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The Holy Grail of Energy Independence

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Saturday, 27 October 2012 10:44

NPR's Planet Money did a nice piece deflating the nonsense on energy independence. Their crew took the long trip all the way to distant Canada, a country that is energy independent. And, thanks to the fact that they have courageous politicians who are willing to kick environmentalists in the teeth, the free people of Canada only have to pay $4.00 a gallon for gas.

As those of us who took intro economics have tried to explain to the reporters covering the campaign, being energy independent doesn't mean anything unless we are at war and somehow cut off from foreign oil supplies. (If this is our concern then drilling out our oil and gas now is incredibly stupid. That means that it will not be there if we ever face such a crisis.)

Oil prices are determined on world market just like the prices of wheat and corn. When a drought in Asia sends up the price of wheat, we will pay more for wheat in the United States even though we are a huge net exporter of wheat. And, as the Planet Money crew showed us, when the world price of oil skyrockets people in Canada pay more for gas even though they are energy independent, as would we even if we were energy independent.

This basic fact means that when a candidate says that he/she wants to make the U.S. energy independent, they are actually saying either that they don't have a clue about economics, or that they think the reporters covering the campaign are so incompetent that they won't call attention to the fact that they are spewing utter nonsense. 

Comments (14)Add Comment
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written by Michael Symes, October 27, 2012 12:16
It's worth pointing out that, despite producing more oil than it uses, Canada still imports about half the oil it needs (which primarily supplies the eastern part of Canada).
...
written by david j michel jr, October 27, 2012 1:01
I don't care if we pay $5.per.gal.,as long as we stop funding country's that want us dead.
Global Price Takers That Receive Subsidies Still Produce Too Much
written by Last Mover, October 27, 2012 1:05
Oil prices are determined on world market just like the prices of wheat and corn.


Which also means the huge subsidies received by Big Oil and Big Ag (including negative externalities) don't reduce the price received as global price takers, but do increase profit and output beyond efficient levels by artificially reducing unit cost at the margin.

They already produce beyond optimal economic levels and still want more under the phony guise of "independence" and "more jobs".
That's a great idea, let's do that
written by Drew Kime, October 27, 2012 1:09
@David J Michel, I too would love to stop funding countries that want us dead. How about this idea: enact foreign policy that doesn't make so many countries want us dead.
Larry KudBLOW says "Drill, Baby Drill"
written by jumpinjezebel, October 27, 2012 1:22
He's been wrong on everything else so what is new. Must be the right prescription for our ills - other than tax cuts for the rich which is his other rallying cry.
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written by tom, October 27, 2012 2:18
Sunshine, wind, geothermal, hydro are not tradable resources. You want to be energy independent you should at least look there before drill baby drill.
Missing a big piece
written by Lstroud, October 27, 2012 3:06
Yes, it probably does very little for prices. There is an argument to be made that fir the US to be energy Independant that they would introduce enough new product into the market to significantly impact price. That argument is more nuanced, however.

The larger scale arguments are related to breaking an oligarchy and better controlling funding to he Middle East.

For one, it removes the substantial control that OPEC exerts over pricing with their production adjustments. More importantly, it decreases he incredible amount of money that the US is pouring into countries with immature governance systems. Hopefully, in time, this will stop propping up unpopular dictators and warlords and allow monetary distribution in these countries to normalize. Generally, it is thought that this will lead to a more peaceful Middle East.
How's that?
written by Drew Kime, October 27, 2012 7:05
"... allow monetary distribution in these countries to normalize."

Oh, you mean the way it's doing here in the U.S.?
Energy independence would mean more jobs at home. ... (and about Larry Kudlow)
written by Rachel, October 27, 2012 8:24

Kicking environmentalists? On the contrary, it often seems to me that the environmentalists are the aggressors, and have given far too little thought to the impact that their policies have on jobs. Some, I imagine, are only too happy to take from the less-well-off. But others probably have very little understanding of how much their clumsy "climate-saving" policies can affect jobs, thanks to a real absence of critical intelligence on the part of the media.

And now that I've discredited myself, I'd like to mention that Larry Kudlow has his good points. After all, he seems to like and respect Dean Baker. And sometimes, instead of promoting a Strong Dollar, he advocates a Stable Dollar instead (maybe the effect of Dean's reasoning). And he actually seems to appreciate the value of limited tax deductions. Instead of forcing poor renters to help pay for the million dollar mortgages of the rich. Good reasoning, against his own interests.
...
written by skeptonomist, October 28, 2012 9:26
Oil production these days is controlled by a sufficiently small number of countries that they can exert monopoly control, if they are cohesive enough. They did just that in the 70's and 80's. Saudi Arabia alone has considerable power over oil price, and it is treated accordingly by US politicians. If the US and other major oil consumers were self-sufficient in energy things would be very different; it is very unlikely, for example, that our military involvement in the Middle East would be nearly as great as it is. Free-market economics is not the only concern regarding energy independence. Our entry into WW II came directly because the US withheld oil from Japan - the free market did not help Japan obtain the oil it needed.

Apparently Dean is mainly attacking the idea that the US could be self-sufficient by more drilling for oil, which of course is a fantasy, even disregarding global warming. Becoming self-sufficient by finding alternate energy sources, or by CO2 sequestration (we have plenty of coal) is a different matter. If the US and other oil-dependent countries could become self sufficient world politics would be very different, though other resources would still be subjects for dispute.
Another condescending economist. How unusual.
written by Invisible Backhand, October 28, 2012 12:39
Yet another economist that thinks economic factors are the only factors.
energy independence
written by Jack McManus, October 29, 2012 10:16
Every thing tou write is correct. However, energy imports are a major source of our balance of payment imbalance. Reducing this would make achieving full employment easier.
Demand side management
written by Minor Heretic, October 29, 2012 7:36
One problem with our energy debate is that most people think in terms of production. How can we pump more oil out of the ground in a year? How many wind turbines can we put up to replace coal?

We waste staggering quantities of energy. Your average European uses a little over the half the energy of your average American, and they aren't living in caves.

Hard to believe case in point: If we replaced all our pre-1990 refrigerators and upgraded the controls on most of our industrial motors we could shut down half the nuclear plants in the country.http://www.minorheresies.com/p...sance.html I'm not saying that we can swap out 100% of old refrigerators in a practical sense, but it gives an idea of scale. Two technologically available solutions and there goes 15% of our electrical use.

For about a 1.5% cost premium we can build houses that use 50% less heating and cooling energy than a standard new home. It's mostly proper design, with a bit more insulation and sealant.

Efficiency and conservation cost less than production, in both money and environmental damage. Also consider that the U.S. uses 25% of the world's oil. If we cut back 25% that would reduce worldwide demand by 6.25%, which would dump the price of oil. If we doubled the average efficiency of our vehicles (21 mpg to 42 mpg), which is eminently doable, we would cut worldwide oil demand by 5%.

Corporations want money flow, so supply side solutions are what gets the press coverage.
Correction
written by Minor Heretic, October 29, 2012 7:42
For "15% of our electrical use" substitute "9% of our electrical use."

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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