Andrey Rudakov/Bloomberg via Getty Images

Please Stop Talking About Energy Independencey

 

daniel raimi is a fellow at Resources for the Future, an independent, nonprofit research institution in Washington.

Published July 25, 2022

 

Russia’s invasion of Ukraine has global energy prices skyrocketing, creating economic disruptions in Europe and reverberating around the world. Meanwhile, President Biden barred U.S. purchases of Russian fuels, sending a strong message that naked military aggression is unacceptable in today’s world.

To counter the effect of rising oil prices, the Biden administration — like every administration since the late 1960s — has articulated the need for the United States to become energy “independent.” And judging by Google searches, public interest in the concept is the highest it’s been in decades.

But as most experts have argued before — and hardly anybody listened — energy independence is a goal based on a misunderstanding of how energy markets work. In fact, seeking independence from the global energy system would amount to shooting ourselves in the foot, regardless of whether we’re talking about fossil fuels or renewable energy technologies. Here, I’ll explain why it’s finally time to let go of the alluring yet misguided concept of making this country “energy-independent.”

Energy Prices in Context

First, a little context. The ramp-up in crude oil and gasoline prices in recent months has been startling. However, the oft-repeated statements that gasoline prices have reached “record highs” are not quite right. Adjusted for inflation, prices were significantly higher in 2008, just before the Great Recession, and were also higher for long stretches of the 2010s. The figure on page 5 shows average weekly nationwide gasoline prices in nominal and inflation-adjusted terms.

Despite the reality that gasoline prices have been higher in the past — and most likely because the current hike has been so rapid — drivers have been alarmed as they watch the ticker on the gasoline pump click past $40, $50 or $60. In fact, the jolt seems to have done more to capture the attention of the public than any energy event since the bad old days of the 1970s, when Arab oil embargos and the Iranian Revolution sent pump prices soaring.

In response to pressure that could translate into votes in November, politicians are looking for the villain of the tale. Democrats in Congress and their allies in punditry have accused oil companies of “price gouging,” despite the fact that global markets — not oil companies — determine the price of crude oil, which is the main factor driving gasoline and diesel prices. Indeed, if oil companies were so good at manipulating prices, one wonders why they let them stay so low for prolonged periods during the past quarter century.

Not to be outdone, Republican officials and their media allies have blamed high energy prices on Biden administration regulation, notably the climate-wary moratorium on new oil and gas leases on federal lands and in federal waters, which the administration lifted in mid-April. This argument is just as flawed: President Biden has been in office for just a year and a half, and any leasing decisions made by this administration would take the better part of a decade to make a dent in domestic production.

So who really is to blame for high gasoline prices? Well, no one in particular. When Covid-19 curtailed demand for transportation fuels in early 2020, oil companies unsurprisingly reduced outlays needed to sustain extraction and refining. But when the global economy rebounded more quickly than expected in 2021, oil demand grew faster than anticipated. The result was a classic gap between demand and supply that put pressure on prices. And when Russian tanks rolled into Ukraine, fears of future supply shortages in an already tight market sent distributors and refiners scrambling for crude, pushing prices up even further.

The White House is plainly aware of where the buck is likely to stop in an election year. And the administration has sought to nudge down prices by nudging up fuel supplies in unorthodox ways. It is selling up to one million barrels a day of crude oil from the federal Strategic Petroleum Reserve, chastising oil companies that allegedly could produce more oil now, loosening environmental restrictions on the blending of corn ethanol with gasoline during the summer, and reaching out to the sanctioned governments of oil-rich Iran and Venezuela, which may be able to bring more barrels onto the market with the loosening of U.S.-imposed sanctions.

Andrey Rudakov/Bloomberg via Getty Imaes

As of mid-April 2022, crude oil prices are bouncing around above $100 per barrel, and average gasoline prices are gyrating in the $4.00-$4.10 per gallon range (much more in California, where additional environmental rules raise pump prices, and where a small number of refiners may be exerting market power). Unsurprisingly politicians from both sides of the aisle are calling for policies that would make the United States “independent” from global disruptions and high energy prices in the long run. So what’s wrong with that?

The Illusion of Energy Independence

When people use the term energy independence, a rational listener would assume that they meant the same thing as Merriam Webster’s definition: “not subject to control by others.” But the public doesn’t care whether fuel originates in New Mexico or Nigeria. Consumers want policymakers to exert control over energy prices, not control over the level of imports.

Indeed, looking again at search interest on Google, it’s clear that the desire to become independent is not at all correlated with the amount of crude oil we produce or import. Searches for the term only spike when gasoline prices reach painfully high levels, as they did in late 2008 (the last time oil prices rose this rapidly) and March 2022.

Consider this example. When the U.S. cut off Russian oil imports in March (and Russia had to look for new buyers of that crude), did we become “independent” of Russian oil? Anything but. Because the oil market is global, a decrease in supply or an increase in demand anywhere in the world raises prices for everyone, regardless of how much they import or export. The price spikes that consumers are facing around the world demonstrate just how dependent the U.S. — and every other nation — is on decisions made in Moscow, Riyadh, Beijing — and, for that matter, Houston. As long as the U.S. consumes oil, it will be affected by world oil markets and thus can’t be energy independent in the sense we care about (read: stable prices).

 
The inability to access global markets when they are most needed would exacerbate, rather than mute, the price volatility that sets consumers and elected officials off in search of scapegoats.
 

Some have argued that the U.S. was, in fact, energy independent under the Trump administration because the nation exported more oil and natural gas than it imported in 2019 and 2020. Setting aside the fact that this was also true in 2021 after the Democrats regained the White House, let’s consider whether being a net exporter of energy makes a nation independent of global market forces. To answer this question, all one has to do is look back at President Trump’s 2019 tweets urging OPEC to produce more oil to ease high gasoline prices. This episode, like so many before it, demonstrated that prices paid by U.S. drivers were, in Merriam Webster’s words, subject to control by others.

So in a world of interconnected energy markets, is energy independence even achievable? And if it is, would it be desirable?

What Would Energy Independence Look Like?

In broad strokes, there are two ways to become “independent” of market forces in a globally traded commodity such as oil. The first — highly theoretical — approach would be to bar imports and exports, only consuming what is produced domestically. In this setting, domestic energy prices would be dictated by domestic supply and demand. Although this approach may sound desirable at first blush, a simple scratch at the surface reveals glaring flaws.

First, the U.S. is, of necessity, still a major net importer of crude oil. In recent years, we have produced 9 million to 12 million barrels a day of crude but consumed 15 million to 17 million barrels of refined products (mostly gasoline and diesel). Matching domestic supply with current consumption would thus require a massive scale-up in U.S. oil production through investments that producers would only make with very high expectations, meaning that super-high oil prices would prevail for years, if not decades.

Second, many U.S. refineries are configured to process types of crude oils that are different than those produced domestically. For example, some facilities along the Gulf Coast were built to refine sour crude from Saudi Arabia (“sour,” meaning high sulfur content) or heavy crude from Mexico or Venezuela (“heavy” meaning more viscous). These refineries could process the sweeter, lighter crudes typically produced in the United States. But this would come at considerable expense for refiners, who have invested tens of billions of dollars over the years to handle sour and heavy crudes.

Third, isolating the U.S. from foreign energy would mean forgoing the benefits that global markets offer in times of disruption. For example, when U.S. producers and refiners in the Gulf of Mexico shut down for major hurricanes, or when major pipelines shut down due to cyberattacks, refiners and product distributors can and do import the shortfall. Without these foreign supplies, price shocks would be even more severe.

All hypotheticals point in the same direction: actual “independence” from global oil markets would increase, not decrease, average domestic energy prices. And the inability to access global markets when they are most needed would exacerbate, rather than mute, the price volatility that sets consumers and elected officials off in search of scapegoats.

Oil and gas industry advocates have argued that the best way to ensure stable prices, if not energy independence, is to drill more here at home. Indeed, from roughly 2014 through 2019, the rapid growth of domestic production helped keep global oil prices low by adding to total global production, translating into relatively low and stable gasoline prices. But the investors who financed this boom in oil production utilizing hydraulic fracturing (i.e., “fracking”) mostly lost money. And this experience made them reluctant to invest, even as prices rose throughout the first quarter of 2021.

Most importantly, an increase in U.S. production would do almost nothing to insulate consumers from painful price spikes that result from unanticipated geopolitical shocks like Russia’s invasion of Ukraine. As long as there are no significant barriers to exporting or importing oil, higher prices in Europe or Asia quickly translate into higher prices here. Short-term price spikes will continue to be a defining feature of the oil market, as they have since the 1800s. To be sure, higher levels of production, especially when paired with high prices, would bring major economic benefits to oil-producing states, notably Texas, North Dakota, Wyoming and Oklahoma. But this would not dampen the pain that drivers feel when they pull up to the pump.

A Better Way

So if increasing oil production and decreasing oil imports won’t provide a path to energy independence (meaning stable, economically viable prices), what would? In the long term, the only plausible path is for households and businesses to use less oil.

Policymakers have recognized this fact for decades. Regulations including the federal Corporate Average Fuel Economy (CAFE) standards for vehicles, the Renewable Fuel Standard requiring blending of biofuels with gasoline, tax breaks for electric vehicles and California’s Low Carbon Fuel Standard pushing electrification and new low-carbon fuels are all intended to reduce our reliance on oil. But these policies have, to date, barely scratched the United States’ exposure to global oil market price volatility. Since 2000, U.S. consumption of crude oil and petroleum products has consistently hovered around 20 million barrels per day.

Thomas A. Ferrara/Newsday RM via Getty Images

Our collective inability to reduce oil consumption is largely tied to our increasing appetite for ever-heavier vehicles (think large SUVs and full-size pickups). But hope may be on the horizon. The rapid decrease of battery costs is making real the promise of big, highperformance electric vehicles, while oil demand can be reduced through further improvements in engine efficiency and continued research into alternative fuels such as next-gen biofuels and emerging, seemingly magic technologies such as “air to fuels.”

Will these efforts yield true independence from the global oil market? Unlikely. Even under scenarios in which the world limits temperature rise to 1.5°C, oil consumption is likely to persist in the petrochemicals and heavy-duty transportation sectors for decades to come. Still, dramatically enhancing energy efficiency and rapidly deploying EVs would reduce consumption well below today’s levels, meaning that future price spikes would have a much smaller impact on consumers’ pocketbooks.

Clean Energy Co-dependence

Clearly, efforts to reduce oil consumption bring with them climate and other environmental benefits. Enhancing vehicle efficiency has obvious climate benefits, and electrifying transportation would also dramatically reduce emissions so long as electricity generation marches toward net-zero emissions. Taking the benefits of clean energy one step further, some advocates have argued that “real energy independence” can be achieved through the deployment of wind, solar, EVs and other clean energy technologies.

But let’s be clear: a clean energy future will not be an energy independent future. Whether it’s nickel, cobalt, “rare earths” or lithium, the minerals that underpin batteries, wind turbines and solar photovoltaic modules rely on global supply chains that are subject to market and geopolitical pressures parallel to those affecting oil. In fact, the production of some of these materials is currently far more geographically concentrated than oil. For example, almost 70 percent of the world’s cobalt is produced in the Democratic Republic of Congo, and more than half of the world’s rare earth elements are produced in China.

Moreover, it’s not just access to raw materials that will convey geopolitical power in a clean energy future. These commodities must be processed before they can be deployed. And today, an overwhelming portion of processing capacity for these critical minerals is located in China.

To be clear, there are important differences between supply chains for these materials and the global oil market. For example, once a household has purchased an electric vehicle, it would be insulated from the price volatility that a gasoline-powered vehicle faces, as electricity prices are — in most cases — stabler and more heavily regulated than gasoline prices. But disruptions in global supply chains, whether caused by natural disasters or geopolitical turmoil, could still send the prices of critical materials soaring, subjecting the deployment of new clean energy technologies to considerable price volatility.

Looking ahead, the Biden administration is seeking to boost domestic investment in the extraction and processing of these materials, and it has invoked the Defense Production Act to speed growth in this sector. Such actions may enhance resilience to future geopolitical turmoil and may position the U.S. to be a major player in the supply chains of a clean energy future. But walling off the U.S. from global supply chains in critical minerals is a bad idea for the same reason that walling off the U.S. from global oil markets is a bad idea. Isolation from these markets increases, not decreases, the risk of price volatility.

main topic: Energy
related topics: Geopolitics