The Debate on ‘Energy Independence’
September 23, 2008
William F. Shughart II
Oxford Eagle
When presidential candidates speak of promoting energy independence, presumably they do not mean independence of Canada or Mexico, America’s two most important foreign sources of oil and natural gas. They instead mean adopting policies to reduce U.S. dependence on energy imports from more volatile corners of the globe, such as Venezuela, Nigeria and the Middle East.
Pledges to lessen American dependence on foreign energy suppliers have been staples of every presidential campaign since 1973, when OPEC orchestrated the first global oil shock. The embargo that followed Iran’s 1978 revolution, the run up in crude oil prices from $10 per barrel in 1998 to as much as $145 earlier this year, and Russia’s August invasion of Georgia, have kept the issue on the political front burner.
Two options
There are only two ways of achieving greater energy independence. One is to reduce domestic energy consumption; the other is to expand and diversify domestic energy supplies.
Both candidates support policies to limit energy demand through a combination of conservation initiatives and improvements in energy efficiency. But if we have learned anything from the dramatic decline in gasoline consumption over the past year, it is that governmental mandates, such as the 35-mile-per-gallon fuel economy standard U.S. automakers must achieve by 2020 or proposals to reinstate a national 55-mile-per-hour speed limit, are not needed to change behavior: people conserve when it is in their economic interest to do so.
Assuming that public agencies must guide the hunt for new energy sources, Sens. McCain and Obama both have promised additional government spending for research into alternatives to fossil fuels. The economically and environmentally disastrous corn-based ethanol program supplies a cautionary tale.
The case for ethanol
Ethanol would not be on the market today except for aggressive lobbying by “Big Corn” (Archer Daniels Midland and other large agribusinesses), a federal subsidy of 51 cents per gallon and billions of dollars in government support for farmers. Ethanol is only marginally helpful in reducing U.S. dependence on imported oil in any case. If domestic fuel consumption continues to increase at current rates, by 2012 gasoline-ethanol blends will reduce foreign oil imports by less than 2 percent. Even if every drop of ethanol were substituted for Middle East oil, imports would be reduced by only 7 percent.
The candidates differ most sharply on the steps they would take to expand domestic oil and gas supplies. Exploiting proven reserves in the Outer Continental Shelf, the mountain West and Alaska, most of which are on federal land and currently off limits to exploration and development, is favored by Sen. McCain (“Drill, baby, drill”!). The U.S. Minerals Management Service estimates that these untapped sites hold enormous natural gas deposits plus 102 billion barrels of oil—enough to eliminate the need for Persian Gulf imports for the rest of this century.
Candidates’ views
Sen. Obama opposes opening new oil fields in environmentally sensitive areas. He instead backs a “windfall” profits tax on Big Oil to pay for $1,000 stimulus checks that would help financially strapped Americans cope with high food and fuel prices. Such a tax, as Jimmy Carter learned, would chill producers’ incentives to engage in highly risky ventures (nine out of ten test wells is a “dry hole”). Redistributing oil company profits to consumers simultaneously would raise demands for gasoline and heating oil. Higher, not lower, prices are the predictable result.
More so than Sen. Obama, Sen. McCain would promote greater reliance on coal and nuclear power. He also has proposed eliminating the 54-cent-per-gallon protectionist tariff on ethanol imported from Brazil, which makes it uneconomical for U.S. refineries to switch from corn-based ethanol to a more energy-efficient substitute derived from sugar cane.
The world is a dangerous place and it is natural to think that unfriendly oil producing countries hold us over a barrel. But because U.S. oil refineries currently are the only ones capable of handling heavy Venezuelan crude, Hugo Chavez is not about to cut us off. Nor does Saudi Arabia have a strong interest in reducing exports to its largest customer. As a matter of fact, the Saudis are helping bankroll the first major U.S. refinery expansion since the 1970s.
The goal of energy independence is Utopian. Nor, from an economic point of view, is it especially desirable. If achieving independence means promoting alternatives to fossil fuels that are viable only with massive taxpayer subsidies, “investing” in them seriously misallocates scarce resources.
After all, it was Standard Oil’s perfection of kerosene refining, not government policy, which ended the energy “crisis” of the late 19th century, when the world was running out of whale oil.
William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.