Energy Independence? Kerry’s Dreaming

By Jerry Taylor
August 24, 2004

A curious thing is happening out there in the heartland as Senator Kerry crisscrosses swing-state after swing-state in his race for the presidency. While the crowds have been politely enthusiastic over his health care plan, his pledge to close the deficit, his ideas to staunch the flow (actually, the trickle) of jobs going overseas, and over his murky riffs on Iraq or the war on terror, roars of approval are routinely going up whenever Kerry thunders about the need for energy independence so that “we’re never again beholden to the House of Saud for our economic well-being.” Democratic pollsters are giddy and think they’ve struck pay dirt. Economists are appalled and think they’ve struck fools gold.

While energy independence is not a new idea - it’s been embraced to varying degrees by every single national politician (including President Bush!) over the last 30 years - it’s the sort of thing that sounds good at first blush but looks ridiculous the more you think about it. Actually, characterizing the idea as ridiculous is charitable. “Asinine” was the word used by one of Kerry’s own energy advisers in the New York Times recently in the course of lamenting the direction his candidate was taking on the campaign trail.

First off, energy independence won’t do any good whatsoever unless we either stop using petroleum products altogether or, alternatively, ban all imports and exports of oil, gasoline, and the like. That’s because moving oil around the globe is so cheap and easy that a shortage of oil anywhere in the world increases the price of oil everywhere in the world. That’s why the oil price shock set off in 1979 by the Iranian Revolution increased the price of oil in Great Britain just as much as it increased the price of oil in Japan. It didn’t matter that Great Britain was energy independent at the time and that Japan was 100 percent reliant upon imports.

How much would prices go up if we withdrew from the global oil market to secure our energy independence? Well, America consumes 20.3 million barrels of oil a day but produces only 5.6 million barrels a day. Knocking out imports would increase oil prices to well over $100 a barrel and blow even today’s high gasoline prices through the roof. Accordingly, the cost of immunizing America’s economy from decisions made by the House of Saud are too high to entertain seriously.

Are we then “dangerously beholden” to the Saudis and the rest of OPEC, as Senator Kerry claims? No more than we are “dangerously beholden” to the guys who run grocery stores. Sure, we need the oil to keep the economy going, but the Saudis (like most of the rest of OPEC) need the revenues produced by the oil trade to keep from starving. Given the lack of any other particularly profitable industry within Arab OPEC member states, oil producers need the money generated by oil sales more than oil consumers need the petroleum.

That explains why over the entire history of the cartel, not once has an OPEC member state chosen to pursue political objectives rather than profit maximizing objectives when making decisions about oil production. The idea that oil sheiks decide how much to pump based on their feelings towards the West is a self-serving myth perpetuated by oil regimes that want foreign policy brownie points for doing what they must do regardless.

Simply reducing the amount of oil we import from the Middle East would likewise accomplish nothing. A Saudi production cutback would increase the cost of oil produced in Texas, Mexico, and Russia just as much as it would increase the cost of oil produced in Saudi Arabia. Moreover, if we don’t buy Saudi oil, somebody else would. Given the global nature of the marketplace, what matters is overall supply and demand, not who provides the supply or who makes the demand. But wouldn’t we be less vulnerable to some future embargo were we less dependent on Middle East oil? No. All that happened during 1973 oil embargo, for instance, is that instead of buying oil from OPEC, the United States bought oil from other market actors that bought oil from OPEC and shifted consumption to non-OPEC producers (whose old customers shifted to OPEC). It was the production cutback that accompanied the embargo - not the embargo itself - that drove the resulting oil spike. As Sheik Yamani conceded later, the embargo “did not imply that we could reduce imports to the United States … the world is really just one market. So the embargo was more symbolic than anything else.”

As the New York Times reports, Kerry’s top energy advisers know all of this - as does everyone even passingly familiar with energy markets. But Senator Kerry is apparently not the kind of man to let a little reality get in the way of a good applause line.

Jerry Taylor is director of natural resource studies at the Cato Institute.