, increase the world’s overall supply of oil, lowering the absolute price of crude 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 production in response, “diminishing or eliminating the effect.” (Saudi Arabia, for instance, recently announced that it would reduce a planned drilling expansion because of increased production in Brazil and Iraq.)

This doesn’t mean that boosting U.S. oil production is pointless. Importing less oil from abroad would help shrink the U.S. trade deficit. Dollars spent on oil would stay within the country rather than flee overseas. That’s not nothing. But according to the CBO, even a massive surge in production wouldn’t likely do very much to buffer the United States from the sorts of wild and harmful swings in the oil market that are becoming increasingly common.

The only real protection against oil volatility, the report concludes, is to become more fuel-efficient and ramp up alternatives to crude.

 
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