G-7 Fallacy of Energy Independence
What is energy independence?
Would removing all limits on US oil production make the US energy independent?
No. Removing all limits on US oil production would help reduce oil prices, if other countries didn’t reduce their supplies to match our increased supplies.
What is energy independence?
When people talk about energy independence, they usually anticipate three outcomes: low US energy prices, stable US energy prices, and US energy prices unaffected by the actions of foreign governments.
How did energy independence become important?
The price of oil was $3.38 a barrel in October 1973. Then, OPEC, the Organization of Petroleum Exporting Countries, withheld supply, both to make more money for its members and to achieve political goals held by some OPEC member countries. The price of oil reached $11.10 a barrel by March 1974.
Why was there such a dramatic price increase?
Demand couldn’t change instantly via mechanisms like more fuel-efficient cars, so supply was lower than demand. At first, lower supply resulted in lines for gasoline. It took hours waiting in line to fill your tank. Gas stations ran out before everyone got gas, or limited the amount people could buy. Very quickly thereafter, prices went up. People made hard choices and used less gas. Demand fell. Supply and demand balanced again, at a higher price than before.
In 1973, gas prices in the US averaged $0.39 a gallon. In 1974, the average was $0.59 a gallon, a 51% increase. The minimum wage in 1973 was $1.60 an hour.
Gas prices doubled again in 1979, when the Iranian revolution disrupted supply from that country.
The lines, the increased costs, and, ultimately, the subsequent recessions, were directly caused by the oil-related actions of hostile foreign governments. Energy independence became a popular goal.
Suppose the US produced as much oil as we use (as we did, briefly, a few years ago). Would we be energy independent?
No. We’d be part of an international market. If OPEC, or a major non-OPEC producer like Russia, interrupted supplies, people outside the US would offer to pay our producers more for US oil. They would outbid some US consumers. The price of oil would go up, fast. That’s what “energy independence” is supposed to avoid.
Suppose we produced twice as much oil as we use. Prices might be lower (or they might not, because US production is expensive), but if OPEC…you get the idea.
To become energy (oil) independent, we would have to withdraw from international oil markets.
However, international markets drive production to the low-cost oil, which keeps prices down. It costs more to produce oil in the US than it does in places like Saudi Arabia, which still have light oil with a lot of gas pressure at shallow depths. The US doesn’t have much of that oil left. We have to use deep offshore wells, or inject polymers into old wells, or fracture shales. US production is expensive. It requires high prices.
If we withdrew from international markets, all increased use would have to be supplied with higher and higher cost oil. Prices would be more volatile, because fewer sources of new supply would be available, and small demand reductions would have a disproportionate effect on the ability of high-cost domestic producers to make money.
Can the US ever be energy independent?
More about this next time.
Copyright 2022 [or 2023], La Conner Weekly News. Reprinted with permission