The 40-year energy myth

October 18, 2013

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This week marks the 40th anniversary of the 1973 oil embargo, when Middle Eastern producers, the members of OPEC, temporarily banned imports to the US to protest its support of Israel in the 1973 Yom Kippur war. “Crude-oil prices spiked, fuel lines snaked behind gas stations and years of stagflation followed”, writes the WSJ. Every president since has made a push to reduce the country’s dependence on foreign oil — despite the fact that US consumers cannot divorce themselves from global oil prices.

Eight presidents and several Middle Eastern armed conflicts later, the US is scheduled to become energy independent by 2020. As of this year, the US is the largest producer of petroleum and natural gas in the world, squarely outpacing Russia for the first time, largely thanks to increased production of shale gas through controversial fracking practices.

What does that mean for Americans? Not much, in the individual sense. As Quoctrung Bui explains, retail energy costs haven’t gone down much, even as the wholesale price of natural gas has plummeted, because much of your electricity bill comes from building and maintaining infrastructure.

Energy independence has much more to do with macroeconomics and foreign policy than the price Americans pay for energy. The conventional wisdom (slash political talking point on both sides) is that cutting foreign oil dependence reduces economic vulnerability, with the example being the effects of the 1973 oil shock.

But Gal Luft and Anne Korin argue in this month’s Foreign Affairs that high oil prices, which first surfaced around the time of the 1973 embargo, have little to do with where the oil is coming from. America, they write, has never gotten more than 15% of its oil from the Middle East and half of our imports come from the Western Hemisphere. The 1973 oil shock was caused by OPEC artificially reducing the world’s oil supply for their own profit, which is what sent the global price skyrocketing (and has kept it high). Because so much of the global supply is produced but other nations, the US can’t control the price even if it is “energy independent”:

If investor-owned oil companies such as Exxon, BP, Shell, and Chevron were sitting on top of three-quarters of the world’s conventional oil reserves, they would be supplying something around three-quarters of the world’s oil. And if not, they’d be slapped with an antitrust lawsuit. Antitrust lawsuits, however, don’t work against sovereign governments…

Robert Bryce wrote about the myths behind “foreign oil dependence” back in 2008, noting that oil is a global commodity with a global price, and “anyone who argues that the United States will be more secure by going it alone on energy hasn’t done the homework”.

And that’s essentially the message from a September report by consulting firm Wood Mackenzie. It forecasts that even after becoming technically “energy independent”, North America as a whole will continue to both export and import oil “for the foreseeable future”. — Shane Ferro

On to today’s links:

Obamacare website errors include duplicate enrollments, spouses reported as children and missing data – WSJ

Long Reads
22 hours in one of New York’s iconic restaurants – NYTmag

Bad investment of the day, Fantex edition – Felix Salmon
Banking is becoming less ‘Rock Star’-ish – Dealbreaker
Steve Cohen’s SAC is near a $1 billion settlement with the DOJ – Reuters
Steve Cohen is not selling art to pay his bills – Shane Ferro

Some possible reasons to be optimistic about Congress after the shutdown – Cardiff Garcia

A succinct summary of what happened this week – Barry Ritholtz

Tough Choices
Poor, on purpose: what it’s like to choose to live on $5,000 a year – Nona Willis-Aronowitz

On round number bias – Tim Taylor

Rabobank is getting rid of bonuses for executive directors – Quartz

Buzzfeed without the GIFs –

“Ms Grimes’ innovation mantra is AMP, which stands for ‘accelerating meat possibilities'” – Ad Age

“Greenspan’s plodding text oscillates maddeningly between equivocation and chutzpah” – Bloomberg

Niche Markets
Goldman Sachs’ wildly successful experiment in congestion pricing – John Carney

How to get bros to shop for clothes: “it’s a hunting mentality” – The Verge

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It would be difficult to find a piece on an important subject so out of touch with reality. If the message is that the oil and gas revolution currently happening in the United States has little or no real impact on prices, and therefore on the lives of real-world Americans, I’ll just stick to the most obvious points.

— Natural gas is now so incredibly cheap – less than half of what it used to cost – and so incredibly abundant given new production, that American manufacturing now makes sense, even when our higher labor costs are factored in. There is much more to energy than merely the price of gasoline for your car, and making manufacturing affordable in the US to create jobs is maybe the most important national priority I can think of. Has the author even bothered to research the huge manufacturing projects now underway?. Projects underway only because the price of energy (natural gas) has made them economic.

— Speaking of cars, it’s going to take a few years to make natural gas as common as gasoline as a motor vehicle fuel as appropriately fitted new cars and trucks become available, and the fuel starts showing up at service stations. But when it happens,the price of driving will be radically decreased. For many years, natural gas has been selling at a fraction of the price of oil on an energy-equivalent basis and there is little reason to believe this will change given the huge volume of discovered US natural gas reserves.

— America has fundamentally changed in its sense of military and security responsibility for the Middle East on account of our new sense of energy security. Our very high profile willingness to break with Saudi geopolitical interests, to their outrage, is a direct reflection of a new mentality about American exposure to oil risks in the Middle East. Just read Reuters over that last week.

— Don’t be confused about continuing imports and exports. Given basic geographic realities – especially the concentration of the refining industry on the US Gulf Coast – it can easily make sense to continue to import oil from Canada, Mexico and Venezuela (our biggest suppliers) while exporting our own production to Asia and other places from different coasts. After all, oil is oil, a fungible commodity. But that doesn’t mean that the net effect is somehow less than true energy independence. If war or other factors ever compelled us to rely only on our own production, we will soon be able to.

Posted by From_California | Report as abusive

The author misses an important fact. Purchase a barrel of oil from a foreign country, and that country benefits in two important ways. FIrst, the revenue from leases and taxes flow directly to their treasury. Second, the salary and other expenses associated with extraction will be spent primarily in the country of extraction, and again the tax revenue will benefits will accrue to that country. In other words, a dollar spent here is much better that a dollar spent elsewhere. I assume that this additional tax revenue is contributing to the shrinking budget deficit.

Posted by Ashdodi | Report as abusive