Would Energy Independence Insulate the US from Oil Price Spikes and Reduce Wars in the Middle East?

What energy independence would mean--and what it wouldn't

The US's dependence on foreign oil is often cited as the root of several evils. The two most prominent are the ones in the title. The short answer to the first one is "probably not, but potentially." The answer to the second is "no."

Let's put aside the shear difficulties involved in becoming energy independent for a moment to concentrate on this hypothetical situation. In an apolitical and amoral world, an energy independent United States could halt oil exports and insulate itself from rising prices by cutting off the excess demand for US oil and using it exclusively for the domestic market, for which there would be enough oil to go around (hence prices would not rise). We don't live in an apolitical and amoral world however. Here's why that matters: cutting off exports is known as a beggar-thy-neighbor policy. The reason is that it would benefit American oil consumers while harming consumers in the rest of the world. That is because some additional supply would be removed from world markets, driving up the oil price still further.

Not only does this rub against our moral sensibilities, the political (and economic) backlash would be huge. And it wouldn't just be about higher oil prices. The US has encouraged free trade for decades and built up a global economic system based upon that idea. A move like that would be hypocritical and seriously undermine the US's credibility. The result could be a trade war, with other countries erecting trade barriers as well, slowing global trade, driving up consumer prices, and killing the world economy. In other words, the result could very well be worse than higher energy prices themselves would have been. So it would be better if the US didn't use its (fictional) energy independence in this way to keep its own prices low.

On to war in the Middle East (ME). Hasn't US involvement there been based on its thirst for the region's oil? Hasn't this led to wars? This is unfair. US involvement in the Middle East is due in no small part to the region's oil. To deny this would be a bald-faced lie. But I think many people assume that US involvement would somehow be proportional to the amount of its oil it gets from the region. This is a misunderstanding of economics. The US imports less than 25% of its oil from the Middle East (that's including the entire "rest of the world" statistic as being all from the Middle East, which surely drastically overstates things). But this is completely irrelevant. The oil price is determined by global supply and global demand. It doesn't matter if your traditional suppliers still have the same amount of oil. If another supplier doesn't, demand for oil from your suppliers will rise, and so will the price. Even if the US didn't import any oil from the ME, that region would still be among the world's most important suppliers, if not the most important one. It could therefore never be ignored.

This means that the US and every oil consuming country in the world has an interest in ensuring that ME oil keeps flowing. The US, however, is one of the few countries with the power to do so--so it does. Does this cause wars? I actually don't really think so. The US is guilty of promoting "stability" in the region over the years, which has often meant doing business with, and at times outright supporting, Arab dictators. As I've explained in other posts, though, these were marriages of convenience. As the Arab Spring has shown, if all other things are equal, the US will support democracy. Usually all other things are NOT equal, however. The alternative to doing business with dictators is not doing business with dictators, who will then do business with others and stay in power. This would mean the US would also have little influence on those countries (influence it could use for good) and would be more beholden to a smaller number of suppliers, putting its energy supplies at risk and artificially raising its oil prices, damaging its economy. In short, everyone would be worse off. I personally think following rigid and allegedly moral principles to the point that everyone suffers is a false, and facile, morality.

So energy independence doesn't make sense? Well, that's not entirely true, either. In an emergency, it would mean the US could ban exports as detailed above, or threaten to do so, giving it more leverage. That's the sort of "political dark arts" side of it. More cheerfully, energy independence would probably have to mean more green technology--efficiency improvements, renewables, etc., which are a good thing in their own right because of climate change, for one. Efficiency gains are also good because they reduce the energy intensity of the US economy. That means the US would require less energy for each dollar of GDP it produces. THAT really would make the US economy more resilient against rises in the oil price. Why? It's like this: if the US requires one barrel of oil for $2,000 of GDP, a rise in the oil price will have a greater effect than if a barrel of oil can generate $4,000 of GDP simply because the oil price will make up a smaller proportion of total costs in the economy. In the end, then, energy independence as a goal in its own right is not so important, which explains why the US hasn't pushed that hard for it. Reducing US dependence on oil by reducing the economy's energy intensity would provide the greatest benefits of all at a reasonable price.

And we're in luck: US oil consumption has fallen since 2005, despite rising GDP and a larger population. That means its oil intensity is falling (and actually, its overall energy intensity has been falling, too). This will make the US economy more resilient to energy price shocks over time. That can only be a good thing, because energy prices don't look set to fall much in the coming decades (except maybe for natural gas, but even that is uncertain). Just don't expect that to bring peace to the Middle East or to reduce US involvement there. Democracy just might, though, you never know...


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