Energy independence

Energy independence talk is just so much gas


Financial Express, New Delhi April 6, 2010

Last week, in front of a bio-fuel jet fighter at Andrews Air Force Base, President Barack Obama announced his intention to open up much of the eastern seaboard and parts of the Gulf of Mexico and Alaska to offshore oil drilling.



The White House press release said the move will “enhance our nation’s energy independence while protecting fisheries, tourism, and places off U.S. coasts that are not appropriate for development.” As Obama put it, “For decades we’ve talked about how our dependence on foreign oil threatens our economy yet our will to act rises and falls with the price of a barrel of oil.”



The president apparently decided that the potential environmental risks are worth taking because of the benefits of energy independence -- a nonsensical goal that would never be pursued by anyone who understands economics. We will never get energy policy right if our leaders continue to traffic in such silly misconceptions.



Nobody ever talks about independence for other products. We don’t care about automobile independence, or bottled water independence, or underwear independence. We avoid asserting that those would be worthy goals, for a good reason: Free trade enhances our welfare by allowing us to import products from those who have a comparative advantage producing them.



Why should energy be any different? Three arguments are most commonly offered.




Fluctuating Prices

The first is that oil price fluctuations harm the economy, and that owning more oil would help inoculate against them. This is specious. If the U.S. does discover a mother lode of oil, that discovery will affect the global price of oil. After the price adjusts to the new supply, it will go on and fluctuate from there. Before the discovery, Americans would pay the world price of oil, and watch and suffer as it moves up and down. Ditto for after the discovery.



It might be nice, of course, to own the oil or oil companies if the price increases sharply. That way, U.S. citizens see their wealth increase to offset some of the damage of the higher price. But if that hedge is viewed as attractive, we don’t need to drill to acquire it. We could just encourage Americans to invest in the equities of publically traded foreign oil companies, such as BP Plc, PetroChina Co. or Royal Dutch Shell Plc.




Fear of Embargo

The second reason sometimes given for more U.S. production is that a foreign enemy might decide to organize an embargo against us and shut off our supply of oil. Such an embargo might, indeed, harm the economy, as it did back in 1973.



Still, think about it. If we fear there might be an embargo in the future, the optimal response is to purchase more oil from abroad today, not less. We should try to get as much as we can before the spigot is turned off. We should also reduce domestic production, not increase it, secure in the knowledge that the oil is there, available when we need it, in places such as the Arctic National Wildlife Refuge. If we ramp up production today, then we may find ourselves facing an embargo down the road after we have drained all of our own domestic reserves.



The third argument one sometimes hears is that we should stop buying oil from evil-doers such as Iran, as that only provides them with resources they can use to do us harm. But the problem is, oil is a commodity, and if we do not purchase it from a given supplier, someone else will. Such a boycott has no effect whatsoever.


Focus on Benefits
This doesn’t mean that Obama’s idea to allow drilling offshore is necessarily a bad idea. But the benefits and costs need to be weighed rationally. The benefit is that an oil discovery increases our collective wealth, which is a good thing. Once we know that we have a proven reserve, we can choose to let it appreciate in the ground, or tap it and generate current income. In either case, we are better off.




That benefit must be weighed against the costs, the biggest of which is environmental.



Last September, I wrote about the leaking oil platform in the Timor Sea that was pouring about 2,000 barrels of oil per day into pristine ocean. That environmental catastrophe was finally stopped on Nov. 3. By then it had spewed more than 100,000 barrels of oil over the course of 74 days, producing oil slicks that cumulatively covered more than 22,000 square miles, according to one estimate, an area almost the size of West Virginia.



Clearly, a spill like that would be an environmental catastrophe in our waters, too. Whether we should accept the risk of such a catastrophe depends on the odds that such an accident could be repeated here.I doubt such cold calculation was behind the latest decision to allow more drilling. One suspects that the almost religious commitment of both parties to the pursuit of energy independence makes costs and benefits irrelevant.


Financial Express, New Delhi April 6, 2010