April 1, 2012
Energy Self-Sufficiency
Energy Self-Sufficiency—Posner
The policy of trying to achieve economic self-sufficiency, thus eliminating the need for foreign trade, is called "autarchy" and is associated with warlike regimes, such as Nazi Germany, since war may cut off a nation from foreign markets in products essential to a nation's war machine. Germany made long strides toward energy self-sufficiency, essential to its blitzkrieg tactics, by manufacturing oil from coal; Germany had coal reserves in abundance, but no oil reserves. The only source of oil, besides its coal, that it could count on was the Romanian oil fields, and their output was too limited to supply the German military's fuel needs.
Autarchy is a very costly policy for a nation to pursue, because, to the extent the policy succeeds, the nation loses the opportunity to substitute foreign products for inferior or more costly domestic output. A nation that has no exports will have nothing to trade for superior or cheaper foreign products.
Nevertheless it can be sensible to be concerned about the reliability of foreign sources of commodities that are important to a nation's power or welfare. Most of the world's oil resources are owned either by unstable countries, ranging from Nigeria and the Sudan to Iraq and Iran, or by unfriendly countries such as Russia, or by countries that are both unstable and unfriendly, such as Venezuela, or by potentially vulnerable countries, such as Kuwait and the other Persian Gulf sheikdoms, and Saudi Arabia.
Anxiety about the supply of oil, coupled with increased demand by rising countries such as China, have driven oil prices very high. That is actually a good thing because it both limits demand and stimulates exploration and development, including development of substitute energy sources. High oil prices have stimulated increased U.S. production of oil, although it has left us far from self-sufficient—we still import about half of all the oil that we consume. And this despite the fact that for reasons that Becker explains, such as substitution of very cheap natural gas (very cheap because of increased supply attributable to hydraulic fracturing ["fracking"]) for oil in power plants, the economic downturn, and the high price of gasoline as a direct consequence of high oil prices, domestic demand for oil has declined.
Should we worry about our continued if slightly diminished dependence on foreign oil? Probably not. Advances in technology, which include fracking, which is used to increase production of oil as well as gas, and deepwater drilling, should offset supply interruptions caused by foreign oil nations' instability or hostility or vulnerability. Moreover, there are substitutes for oil and oil products as fuel and power sources, and the higher oil prices are, the faster those substitutes will come to market. Among attractive substitutes is simply less commuting—more working from home or living closer to work—and therefore less highway congestion, a negative externality. High gasoline prices, by reducing demand, have the same beneficial environmental effects as high gasoline taxes, which many economists recommend.
High gasoline prices may be a social boon, but they are a political problem. The contenders for the Republican presidential nomination are blaming those prices on Obama. They want the Administration to authorize more deepwater drilling and take other measures to increase domestic production. But unless those measures led to a significant increase in the world supply of oil, which is hardly likely, since the United States has only 2 percent of the world's oil reserves, oil prices and therefore gasoline prices would be unaffected because, as Becker explains, those prices are set at the intersection of global demand and supply.
Moreover, there is a difference between authorizing new drilling and expanding supply. If the authorization leads to new production sufficient to reduce oil prices significantly, further increases in production are discouraged. Lower prices make it more difficult to cover the costs of increased production, especially since those costs may rise as oil companies are forced to explore for and develop oil in less favorable terrain, as older fields become exhausted.
If we do wish to lessen our dependence on foreign oil, the best instrument is probably a tariff. A tariff would increase the price of imported oil, and therefore encourage more domestic production. Moreover, it would weaken oil exporters, by reducing their output (the United States is a huge market for foreign oil—it consumes about 20 percent of the world's oil, and half of that comes from abroad). It could actually lead to a reduction in oil prices. If a product has a positively shaped supply curve, meaning that the cost of production rises with output, then a reduction in output reduces the cost of production and therefore, given competition, the price.
Fracking and Self-Sufficiency in Gas and Oil-Becker
More or less every American president starting with Dwight Eisenhower, and prioritized by Richard Nixon, called for American self-sufficiency in energy sources. In fact, America is now about self-sufficient in natural gas, and America's oil imports have declined as a fraction of its total oil consumption from a peak of 60% in 2005 to about 50% in 2011. Part of the decline is due to the Great Recession's effects on US output and automobile use. Another part is due to rising prices of oil that reduced oil imports, but increased spending on these imports. A third and growing part is due to increased domestic production of oil and especially gas that is likely to continue to grow rapidly during the next decade. The main reason for the expansion in domestic gas and oil production is a technique called "hydraulic fracking". Texas wildcatter George Mitchell was the most important person responsible for the development of the fracking method to extract gas from shale formations in the 1980s. This method uses large quantities of water under high pressure with added chemicals to crack open rocks and extract the gas, and sometimes oil, hidden in these rocks. The cost of using fracking for natural gas extraction has become so competitive that most US natural gas production comes from fracking. As a result, the price of natural gas has fallen from a peak of about $10.80 per million BTUs to $2.20 currently. Instead of building terminals that could import liquefied natural gas, energy companies are now trying to export more natural gas. US natural gas inventories are so bloated there is a possibility that the price temporarily could be forced down toward $0, or even to a negative level. Traditionally, a barrel of oil has sold for about 11 times the price of a million BTUs of natural gas. During the past few years, rising prices of oil and declining natural gas prices have raised that ratio to almost 50.No wonder there has been a rush to substitute gas for oil in electric power generation and in other activities. Environmentalists have criticized the use of fracking techniques, and have pushed for bans or serious restrictions on their use. These critics claim that the techniques use too much water that could be used for other purposes, that it contaminates drinking water in areas surrounding fracking activities, and that it pollutes the air in surrounding neighborhoods. I am not in a position to authoritatively evaluate these environmental claims. However, the chairman of Chesapeake Energy, a major fracking company, recently argued in a Wall Street Journal interview that fracking does not use so much water, and that in any case the company in most of its operations now recycles 90% to 100% of the water it does use. Furthermore, the EPA just dropped its claim that a different energy company contaminated drinking water in Texas. This is the third time in recent months that the EPA backtracked on claims that link fracking to pollution of surrounding water supplies. The size of the effects of fracking on air pollution is still an open question as the debate continues over this and other environmental effects of fracking. Some political leaders have proposed a very bad idea:to restrict American output of oil and gas to use by American industry and consumers. If such laws were enacted and yet the US continued to import oil from abroad-which will be the case for the foreseeable future- restricting US production of oil to American use would have no effect on the domestic price of oil. The reason is that the global oil price would then determine domestic prices since no one would buy domestic oil if it were more expensive than imported oil, and no one would use imported oil if it carried a higher price than domestically produced oil. On the other hand, suppose domestic production was so large that oil imports were unnecessary and exports of oil were prevented. Then domestic oil (along with natural gas) would sell below the world prices for these fuels. This would be bad for the domestic oil and gas industry because it would be forfeiting profits from selling some of its production abroad. Moreover, the relatively low domestic prices of these fuels would encourage greater domestic use that would lead to more pollution, although cleaner gas or oil would be substituted for dirtier coal in the production of electric power and in other uses. Fracking has made the US self-sufficient in gas, and it is leading to reduced imports of oil. If this progress continues, before too long US consumption of oil as well as natural gas would not be drastically affected even by an entire breakdown of imports from the Middle East. The early progress in fracking techniques was very much aided by federal support and the work of engineers in the Energy Department. However, fracking was made into a profitable technique mainly through the ingenuity of people like George Mitchell in search of financial gains from finding ways to expand domestic production of gas and oil.