Smoke and Mirrors in Energy Policy

by , June 13, 2012

Petroleum is always in the news, especially in an election year, when politicians fear that voters angered by high gas prices will do them in. In addition, much attention has focused on upcoming economic sanctions on imports of Iranian oil (which will soon be imposed by the Europeans) and on financial institutions in other countries that undertake transactions with the Iranian central bank to buy Iranian oil (which will be imposed by the United States) — in the quixotic attempt to get Iran to give up its nuclear program. This nuclear program would provide security and prestige to the radical but unpopular Iranian government. But blocking Iran’s oil from the world market would theoretically tend to reduce the world’s oil supply, thus causing the higher fuel prices that politicians fear most.

To get around this electoral problem and have his cake and eat it too, Obama has gotten a wink and a nod from Saudi Arabia, a major foe of Iran, that the desert kingdom will pump more oil onto the world market to offset the reduction in Iranian oil exports. In the end, however, a worldwide glut of oil may ensue, because trade embargoes, especially those on relatively fungible items like oil, are usually sieves, rife with opportunities for evasion. Iran will discount its oil, making the product difficult to resist for oil-thirsty economies in the industrializing world. Oil tankers will mysteriously change their destinations while at sea. Even prohibitions on financial transactions can be evaded — for example, China, the world’s largest customer for Iranian oil, can use channels to buy such oil that circumvent the Iranian central bank, thus providing a loophole for Chinese financial institutions to avoid being shut out of the U.S. banking system. The probable petroleum glut may become significant when lower demand from a slowing world economy is added to augmented Saudi production and surreptitious Iranian supplies

Severely leaky sanctions that fail to bite economically, however, may be a boon to the Obama administration. Because of the likely oil glut, the oil price will stay low for the election, while Obama retains the symbolism of “doing something” about Iran’s nuclear program.

In another example of the administration’s “smoke and mirrors” in energy policy, it has touted lessening U.S. dependence on foreign oil because of lowered demand from increasing auto fuel efficiency and because of the rapid rise of U.S. oil production (production has risen by a quarter in the last four years). And that is true as far as it goes, which is not far. Net imports of U.S. petroleum have been reduced from about 60% of total consumption in 2005 to just over 40% today. Yet protectionism (euphemistically called “energy security” or “energy independence”) is as economically inefficient in energy as it is in any other product. In a worldwide petroleum market, U.S. companies should buy from the cheapest source, no matter where the oil is produced. In fact, some new U.S. production may be sold overseas.

Even with American demand declining and domestic production increasing, however, it is unlikely that the United States will become energy independent anytime soon. Although this goal is one of the few things that both political parties can agree on, it is a canard and is not even desirable. No one ever tells American voters and consumers that energy independence, even if possible, would cost them dearly in inefficiency-induced price increases. Technology has increased U.S. production, but many overseas sources of oil are still cheaper than such domestic drilling.

Even for those politicians unable to shake the erroneous notion that oil is a “strategic” commodity coming to the United States from dangerous or unfriendly Middle Eastern countries, increased production in Brazil and from Canadian tar sands will render this notion obsolete. Contrary to popular belief, the United States doesn’t currently import that much of its oil from the Persian Gulf and will likely import less in the future as production in the United States and Western Hemisphere rises.

Therefore, given these facts, the American taxpayer and consumer should wonder why the U.S. spends inordinate sums on military forces to “defend” Persian Gulf oil and constantly meddles in the affairs of Middle Eastern countries.

Read more by Ivan Eland