It’s not the Oil Imports, It’s Just the Oil!
Posted July 26, 2010 at 12:49 pm 
Filed in: Economic Security, Energy Security, Energy Supply, Oil Dependence, Oil Prices The distinction between domestically produced and imported oil has been a subject of considerable debate and confusion. From an energy security standpoint, a common argument goes that increased production of oil in the United States would reduce our reliance on imports. This is seen as able to buffer the U.S. economy against the continued threat that oil price shocks pose to the economy, particularly fresh in our national consciousness since the 2008 oil price run-up. The implications of this notion are quite broad:
We are fighting a war in Iraq that is, according to former Federal Reserve Chair Alan Greenspan, “largely about oil.” We subsidize domestic oil and gas companies to the tune of $2 billion per year. George W. Bush, arguing in support of drilling in Alaska’s Arctic National Wildlife Refuge (ANWR), has claimed, “It will make America less dependent on foreign sources of energy, eventually by up to a million barrels of crude oil a day.”
However, none of these measures, ostensibly about reducing dependence on foreign sources of oil, can meaningfully affect America’s energy security, because we operate within a globally integrated oil market. In this market, the price of oil is largely uniform worldwide. Yale University Professor William Nordhaus likens the oil market to “a giant bathtub,” where all the world’s extracted oil lies available for purchase. The price of oil, then, is determined independently of which country contributes to this bathtub, and unfriendly regimes have similar motives to sell oil into the bathtub as do friendly regimes. It is the total amount of oil sold into this market, rather than who sells it, that primarily determines its price.
The U.S. consumes 25 percent of the world’s oil, but produces just 10 percent. Contrary to the meme that permeates through energy policy debates, however, U.S. energy security would not drastically improve were this picture to change so that U.S. consumption and production were aligned. Obviously, domestic oil producers would benefit from increased domestic production, which in turn benefits the U.S. economy. More broadly, it would behoove the U.S. and the world to rely as much as possible on stable, rather than unstable countries for oil supplies. Finally, by increasing production, the U.S. would benefit by offsetting the funding received by many hostile, oil exporting regimes. Critically, however, none of these factors would insulate the U.S. economy from the threat of oil price shocks, which remains a paramount energy security concern.
Focusing only on oil prices, an attack on an oil-producing state in the Middle East would affect our economy similarly as would a hurricane disrupting oil production in the Gulf of Mexico, assuming a similar loss of production. To quote Nordhaus, “a crisis anywhere is a crisis everywhere.” By and large, this suggests that policies aiming to improve U.S. energy security should chiefly emphasize reducing oil consumption, rather than increasing production or securing access to supplies abroad.
An economy less dependent on oil, regardless of its source, would be more resilient against high oil prices. As such, David Greene argues that we should not define “energy independence” as requiring freedom from foreign oil. Instead, the U.S. should aim for a point where oil use does not sizably affect the U.S. economy. Greene defines this as the point at which the economic costs of oil dependence are generally below 1% of the nation’s GDP. Policies to address this include promoting alternative-fueled vehicles and alternative modes of transportation, improved fuel economy, and higher fuel taxes or a price on carbon.
As a whole, the U.S. will remain vulnerable to oil price swings for many years, no matter where oil is produced. Energy insecurity stems not from reliance on foreign oil – but more simply, from reliance on oil.
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