Democrats' Response to Oil Scarcity: Punish those who find and produce oil

I find arguing with dumb Aggies and lawyers who think they are businessmen to be intellectually boring and frankly, unproductive. A nice, timely article in the WSJ this morning that talks about the worldwide energy market. Notice the snippets on pricing which bolster my points.

www.wsj.com

The Mirage of Energy Independence
By DOUG WILSON
April 28, 2007; Page A9

With oil prices some three times higher than a decade ago, and access to more than half of the petroleum reserves on the planet beneath nations vulnerable to the whims of Islamic fundamentalists, it's understandable that Americans want Washington to free them of dependence on foreign energy. Understandable -- but misguided. The goal of energy independence is simply an illusion in an age of global interdependence. The goal of U.S. energy security through diversification is not.

Start with a reality check. In 1974, when President Nixon first called for energy independence, America was importing about six million barrels of oil a day from other countries -- a bit more than one-third of consumption. Today, daily imports are around 14 million barrels, two-thirds of our consumption. The Bush administration's prescription, more rapid exploitation of America's own dwindling reserves, could make a difference. But not a big difference: A combination of stepped-up production from offshore wells and successful exploitation of reserves in the Arctic Wildlife Refuge could pare dependence on foreign oil by, at most, a few percentage points over the next few decades. The priorities of the domestic oil industry shouldn't be confused with the priorities of the nation.

The inherent limits of domestic oil exploitation have led many to embrace alternative fuels. Indeed, just about the time Richard Nixon was promising to slash oil imports, Brazil was actually working to make it happen. Today, thanks to a mix of generous subsidies to stimulate ethanol production from sugar cane and mandates requiring that cars be equipped to run on alcohol, only about half the fuel burned by cars in Brazil is petroleum-based.

But the payoff to Brazil's Herculean effort has been less salutary than is sometimes advertised. Since alcohol is not an adequate substitute for either diesel fuel or heating oil, ethanol comprises less than 20% of the liquid fuels used in the country. And that modicum of independence has come at a substantial cost in terms of government subsidies, higher automobile and fuel prices for motorists, and environmental damage to ecologically fragile agricultural land.

Gearing up to make large quantities of ethanol from corn in the U.S. is likely to be equally problematic. An explosion in demand for corn to make fuel has already raised corn prices -- increases that will ripple through the economy in higher prices for everything from hamburger to Coke. And some truly unintended consequences are already being felt: The price of tortillas, the staple food of Mexico's poor, has gone up.

In a way, though, this sobering news is beside the point. The very idea of energy independence clashes with the realities of globalization. Suppose, for the moment, that accelerated exploitation of domestic oil reserves, technological advances in alternative fuels and a sea change in Americans' enthusiasm for energy conservation made it possible to power the economy without imported oil. Would we be free of dependence on foreign oil in any meaningful sense?

No. As long as the U.S. remains part of a global market in fuels, the impact of events abroad will not stop at the border. For example, in a crisis that cut off supplies from Saudi Arabia, the price of oil needed in Europe and Asia might double or triple overnight. Prices would rise in response in the U.S. even if we weren't importing oil, as markets directed the fuel that was available to the highest bidders.

Well, couldn't the U.S. go it alone, insulating the economy by prohibiting fuel exports? That would be difficult, in light of the complex supply chains in refining, transporting and storing petroleum products that crisscross political boundaries. More to the point, it would shake the foundations of modern global capitalism, in which individual economies can specialize in what they do best, confident that they can buy abroad what they don't make for themselves. When President Nixon dared to challenge this global division of production by temporarily barring soybean exports during a period of global grain crop failures in 1973, our allies shuddered. Japan, a big grain importer, vowed never to be caught short again, buying insurance against future embargoes by underwriting a major shift in global soybean output to Brazil.

If the very idea of energy independence is an illusion in an interdependent global economy, what's the point of having any national energy strategy? A surprising number of free-market economists would answer "not much" -- it should be up to major oil distributors and consumers to assess the risks of a supply crisis and plan accordingly. But I think there is still a good case to be made for a national energy strategy that is based on energy security as our goal and diversification as our means.

Some of the biggest fuel consumers -- electric utilities, heavy industry -- long ago responded to the unreliability of oil supplies by switching to natural gas, coal and uranium. However, conventional options for powering cars and trucks are more limited, justifying diversification efforts into both alternative liquid fuels and alternative foreign sources of fuel.

In the spirit of diversification it makes sense to provide incentives for R&D in liquid fuels from coal, oil shale and biomass -- though not open-ended commitments to production subsidies like the Brazilian ethanol-from-sugar program or, for that matter, America's ethanol-from-corn program. By the same token, the goal of fuel diversity might justify incentives to design and build "plug in" electric hybrid vehicles that could displace a portion of liquid fuels now used in transportation by deriving part of their power from the electricity grid. But probably the cheapest source of diversification in transportation is still conservation -- using taxes or tougher federal mileage mandates to increase the fuel economy of cars and trucks.

The other, more controversial, leg of a fuel diversification program would promote fuel production from more reliable foreign sources. With oil prices hovering in the $50-a-barrel range, Canadian companies may need no more encouragement to expand fuel extraction from the country's virtually limitless tar sands. But it might well make sense to offer financial incentives and technological assistance to Mexico to develop its deep undersea reserves beneath the Gulf of Mexico. To the same end, it might be useful to extend a hand to Venezuela to exploit its humungous deposits of viscous, high-sulfur heavy oil.

Venezuela's current government is, of course, no friend of the U.S. But the producer-consumer interdependence between the two economies transcends ideology. And in any event, the broad goal is security through diversification -- making oil-consuming countries less dependent on oil from far less reliable, politically problematic sources like Saudi Arabia, Iran and Iraq.

The idea of energy independence resonates in a country fed up with fighting in the Mideast and, more generally, uncomfortable with the economic entanglements of globalization. But independence should be seen for what it is: a distraction from the task of diversifying sources of liquid fuels in order to minimize the risks of doing business in a risky world.