Meta-Blog

SEARCH QandO

Email:
Jon Henke
Bruce "McQ" McQuain
Dale Franks
Bryan Pick
Billy Hollis
Lance Paddock
MichaelW

BLOGROLL QandO

 
 
Recent Posts
The Ayers Resurrection Tour
Special Friends Get Special Breaks
One Hour
The Hope and Change Express - stalled in the slow lane
Michael Steele New RNC Chairman
Things that make you go "hmmmm"...
Oh yeah, that "rule of law" thing ...
Putting Dollar Signs in Front Of The AGW Hoax
Moving toward a 60 vote majority?
Do As I Say ....
 
 
QandO Newsroom

Newsroom Home Page

US News

US National News
Politics
Business
Science
Technology
Health
Entertainment
Sports
Opinion/Editorial

International News

Top World New
Iraq News
Mideast Conflict

Blogging

Blogpulse Daily Highlights
Daypop Top 40 Links

Regional

Regional News

Publications

News Publications

 
The Myth of Oil Independence
Posted by: Jon Henke on Thursday, January 26, 2006

Seth Williams at Say Anything blogs about the oil problem, concluding...
Those that would insist we isolate ourselves from odious, yet oil-rich, regimes ought to be prepared to tell us how we would make up the shortfall that would result. Any plan that would insist we quit all or even some foreign oil cold turkey is a sure recipe for economic collapse and social disorder.
I think people fundamentally misunderstand the economics of oil, as well as the possible solutions available to us. Fact is, the only way to achieve "oil independence" is by becoming completely independent of oil. So long as we consume oil, we're subject costs and burdens of the worldwide market for oil. It doesn't matter whether we produce the oil ourselves, import it, or import it only from friendly regimes. So long as we consume oil, we're subject to the world market; quibbling about imports or trade partners is superficial and ultimately doesn't address the "independence" issue.

To explain, let me resurrect (with minor alterations) a comment I'd left in a previous post.

Divider


From a strictly economic perspective, it does not matter whether we get more oil from within or without the US. (except to those who profit from the oil in the first place, which may or may not be US companies) Being oil-independent does not change the cost/benefit ratio. That’s counter-intuitive, so let me explain.

(all numbers strictly hypothetical) First, an additional X barrels of oil a year on the market will, ceteris paribus, bring down the price of oil. Instead of paying, say, $65/bl, the market might pay $55/bl. Great for everybody! But we don’t get a (significant) discount just because we produce the oil. Exxon isn’t going to turn down $55/bl to sell oil to Americans at $45/bl just because we’re such hoopy froods. Having that extra oil is good....but the benefit is shared pretty much equally by everybody in the market.

But ultimately, the consequence of cheaper oil is that the low-cost producer (Saudi Arabia) gains market share. Lower oil prices means greater consumption. When oil prices are sky-high, Saudi Arabia makes a mint. (their cost to bring a barrel of oil to ground is, iirc, something like 2-3 dollars) When prices come down, the higher cost producers (us, probably) have to scale back or shut down...but Saudi Arabia can keep selling all the oil they can drill. In fact, ironically, while additional oil production may be profitable at $65/bl, the very addition of that oil to the world market might drive oil prices down below the level at which that production is profitable.

The benefit of domestic oil is entirely in an incredibly far-fetched emergency security circumstance: if the entire world stopped selling us oil, we’d still have ready access to a supply of oil.

But what are the odds of a worldwide embargo? Sure, OPEC can stop selling to us....at which point we'd buy from other sellers. If we ever reached the point at which the entire world was willing to embargo the US and risk the economic consequences of shutting our economy down, our problems would certainly be significant enough that access to domestic oil wouldn't save us.

In any event, the identity of the buyer and seller are almost irrelevant; global supply and demand determine price.

But what if the US was to produce as much oil as we consumed? Well, we can’t buy for less than the market rate. If oil shoots up to $150/bl, we’re gonna be paying $150/bl. for our domestically produced oil. Our additional supply will ease the supply crunch, but only at the global margin. We might even offset the oil taken off the market if, say, Iran decided to stop selling altogether. But remember — absent distinctions between light, sweet crude and the more sour stuff — oil is oil, no matter where it comes from. Arnold Kling once asked a question to demonstrate this point:
If the United States currently satisfies 10 percent of its demand for oil with imports from Saudi Arabia, by what percentage must the U.S. reduce its consumption in order to be 100 percent independent of Saudi oil?
If you answer "10 percent," you get an F. If we reduce oil consumption by 10 percent, then we will not cut 100 percent of our imports from Saudi Arabia. We cannot arrange to consume only American oil and no Saudi oil. Oil is oil. If we reduce demand by 10 percent, we probably will reduce our demand for Saudi oil by 10 percent, not by 100 percent. [...] The correct answer to the question of how much the United States would have to reduced oil consumption in order to drive our demand for Saudi oil to zero is 100 percent. Only if we stop using oil altogether can we be sure that we are not contributing to the demand for Saudi oil.

Short version: additional supply of oil will affect the price of oil on the global market, but we will end up paying the market price regardless of where the oil is produced. If the price of oil reaches $150/bl, then our cost per barrel will be $150. Even if we produced oil domestically and (somehow) distributed it to Americans at no charge, it would still cost us $150/bl in opportunity cost.

The only way to achieve real oil independence is to develop an energy source to replace petroleum. Anything else is just superficial tinkering.
 
TrackBacks
Return to Main Blog Page
 
 

Previous Comments to this Post 

Comments
Actually, if we reduce our oil consumption by 10%, isn’t it likely that we’ll end up importing more than 10% of the oil we consume from Saudi-Arabia?

After all, a reduction in demand will, ceteris paribus, lead to a reduction in price. When this happens, low-cost producers (Saudi-Arabia) won’t be affected (that is, they still make a profit on each barrel they produce), but high-cost producers (the US) may end up ceasing production.
 
Written By: Fredrik Nyman
URL: http://
Another point;
Let’s say we start domestic drilling. (Gee, local supply... using what we have here...what a concept!) Wouldn’t the world-wide price for oil go down in more or less direct proportion to what we pump?

(Granted, we’re subject to what the rest of the world pumps as well, but do we really consider that the rest of the world will stop pumping because we come online?)



 
Written By: Bithead
URL: http://bitheads.blogspot.com
Very good point.
 
Written By: Jon Henke
URL: http://www.QandO.net
Wouldn’t the world-wide price for oil go down in more or less direct proportion to what we pump?
To some degree. It depends on what you mean by ’direct proportion’. An additional million barrels will affect the price of oil at the margins, but it doesn’t matter where that additional million comes from.
 
Written By: Jon Henke
URL: http://www.QandO.net
The point of drilling domestically is not to reduce dependence on oil but foreign oil. If Iran continues on its path and they shut down their oil production or we decide we won’t buy Iranian oil, then we can rely on other sources (including our own). The point isn’t entirely to avoid price increases, but rather to NOT support "evil" regimes and also to have ready oil sources at home (i.e. principle of self-sufficiency). And don’t forget Venezuela, which is the 3rd largest producer of oil and whose "President" doesn’t regard the U.S. highly.
 
Written By: Nuclear
URL: http://
Excellent post, Jon, and something I have trouble communicating sometimes, especially to anti-free-trade conservatives. I wish the word "fungible" was better understood, especially among journalists.

Now let me risk some minor nit-picking, in the "ceteris are not always parabis" vein. I would point out that we do have a vested interest in ensuring that the supply market is varied enough to make it hard to create a cartel. One of the factors leading the declining influence of OPEC was the opening of the North Sea oil. I would maintain that, in specific rare cases, a new supply can have an effect on prices out of proportion to usual free-market dynamics, because the price set by the cartel was above what would otherwise obtain in a free market.

 
Written By: Billy Hollis
URL: http://
and what about our economic benefit from producing oil?
 
Written By: Chris
URL: http://
It’s more like "padding," especially if you think OPEC is still in a cartel position.

If we can produce more oil tomorrow than we produce today, we can reduce the total percentage of Saudi oil in the world (though that’s a big pool already; flooding it anytime soon is unlikely). If, for example, we put all our agricultural waste through the thermodepolymerization process, we’d be a net exporter of oil... but Saudi Arabia and Iran and Venezuela and Nigeria could still affect the price of oil here in the US because they’d still be producing a certain significant amount of the total quantity of oil supplied to the world, and the market isn’t closed off. If we produced all our own oil here in the US, Saudi Arabia can still make money selling to Europe or China or whomever.
 
Written By: OrneryWP
URL: http://
Wouldn’t the world-wide price for oil go down in more or less direct proportion to what we pump?
Depends on how much it costs to drill and then pump the oil out of the ground. Every oil field has 2 important price points, the cash flow price, the amount you need to receive to cover your operating expenses for pumping oil out of the ground, and the capital price, the amount you need to receive to cover your operating expenses plus the capital expenses of drilling the well in the first place. When the price of oil drops below the capital price, no new wells are drilled. When the price of oil drops below the cask flow price, the wells are turned off and every one goes home (its not that simple but close enough for this conversation).

So if you open a new oil field in North America AND if it is big enough AND demand is not rising then it will drive the price down but if the price goes down below your cost of doing business, you shut the oil field down and the price rises.

This is yo-yoing of production is very expensive so you don’t open any new fields unless you are damn sure you can make money at it.

And make no mistake, ANWR is damn expensive oil both in terms of capital and operations. Which is why ANWR is not that big of a deal. It is profitable at the current price but no one is sure if oil will stay at the current price. Once the CW is that high price oil is here to stay, ANWR will be drilled. The current politics over ANWR is just PR and spin (and lobbyist making money), the noise and heat given off by a major shift in the market for a core commodity. As with all politics, sound and fury signifying nothing.
 
Written By: Lighthouse
URL: http://
and what about our economic benefit from producing oil?

I’d prefer to use everyone else’s oil first, thank you very much. That way we will have oil and they won’t. Mwa ha ha.


 
Written By: Mark A. Flacy
URL: http://
The only way to achieve real oil independence is to develop an energy source to replace petroleum. Anything else is just superficial tinkering.
Not to call you out on your use of the passive voice, but who is going to do the developing?

Does the MARKET care about oil independence? Stated another way, would national energy security motivate private actors to develop an alternative energy source? My guess is no.


 
Written By: mkultra
URL: http://
The point of drilling domestically is not to reduce dependence on oil but foreign oil. If Iran continues on its path and they shut down their oil production or we decide we won’t buy Iranian oil, then we can rely on other sources (including our own). The point isn’t entirely to avoid price increases, but rather to NOT support "evil" regimes and also to have ready oil sources at home
There is a problem with this formulation, though. The original post might better state that the US pays a DIRECT or INDIRECT price for oil. Yes, the US can reduce its dependence on foreign oil, but not escape a cost for doing so. If oil shale, or sands, or hydrogen cost more per unit of energy delivered than imported oil, the United States pays a price, nonetheless. That cost is higher energy costs and slower economic growth, whether or not those costs are imposed by OPEC or by the cost of producing the energy. For example, if oil shale costs US$ 85/barrel (2006 dollars) and the world price is US$ 65, but nonetheless the US uses the oil shale the US will NOT be affected by the disruption of oil supplies, internationally, true, HOWEVER it will pay a high economic price for that particular security.
Bottom-line: Energy Independence comes at a cost. A cost that may be indistinguishable from Energy Dependence.
 
Written By: Joe
URL: http://
You are not going to reduce the amount of oil Saudi’s sells by increasing production in the US. Saudi oil is very high quality oil, with lots of the high dollar light volitales and low amounts of waste so it is very profitable to refine. As compared to the crap they produce in Venezuela which is heavy gunk not much better than tar sands. All things being equal, Saudi oil is always going to be the first oil bought, the first oil used. So even if we were to reduce all oil consumption to 90% of what it is today, what would be sold would be almost 100% Saudi oil.

It gets worse, Saudi oil is also some of the cheapist oil in the world to produce so you are not going to drive them out of buisness by flooding the market with oil. High quality oil thats very cheap to produce means that the Saudis will be the last oil producers to shut down. Unless they run out which is a whole other conversation.
 
Written By: Lighthouse
URL: http://
America is worried about oil security. Saudi Arabia has the largest and cheapest oil supply. America has a large army sitting right next door to Saudi.
 
Written By: Unaha-closp
URL: http://
"Does the MARKET care about oil independence? Stated another way, would national energy security motivate private actors to develop an alternative energy source? My guess is no."

To oversimplify a bit, market buyers care about meeting their energy needs in the cheapest (and hopefully cleanest) possible way. Market sellers care about meeting this need at the lowest possible cost of production. As current energy sources become more expensive, the incentive to create new, less expensive, energy sources rises.

While a few people are undoutably moved to act only out of concern for the so called greater good, national energy security, the flag, or whatever, I have far more confidence that the incentives of wealth, fame, and pride will lead to viable alternatives. Besides, we already have a viable alternative in nuclear energy, if only more reactors would start getting built.
 
Written By: Unknown
URL: http://
Unahop-Closp, the last time this was a subject of discussion,1974-’79, Department of Defense, conducted a number of studies on seizing the oil fields. The open conclusion, to be distinguished from the SCI conclusion, was that oil fields were very "soft" targets, very easy to destroy, very difficult to secure.
 
Written By: Joe
URL: http://
The open conclusion, to be distinguished from the SCI conclusion, was that oil fields were very "soft" targets, very easy to destroy, very difficult to secure.

That actually makes logical sense, a sensible reason to rule out force - thank you.
 
Written By: Unaha-closp
URL: http://
To some degree. It depends on what you mean by ’direct proportion’. An additional million barrels will affect the price of oil at the margins, but it doesn’t matter where that additional million comes from.
Well, I was aiming at rather more than this. Consider the price of crude when Katrina came along, knocking out a reltive few wells... despite the idea that we were awash in crude, because a number of reinderies were offline too.

What happens when we put a similar number of new wells online? The mere idea that increased supply... (And competitive supply, at that) is out there, I suppose, would start prices falling more than would the actual amunt of added oil available, whetever that ends up being. Remember, a lot of the pricing models are speculative in nature, and thereby subject to image as much as anything else.

 
Written By: Bithead
URL: http://bitheads.blogspot.com
I am afraid we have a much more viable alternative than nuclear energy, coal. The US is the Saudi Arabia of coal, we have tons and tons and tons of the stuff. As oil gets more expensive, coal will be substituted for oil. Even if we dont burn it, the Chinese will. Good news is that will we be exporting huge amounts of coal, goodbye trade deficit. The bad news is coal is much, much worse than oil when it comes to pollution. This is real irony from a green perspective, we will not stop buring oil unless it gets more expensive but when we stop burning oil, we will shift to coal, from a green perspective a much worse fuel than oil. (and really this is about clean air, not global warming, in this case we are all greeens).

But I dont see any way around it, given that exporting coal will solve our trade deficit and it is the most economical alternative once you move past oil we are going into a second coal age. Buy your coal stocks now. Actually buy oil because we will burn oil first and move to coal only if oil is too expensive.

Or not, maybe we will get lucky, maybe there is plenty of oil in the world. Maybe there is even enough for the less than 1 billion people in the industrial world to burn at our current rate AND enough left over for the 2.5 billion people living in Asia to burn as they try to achieve something like a first world standard of living. Maybe...
 
Written By: Lighthouse
URL: http://
Lighthouse, from my brief skimming, it appears that the cost to produce a unit of electricity with coal vs. nuclear is very similar - less than 5% difference (coal being slightly cheaper).
 
Written By: Unknown
URL: http://
To my earlier comment, I would add a wrinkle;

Joyner notes the other day that the mjority of the world’s oil is in the hands of one terrorist or another. Should the added military and diplomatic costs of dealig with these bastards be added into the cost equation, do you suppose?

Thereby, how much cost savings might we realize by putting our own supply online?

 
Written By: Bithead
URL: http://bitheads.blogspot.com
produce a unit of electricity with coal vs. nuclear is very similar - less than 5% difference (coal being slightly cheaper).
I hope you are right. In theory, nuclear should be cheaper than coal or oil but it has never worked out that way.

I actually think that we will end up using both nuclear and coal and everything else. If by 2050 the 2.5 billion people in Asia achieve a standard of living 1/2 that of the EU’s today, we, as in the planet Earth, will be consuming 50% more energy than we do today. Each and every day. I know that does not take into account conservation but it also assumes the western standard of living stays the same. No matter how you slice it, the rise of Asia is going to consume huge amounts of energy.
 
Written By: Lighthouse
URL: http://
The other fairly obvious note that nobody seems to have specifically (or at least loudly) mentioned is that, if our goal is to keep the Saudis and Iranians from getting oil money to spread Salafi/Wahhabi poison with, then even if the US never used a drop of their oil (or even of any oil!), they’d still be making money and selling every drop they produced to the rest of the world.

Admittedly, with US consumption out of the market, the price would drop (probably quite significantly, is my guess), so they’d make less, but the fact remains.
 
Written By: Sigivald
URL: http://
Jeez, this is getting tedious. All you need is a little imagination, and voila! problem solved.
 
Written By: Roger Snowden
URL: http://nonboxthinking.blogspot.com
Um, how is nuclear and coal energy going to help us eliminate our dependence on oil? The majority of our oil use goes towards liquid fuels (gasoline alone accounts for 50%). Unless you can put a Mr. Fusion reactor in the back of our cars sometime soon, nuclear power is gone. And although you can get Fischer-Tropche fuels out of coal, it’s still A) expensive and B) not gasoline. And a hydrogen economy is still a long way from reality.



There are other alternatives. But nuclear power isn’t that big of a deal for us at the moment. We already generate virtually all of the electricity we need, a good chunk (ie, greater than 50%) of which comes from our domestic coal supply.
 
Written By: Mariner
URL: http://
Love the Canadian destroyer, Roger.
 
Written By: McQ
URL: http://www.qando.net/
"Um, how is nuclear and coal energy going to help us eliminate our dependence on oil?"

It’s not completelty, dude, who’s claiming it will? It’s one part of the solution.
 
Written By: Unknown
URL: http://
The benefit of domestic oil is entirely in an incredibly far-fetched emergency security circumstance
That’s a big assumption. There are a whole host of things that could conceivably happen that would make importing most of our oil untenable. A global catastrophe - natural or man-made - orders of magnitude greater than last year’s tsunami is not impossible, and could impair global trade and transport for years.

Anyway, even if ANWR oil proves not cost effective and production is halted, we’d still have in place the infrastructure to retrieve it if needed. Consider it a sort of strategic oil reserve.

 
Written By: equitus
URL: http://
Anyway, even if ANWR oil proves not cost effective and production is halted,
The possibility of a meteor strike may not be enough to convince everybody into giving a multi-billion dollar subsidy to the oil industry.
 
Written By: Unaha-closp
URL: http://
The possibility of a meteor strike may not be enough to convince everybody into giving a multi-billion dollar subsidy to the oil industry.
Um... right. Well, you shot my point to hell. My oil industry masters are going to punish me for that. Looks like I’m going to have to walk everywhere for the next few weeks.

Anyway, it’s not a bad idea if you think of ANWR as a strategic oil reserve.
 
Written By: equitus
URL: http://
That’s a big assumption. There are a whole host of things that could conceivably happen that would make importing most of our oil untenable. A global catastrophe - natural or man-made - orders of magnitude greater than last year’s tsunami is not impossible, and could impair global trade and transport for years.
If global trade an transport was shut down to that degree, it’s hard to see how our economy would not be shut down to a similar degree with our oil needs declining equivalently. We certainly wouldn’t need the oil we currently use to produce all that stuff we export.

What you’re describing is a global catastrophe that would make the Great Depression look like a Sunday picnic.
The point isn’t entirely to avoid price increases, but rather to NOT support "evil" regimes and also to have ready oil sources at home (i.e. principle of self-sufficiency).
It doesn’t matter. Whether we buy from Iran, Saudi Arabia or somebody else, they’ll make the same money.
Not to call you out on your use of the passive voice, but who is going to do the developing?
That’s a good question. There’s billions, maybe trillions, in it for anybody who can develop and patent an alternative energy source.

However, I could also see an argument for a Manhattan Project type research subsidy for national defense. That’s one possible solution to the Mid East problem. If, of course, it worked.
even if the US never used a drop of their oil (or even of any oil!), they’d still be making money and selling every drop they produced to the rest of the world.
Presumably, if we developed an alternative energy source that eliminated the need for oil, this alternative would not remain within our borders. If we find it, others will adopt it, too.
 
Written By: Jon Henke
URL: http://www.QandO.net
"It’s not completelty, dude, who’s claiming it will? It’s one part of the solution. "

But that’s my point; it won’t help at all. By my calculation, less than 0.3% of our oil goes towards electricity production. That’s pretty much all nuclear power can do at the moment. Now, admittedly we can also move towards more electrical heating and the like. But that would only bring the amount of oil saved to less than 4% of our total oil used. If you want to talk about oil independence, you MUST talk about liquid fuel, as that accounts for the vast majority of its use. I’m not trying to downplay nuclear power (I think it’s a good idea too); I’m merely pointing out that it has very little relevence to any potential oil crisis.
 
Written By: Mariner
URL: http://
Actually, last numbers I saw put liquid fuels at around 45% of the total outlay, Mariner. The majority of it’s use therefore is not autos and trucks, but industrial uses, including manufacturing. That’s why when the manufactuing sector goes nuts, and orders are up, oil prices go up.

 
Written By: Bithead
URL: http://bitheads.blogspot.com
That 45% is just for gasoline. Add in diesel, jet fuel, etc and it’s up to about 67%. Transportation is the biggest use. It always has been.

Admittedly I made a mistake with the electricity production, as I was only looking at distillate fuel oils when the majority of oil electricity comes from residual fuel oil. Which brings the total amount of oil used for electricity up to a whopping 2.5%. And that 4% was only for commercial and residential use. The petrochemical industry, by the way, is about 10-12% of our oil use I believe (the EIA doesn’t break things down into nice and easy chunks, but this looks about right). You can’t make plastics out of uranium. So even if we could use electricity for every single use of oil outside of transportation and petrochemicals, we would get rid of 20% of our oil use. And that’s every single use: heating, motor fuels, running emergency generators for when the electricity goes out... I don’t think that’s practical (there’s a reason we use liquid fuels, after all). My point still stands - nuclear power won’t put a major dent in our oil use.
 
Written By: Mariner
URL: http://
http://www.eia.doe.gov/neic/brochure/gas04/gasoline.htm
 
Written By: Bithead
URL: http://bitheads.blogspot.com
Mariner,

We can and do grow organisms that can make plastic.

Jon,

People have been working on alternative energy transporters and sources for millenia. Nuclear energy is the best one of the bunch. This planet is awash in hydrocarbons, and we will never run out as long as there is life on this rock. Back in the 70’s I did some work with biomass conversion. There are some interesting potential sources from that front if we don’t let the enviro-wackos inhibit the potential that genetic engineering brings to the table.

Nevertheless, TANSTAAFL! The laws of thermodynamics rule in the world of chemistry, and partly rule in the world of nuclear reactions. Most of the things folk talk about now have seen 100 years of research or more. There is a reason why we use petroleum and other hydrocarbons, and the main one is thermodynamics.
 
Written By: Charles D. Quarles
URL: http://spaces.msn.com/members/cdquarles/
If you start off with the wrong premiss, you end up with the wrong conclusion...this all starts with assumption that oil independence means not importing ANY oil...that is simply not true...oil independence implies that we are not materially constrained as nation by our demand for energy from foreign sources..think about it...what is the impact when 60% of our oil comes from foreign sources and two-thirds of that resides in the middle east...contrast that with 30% coming from foreign sources and our ability to replace that with domestic forms of energy...whether that be from alternative green sources or fossil fuel substitutes...it no longer makes us the hostage that we are becoming....you don’t have to look very far today to see the impact of foreign oil on our geo-political decision making....could you imagine the different decisions we would be able to make if Iran shut down its oil supply and no one cared (including China and Russia)...we need to make this a national priority...check out the website www.usoilindependence.com...for one solution that could make a difference...thx
 
Written By: Mark
URL: http://usoilindependence.com

 
Add Your Comment
  NOTICE: While we don't wish to censor your thoughts, we do blacklist certain terms of profanity or obscenity. This is not to muzzle you, but to ensure that the blog remains work-safe for our readers. If you wish to use profanity, simply insert asterisks (*) where the vowels usually go. Your meaning will still be clear, but our readers will be able to view the blog without worrying that content monitoring will get them in trouble when reading it.
Comments for this entry are closed.
Name:
Email:
URL:
HTML Tools:
Bold Italic Blockquote Hyperlink
Comment:
   
 
Vicious Capitalism

Divider

Buy Dale's Book!
Slackernomics by Dale Franks

Divider

Divider