Is Energy Independence a Pipe Dream Policy?

This week’s uprising in Egypt that occurred in concert with a minor spike in the price of oil unsurprisingly led to renewed commentary suggesting the U.S. must achieve “energy independence.” A USA Today editorial noted that “More than half the oil Americans use is imported – a vulnerability exposed by the ongoing tumult in Egypt”, while noted energy scold T. Boone Pickens decried our continued “exposure” to overseas events that allegedly reward us with higher oil prices.

But looked at with a more reasoned eye, the events in Egypt exposed the sheer absurdity of the charitably false notion of energy independence.

For one, the not so notable increase in oil prices was to be expected either way. As this column has shown more than once, the price of a barrel of crude tends to revert to 1/15th of an ounce of gold (NYSE:GLD), and as of Tuesday, oil’s price increase merely brought it in line with its historical cost.

Canada is seemingly “energy independent”, but assuming ongoing Middle East uncertainty, its citizens will – like us – buy gasoline the price of which is based on the cost per barrel set in global markets. Much as we might like to naively fantasize about walling ourselves off from international market realities, we’ll never be immune to the activities around the world that impact oil’s price. Canada and its citizens won’t be either.

Of course assuming a major uprising in the Middle East that does include a major reduction of shipments from that part of the world, the U.S. is poised to weather such an occurrence better than most countries. Not only is the U.S. the world’s third largest producer of oil according to Crude World author Peter Maass, it’s 11th in the world in terms of proven reserves (Canada is 12th), plus the three countries we import the most oil from – Canada, Mexico and Venezuela – are far from the Middle East.

But if oil prices increase due to the aforementioned unrest, this once again will not be unique to the countries that import some (the United States) or all (Switzerland) of the oil they consume. Once again, the price of oil is set in global markets, and if decreased supply causes a large spike in price, this is something that will be suffered almost equally by the world’s citizens regardless of the energy situation of the nation in which they reside.

Naturally some will suggest that the false notion of energy independence isn’t about near-term uprisings in oil rich areas as much as it’s about securing supply assuming OPEC, or other oil-producing countries choose to place an embargo on sales to the U.S. Happily, the very notion itself is misguided.

Indeed, as the 1973 Arab oil embargo made very plain, there’s no accounting for the final destination of any commodity once it’s sold into the markets. Saudi oil Sheik Yahmani later characterized the ’73 embargo as “symbolic”, and with good reason. U.S. interests imported every bit as much oil during the embargo as they did before; the only difference being the entity purchased from.

Simply put, every OPEC country, and for that matter, every oil producing nation could place an embargo on sales to the U.S., but Americans would still consume the embargoed oil as though it had been discovered in West Texas. That’s the case because we’d merely buy the commodity from those not embargoed.  During World War I, the U.S. placed an embargo on Germany, yet Germany continued to import American goods; albeit via Sweden and other Scandinavian countries.

Of course some will say that the oil-producing nations could simply withhold the product from the markets. No doubt they could, but the mere suggestion is laughable. As Maass correctly observed in Crude World, “In the Middle East, a king without money is not king for long.” The reality is that nations such as Venezuela, Iran and Russia need dollars a great deal more than we need their oil, and if the leaders of each ever decided to take their crude off the market, they’d be out of power within days.

All of which brings us to the economic reason for not seeking to attain energy independence. Even if it’s true that we’ve got enough in the way of untapped oil reserves within the states to make us “sufficient”, the law of comparative advantage would reveal our doing so as shockingly dim.

Despite media-driven accounts that ascribe otherworldly visions to oil wealth, the simple truth is that the profit margins of ExxonMobil (NYSE:XOM) and other large U.S. oil (NYSE:USO) companies are a far cry from those earned in the software or technology space, to name but two sectors. So for our politicians to elevate the “achievement” of energy independence is for them to direct limited labor and investment in the States into a space that would underutilize our talents.

In short, the path to energy independence is a path toward less vibrant economic growth. Rather than produce all of our own oil, we happily embrace comparative advantage such that we let others find the oil, and in doing so, this gives our brilliant minds the time to create Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG). A better, more enriching trade would be hard to fathom.

So while we can expect lots of breathy commentary about the need for energy independence in the coming weeks, particularly if Middle East unrest spreads, cooler heads will hopefully prevail. The false God of independence will not wall us off from supply-driven increases, and more important, the waste of human and financial capital necessary to achieve the silly notion would be far more economically crippling than any presumed supply shock could ever hope to be.

John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.

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