Commentary

All Circuits Misloaded

We’ve been hearing a lot about Ronald Reagan from the Republican presidential field of late, but there is little trace of him in the position papers issued by the various campaigns thus far. Take energy. Whereas candidate Reagan proposed to solve the energy crisis of the 1970s by abolishing the Department of Energy, deregulating the energy sector, and letting free markets rip, candidates Giuliani, Romney, McCain, and the rest propose to solve today’s energy crisis with elaborate national energy plans, lavish subsidies for favored fuels and industries, mandatory renewable-energy consumption orders, and government dictates to manufacturers regarding how energy-related goods and services are made.

Conservatives have abandoned free energy markets largely because of worries about national security. Leaving energy decision-making to producers and consumers in energy markets will invariably give us lots of foreign oil because it’s cheaper than the alternatives. But foreign oil, we are told, imposes an expensive “oil mission” on the U.S. military, forces us to make nice with regimes that we really shouldn’t be cozying up to, puts money in the pockets of Islamic terrorists, and fattens the coffers of all sorts of sleazy anti-American governments around the world. Hence, only an ivory towered economist blind to geopolitical reality would ever entertain the simple Reaganite policies of old in our present world. Or so we have been told by ex-CIA chief James Woolsey, New York Times columnist Tom Friedman, right-wing commentator Frank Gaffney, House GOP leader Denny Hastert, and a host of others who now increasingly have the Republican ear on energy policy.

This is unfortunate, because the national-security rationale for energy policy is no more persuasive today than it was in the 1970s.

Do we need to spend billions and, if necessary, blood and treasure to defend oil producers in the Middle East? No. Oil producers will provide for their own security needs as long as the cost of doing so results in greater profits than equivalent investments could yield. Because Middle Eastern governments typically have nothing of value to trade except oil, they must secure and sell oil to remain viable. Given that their economies are so heavily dependent upon oil revenues, Middle Eastern governments have even more incentive than we do to worry about the security of production facilities, ports, and sea lanes.

In short, the U.S. oil mission is a taxpayer-financed gift to oil regimes that has little, if any, effect on oil prices. One may support or oppose such a gift, but it is not compelled by our need for foreign oil.

Do we need to “kiss the ring” of oil producers to ensure a steady supply of oil? No. Friendly relations with producer states neither enhance access to imported oil nor lower its price.

Selective embargoes by producer nations on some consuming nations are unenforceable unless (i) all other nations on Earth refuse to ship oil to the embargoed state, or (ii) a naval blockade were to prevent oil shipments into the ports of the embargoed state. That’s because once oil leaves the territory of a producer, market agents dictate where the oil goes, not agents of the producer, and anyone willing to pay the prevailing world crude oil price can have all he wants.

The 1973 Arab oil embargo is a perfect case in point. U.S. crude oil imports actually increased from 1.7 million barrels per day (mbd) in 1971 to 2.2 mbd in 1972, 3.2 mbd in 1973, and 3.5 mbd in 1974. The long gasoline lines and high prices that we associate with the embargo were triggered by with domestic price controls, rationing, and the oil-inventory buildup accompanying fears of a regional war in the Middle East — not the embargo.

Moreover, oil-producing nations have never allowed their feelings towards oil-consuming nations to affect their production decisions. After a detailed survey of the world oil market since the rise of OPEC, MIT professor M.A. Adelman concluded, “We look in vain for an example of a government that deliberately avoids a higher income. The self-serving declaration of an interested party is not evidence.” Prof. Philip Auerswald of George Mason University agrees; “For the past quarter century, the oil output decisions of Islamic Iran have been no more menacing or unpredictable than Canada’s or Norway’s.”

While it is possible that a radical oil-producing regime might play a game of chicken with consuming countries, producing countries are very dependent on oil revenue and have fewer degrees of freedom to maneuver than consuming countries. Catastrophic supply disruptions would harm producers more than consumers, which is why they are extremely unlikely.

If American dollars spent on foreign oil actually increased the fighting strength of Islamic terrorists, then one would expect to see a correlation between oil prices (a good stalking horse for oil profits) and Islamic terrorist activity. But there is no such correlation to be found. In a recent study, we estimated two regressions using annual data from 1983 to 2005: the first between fatalities resulting from cross-border Islamic terrorist attacks and Saudi oil prices and the second between the number of cross-border Islamic terrorist incidents and Saudi oil prices. In neither regression was the estimated coefficient on oil prices at all close to being significantly different from zero.

Hence, belief that cutting oil profits would cut Islamic terrorism is a matter of faith, not a matter of fact. Given the low-cost nature of terrorism (the 9/11 attacks, for instance, cost only about $500,000), there is little chance that anyone’s energy policy is going to bother al Qaeda very much. They seemed to do very well in the 1990s when oil prices — and thus, oil profits — were at their lowest level in the entire history of the oil age.

While it is certainly true that fat oil profits are going a long way towards propping-up the governments of Hugo Chavez, Vladimir Putin, and Mahmoud Ahmadinejad, there’s very little the U.S. can do about that unilaterally. A $1.00 hike in the federal gasoline tax, for example, would only reduce world crude oil prices by 1-5 percent, or by $0.65 — $3.25 per barrel given $65 crude. Getting prices back down to 1998 levels (the lowest inflation-adjusted price in history) would require a gasoline tax of over $20.00 per gallon. Global crude oil supply and demand — and thus, crude oil prices — do not answer to the United States Congress.

Nor are foreign oil supplies as unstable as many think. Recent analysis of U.S. corn production data from 1960-2005, for instance, finds that corn yields varied almost twice as much as did oil imports over that period. Trading off gasoline for ethanol would thus trade off one set of supply risks for another much larger set of the same.

Simply put, there is absolutely no relationship between energy policy and national security. If Republican presidential candidates want to embrace the Reagan legacy, they can start by sounding like Reagan. And that means embracing free energy markets and not federal 10-or-25-year energy plans.

Peter Van Doren is editor of Regulation magazine, published by the Cato Institute, where Jerry Taylor is a senior fellow and director of natural resource studies.