Thursday, August 14, 2008

Energy Independence

Robert Higgs has a nice column on the folly of the notion of energy independence. Suppose we substitute bananas for energy:

If we were talking about bananas, everybody would see immediately the foolishness of seeking “banana independence.” Nobody would fall for half-baked arguments about our addiction to foreign bananas or our love affair with banana bread. It’s obviously uneconomic to grow millions of bananas in this country; it could be done, but doing it would entail much greater costs than buying them from producers in places better suited to their production (that is, places where they can be produced at lower opportunity cost).

The argument with regard to oil, or anything else, is identical.

Moreover, even if we produced all our own oil (or bananas) we would also have to erect a wall to prevent exports if we truly wanted to be insulated from what happens elsewhere. Oil is relatively easy to ship, so if prices rise elsewhere they are going to rise here as well unless exports are forbidden.

I think Higgs is wrong, however, when he writes:
The U.S. government may wish to exercise hegemony in the Persian Gulf so that politically well-connected big oil companies can reap a bigger share of the handling income from producing and transporting the Gulf oil (but if these companies didn’t perform these tasks, other companies would do so).
This confuses the source of oil company profits. Big profits arise when world oil prices rise because the companies produce oil as well as buy from OPEC. Hence, they earn rents on the oil that is produced at lower cost than what they must pay OPEC producers. They are the indirect beneficiaries of price increases because they have inventories of the commodity as well. Of course, if OPEC produced at full bore and drove prices down they would lose since most of their low cost oil was produced long ago.

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