Wizblog

Oil and Energy Independence

Two recent articles dealing with the mixture of oil and politics agree on at least one thing. John Kerry's "plan" to achieve "energy independence" is considered a joke by anyone with a passing knowledge of the energy industry. From an NRO commentary by Jerry Taylor:

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.

Irwin Stelzer outlines key points in the Kerry plan with a similar conclusion:

Kerry is proposing to denude American dinner tables of corn by converting the nation's crop to expensive methanol, along with somehow forcing consumers to pay for expensive solar power, and effectively foreclosing the nuclear option by opposing a bill he once supported that would create a storage site for nuclear waste in Nevada's Yucca mountain, a state with five up-for-grabs electoral votes. How this will allow Kerry to achieve his stated goal of "energy independence" remains a mystery to all serious observers of the energy scene.

Where the two writers part company somewhat is on the issue of whether or not the political motives of oil producers trump their economic/profit motives. Taylor says that has never happened, at least within OPEC:

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.

Stelzer looks at the political situations in three key oil-producing nations and says that, if political considerations haven't trumped economics before, they are about to start:

Unfortunately, concentration on daily price movements diverts attention from the more threatening changes taking place in oil markets.

Most important is the realization by consuming countries that the internal political dynamics of their producer-suppliers trumps the needs of customers every time. Consider three of the world's largest producers, sitting on some 40 percent of the world's reserves: Russia, Saudi Arabia, and Venezuela.