The Mystery of Energy Independence
“Energy independence” has long been the rallying cry for many environmental and anti-war activists who seek to wean businesses and consumers in the U.S. from reliance on imported fossil fuels. The recent record-high gasoline prices have tempted consumer advocates and rank-and-file folks to join the cause. But can energy independence be achieved, and if so at what expense?
“Energy independence” means reducing substantially or ending the nation’s dependence on imported fossil fuels--oil and natural gas. According to the Apollo Alliance, an advocate of energy independence, “a crash program for sustainable energy independence would create three million good jobs, free the nation from imported oil, and promote a healthier environment.”
Why Gas Prices Are High
Gasoline prices this summer are in fact at all-time record highs, even when adjusted for inflation. The recent record profits of oil companies are often pointed to as evidence of price manipulation and price gouging. Not true.
While large in absolute dollar amounts, oil industry profits are modest when measured as net income on each dollar of revenue. Over the past five years, the industry’s net income was only 5.7 cents per dollar of revenue, hardly different than the 5.5 cents average for all industries.
Oil industry profits are also highly cyclical. The oil industry goes through repeated boom-and-bust cycles as prices vary but high levels of investment in capital and exploration must be maintained. Today’s high profits pay for investments made in the past that did not generate returns for investors because of low gasoline prices.
Finally, the oil industry pays high taxes already. ExxonMobil reported net after-tax earnings of $40.6 billion in 2007, $30 billion paid in corporate taxes that year, and an effective tax rate of about 40 percent. Other oil companies reported similar tax rates.
How Dependent Are We?
Our dependency on energy imports is primarily in the transportation sector, where some 96 percent of energy used for transportation comes from oil, and slightly more than half of the oil consumed by the U.S. is imported. By 2020, imports are expected to amount to two-thirds of the U.S. oil supply. This is up from approximately 35 percent in 1973 and 37 percent in 1980.
We are not dependent on imported fossil fuels for our electricity needs. Virtually all electricity in the U.S. is produced from domestic coal (52 percent), nuclear (21 percent), natural gas (14 percent, some of which is imported), hydroelectric (7 percent), and other renewable (2 percent) energy sources. Only 2.2 percent of the country’s electricity comes from oil-fired plants.
The U.S. has sufficient reserves of coal and other energy resources to become energy-independent. The U.S. has the world’s largest coal reserves, currently estimated at 275 billion tons, enough for more than 250 years at current rates of consumption. Coal can be and increasingly is burned cleanly, though mining, transportation, and disposal of ash and sludge have negative environmental impacts. Coal also can be liquified and gasified for use in transportation, home heating, and other applications.
The U.S. is the third largest producer of oil, behind Saudi Arabia and Russia, with the tenth-largest proven reserves of oil in the world. Alaska’s Arctic National Wildlife Refuge (ANWR) holds at least 4.5 billion barrels of oil and possibly as much as 11.5 billion barrels.
Federal lands in the U.S. contain some 635 trillion cubic feet of recoverable natural gas, but development of much of this energy is prohibited by federal laws. For example, more than 40 percent of natural gas reserves in the Rocky Mountain West is off-limits to development, and only 24 percent of U.S. offshore oil and gas prospects are open to exploration and drilling.
Nuclear power also holds great promise and is seeing a worldwide resurgence. New innovations such as pebble bed reactors are likely to reduce costs and further increase safety, but once again, environmentalist activism obstructs new investment.
Why Do We Import Energy?
Despite plentiful domestic reserves, we import more than half the oil we need for two reasons. First, federal and state laws ban commercial access to billions of barrels of oil, trillions of cubic feet of natural gas, and billions of tons of low-sulfur coal. These laws were passed under pressure from environmentalist lobbies supposedly to protect wilderness areas, but the actual intent and real effect have been to restrict access to domestic sources of energy.
The second reason is economic: When the cost of imported oil is low, it is plainly in the interests of U.S. businesses and consumers to buy it, just as buying other goods and services from other countries when they are inexpensive is a boon to American consumers. Free trade benefits both parties to every transaction, and by encouraging greater specialization of labor it boosts productivity and therefore total wealth.
When the cost of imported oil is high, as it currently is, we import energy until domestic producers, alerted to profit opportunities by the higher prices, re-enter the market. Domestic supplies eventually increase, thereby moderating prices and once again benefitting consumers. This response, however, takes time and inflicts hardship in the short term. Increasing domestic supplies also can be slowed or even stopped by government policies such as restrictions on drilling and mining on public lands and “windfall” taxes.
Independence Is a Chimera
Some people say we should pursue energy independence regardless of the short-term costs. This would be foolish for several reasons.
First, genuine energy independence would require energy isolationism--the erection of barriers to free trade with other countries--which is known to slow economic growth and invite retaliation by trading partners. Free trade, not isolationism, is the way to enhance energy security and world peace.
According to Robert Ebel, head of the energy program at the Center for Strategic and International Studies, “It makes absolutely no sense to talk about energy independence. ... We cannot produce our way to energy independence, and we cannot use efficiency or conservation to achieve energy independence. It’s just not going to happen, at least in my lifetime.”
The benefits of energy independence also are a chimera. Reducing oil imports would not affect U.S. foreign policy. Oil from the Mideast accounts for only 17 percent of all U.S. oil imports. Canada and Mexico are the two largest sources of oil imported to the U.S. Oil is bought, sold, and consumed globally. According to some experts, newly discovered oil reserves in Russia, Central Asia, and West Africa are larger than those in Saudi Arabia and Iraq, and as they come online the U.S. will rely less on the Mideast.
The U.S. has historically maintained a military presence in the Mideast for several reasons, including to stop Soviet expansionism, protect Israel from its Arab neighbors, and most recently to stop the spread of Islamic terrorism. If the U.S. stopped buying oil from the Mideast, other countries would buy it instead, freeing up oil that the U.S. would then import. The U.S. cannot unilaterally “de-fund” Islamic fundamentalists by reducing its oil imports from the Mideast.
Policy Recommendations
Since some progress toward self-sufficiency could make our energy supplies more secure, policymakers should focus on removing public policies that restrict the development of domestic energy supplies, including nuclear power and domestic fossil fuel reserves. Some steps include:
- Enact a gas tax holiday--a temporary suspension of motor fuel taxes--and require that the revenue loss be offset by suspending diversions from state highway funds.
- Reduce the number of boutique fuels required by federal laws and end mandates for ethanol and other biofuels.
- Repeal federal and state restrictions on coal, natural gas, and oil development on public lands and offshore.
- Remove regulatory barriers and policies that allow anti-nuclear and NIMBY (“not in my backyard”) activists to stop or delay the construction of nuclear power plants.
- Repeal or reform unrealistic state “renewable portfolio standard” laws that force electric utilities to purchase highly subsidized wind power.
Joseph L. Bast (jbast@heartland.org) is president of The Heartland Institute.
“Genuine energy independence would require energy isolationism ... which is well known to slow economic growth and invite retaliation by trading partners.”
