Copyright by John T. Reed

Every president since Nixon has promised to make American energy independent. None has made the slightest progress toward that goal. Tens of billions of taxpayer dollars have been wasted in the process.

Energy independence is an idiotic goal. Please stop this insanity immediately.

Energy independence means getting 100% of our energy from within the borders of the U.S.

Outlaw imports

OK. Easy solution. Outlaw all imports of energy.

Why not? At present, that would create an instant, severe energy shortage and the cost of most forms of energy and energy conservation would immediately shoot upward unless the government imposed price controls. If they did impose price controls, there would be even more severe shortages and rationing and bribes to buy energy and waste of energy by those who could get it because of its artificially cheap price.

Alternative energy

So why not develop forms of energy other than fossil fuels?

Be my guest. There is no law against your trying to do that with your own money.

What’s that? You don’t want to use your money. You want to use my money and the money of other taxpayers.

No, thanks.

Why not?

Buy from the lowest bidder

Non-fossil fuels do not make economic sense. Not even close. There is a basic best practice of business and personal finance here.

Buy fungible goods from the lowest bidder.

Fungible means things where each one is the same as any other. A bushel of wheat is a bushel of wheat. A barrel of oil is a barrel of oil. Since they are all the same—no quality difference—you buy the cheapest. Imported oil from Canada and Latin America is cheaper than oil from anywhere else for Americans (because nearness lowers transportation costs). So we get our oil from the U.S., Canada, Mexico, Venezuela, and other Latin American countries.

Could we get more oil from within the U.S. borders?

Drill, baby, drill

Sure. Lift the bans on offshore drilling, ANWR drilling, and development of oil shale and such in the U.S.

Why aren’t we doing that? Because environmentalists—reds disguised as greens—hate burning fossil fuels. It’s sort of a religion with them. But they’re OK with wind and solar and geothermal.

So why don’t we use those?

Extremely expensive

Laws of physics and economics. They are extremely expensive. Those sorts of energy cost orders of magnitudes more than a barrel of oil pumped out of the ground.

Solar only makes economic sense where there is no utility electric and you can tolerate cloudy days—namely remote locations like buoys or emergency interstate highway phones. Solar also works in space. No cloudy days there.

But if you use it on earth at your home or business, you will be paying far more for electricity than if you plug into the wall. Taxpayer subsidies may hide the total actual cost from ignorant solar users, but when you add up all the money and energy it takes to produce a kilowatt of active solar electric, it makes no sense with current economics.

Ditto wind.

I do not know enough about geothermal to comment on it here. See my other web article about energy policy.

Independence

What about the whole idea of independence?

If commodity independence is good, why just energy independence? Why not, say, banana independence, too?

I’m not sure, but I suspect we would have to build a lot of greenhouses or turn a lot of Hawaii into banana plantations to achieve banana independence. Why are we not spending billions to do that?

There is no meaningful difference between oil and bananas. We need both. The reason we seek energy independence and not banana independence is because a number of oil producing nations constantly wave their fists at us. The various banana republics do not. So what are we? 11-years old? Sticks and stones.

Ignore the Arabs and Iranians. If it makes you feel any better, their oil actually goes to Europe. Costs too much to ship it across the ocean.

How about everything independence? Let’s outlaw all imports. Buy American. Let the Arabs eat their oil instead of using our money to buy caviar. We more or less did that during the Great Depression with the Smoot-Hawley Tariff. Almost all economists think those tariffs made the Depression deeper and longer. Many think those tariffs caused the Depression. I think Smoot-Hawley caused the stock market crash, then extremely stupid reactions by the Federal Reserve and Hoover and Roosevelt administrations made it deeper and longer.

The biggest argument against energy independence is anything independence hurts the U.S. Smoot-Hawley was a-lot-of-things independence and crushed the whole economy. Energy independence is Smoot-Hawley for energy and energy is far more important nowadays than it was during the Great Depression when few owned cars.

On the Principles of Political Economy and Taxation

Economist David Ricardo wrote a book called On the Principles of Political Economy and Taxation in 1817. The book is most famous for its discussion of the the comparative advantage of nations. Michael Porter, a Harvard Business School professor wrote a book called The Competitive Advantage of Nations which said similar tings. My Succeeding book says to assess your personal strengths and weaknesses and resources and choose the goals and paths to achieve that best match your strengths and weaknesses. Basically, the whole world is better off if there are no barriers to international trade like tariffs.

Economist Milton Friedman used to use a #2 Dixon-Ticonderoga pencil to illustrate the point. Its component parts—cedar, graphite, clay, rubber, brass, and yellow paint—came from a number of different countries. He said you could make such a pencil from all U.S. parts, but it would have lower quality and would cost more. The same is true of everything including energy.

Today, we have lots of artificial things that give various nations comparative advantage. For example, we can make cotton underwear just fine with all U.S. materials and labor. But our underwear these days comes from Latin America. Why? We have given those nations artificial advantages over U.S. cotton, rubber, and labor because we have enacted of some of the world’s most extreme environmental and labor laws. U.S. textile workers demanded to be paid more in wages and benefits, so they got fired and the U.S. textile industry, which was quite strong a century ago, pretty much disappeared.

Our dependence on imported oil stems, in part, from the same sorts of artificial problems: restrictions on drilling and refining, high U.S. wages and benefits for energy workers, extreme environmental rules, and so on. The main reason to get oil from other countries is that they have a lot of it that can be extracted and refined relatively cheaply—more cheaply than the extra cost added by transporting it from the country in question to the U.S.

If your neighbor, say Canada, can produce oil cheaper than you, you buy oil from your neighbor. If you can produce cotton cheaper than your Canada, he buys cotton from you. It’s common sense. It’s better for all concerned.

Biggest wealth transfer

T. Boone Pickens and others point out that the money we pay for imported oil is the “biggest wealth transfer in the history of the world.”

1. I would like to see the precise definition of wealth transfer and the calculations.

2. So what?

If Canada and our Latin American oil suppliers are selling it to us cheaper than we could get it anywhere else, what kind of idiots are we to want to pay more for it? If buying oil from Canada and Latin America is the biggest wealth transfer in the history of the world, wouldn’t buying from U.S. alternative energy suppliers only be an even bigger wealth transfer from consumers to whomever the suppliers were? Why in the world would you want to replace the biggest wealth transfer in the history of the world with an even bigger wealth transfer—especially when the wealth in question is yours? It’s a classic case of cutting off your nose to spite your face.

But the alternative energy providers are Americans, you protest.

What’re you? A racist? Are you discriminating by national origin?

Actually, you are both. That’s illegal in many contexts. If you are spending other people’s money on unnecessarily expensive energy, you are probably illegally violating your fiduciary duty to get the best price. Overpaying an American instead because you like his race or country better than the cheaper suppliers would not get you very far in court as defenses.

The question is which approach transfers the least wealth out of your pocket. How much wealth that course of action transfers into someone else’s pocket is irrelevant.

But, you say, al Qaeda and the Taliban are using our money to buy weapons to kill our guys in Iraq and Afghanistan. Yeah. And we are using their oil to transport weapons and men to kill al Qaeda and the Taliban. It’s a wash. It’s irrelevant.

What about U-boats sinking our tankers?

What about World War III? We can’t rely on oil tankers from the Middle East can we?

No, of course not, the German U-boats will get them.

Once again, we do not import oil from the Middle East. We get it from Canada and Latin America.

Secondly, World War III involves nuclear-tipped ICBMs flying over the oceans. Oil is irrelevant.

Our recent wars like Vietnam, Desert Storm, Iraq, and Afghanistan are against countries who do not have submarines or planes or would not have them for long if they tried to sink our oil tankers.

Countries like Germany in World War II and South Africa under Apartheid sanctions created their own synthetic oil from coal. It was called Sasol. It is still being made and sold in South Africa. The U.S. has lots of coal we could make Sasol from in an emergency. We would also probably open up off-shore drilling, ANWR, and shale in the U.S. if we had trouble getting oil from abroad.

Could we do that overnight? No. But the civilians could do without while the military got priority.

Would it be nice to be energy independent via lots of nuclear power plants, using our natural gas for transportation fuel, and so on? Yes. But the cost is monstrous.

OPEC boycott of western oil importers like the U.S.

Another fear is that Middle East oil exporting countries will cut us off and destroy our economy. That has an effect like German U-boats sinking oil tankers. Many older people think it happened in 1973 and 1979. During those years, we had to sit in long lines at gals stations to get gasoline. Gas stations would put up a red flag if they had no gas and a green one if they had gas. People would fill up when they only needed an 1/8 of a tank because they were afraid they would not be able to later if they passed up the chance.

The public thinks this was caused by the oil exporting Arab countries proclaiming oil embargoes in those two years because of western support of Israel. Politicians were going to jail the American oil company executives. In fact, after the crisis ended overnight—because Energy Czar Bill Simon wiped out the government price controls and allocations system overnight—the various investigations were completed. The results were quietly released. They said the price increases and shortages were not caused by either the Arabs or the oil companies. Rather they were caused by the U.S. government panicking and imposing price controls and government allocation to each gas station.

One big piece of evidence was that neither Germany nor Japan—both targets of the Arab oil embargo—ever had lines at their gas stations. At that time, The U.S. was the second biggest producer of oil in the world after Saudi Arabia. Germany and Japan produced zero oil. What was the secret of no gas lines in Germany or Japan? They did not interfere in the free market. No price controls and no government allocating gas to every gas station.

If you think it through, you realize neither the oil companies nor the Arabs can withhold oil from the U.S. Pay attention and I will give you a kindergarten explanation.

1. Oil is either in the ground or in the world market. No oil company or nation can embargo or withhold oil from a particular country. Once they sell it to anyone, it will end up being sold to the highest bidder wherever that bidder is in the world. If there is a shortage anywhere in the world, that place will be the highest bidder.

2. The nations that do not like our policies or religion or lifestyle cannot leave the oil in the ground. Why not? They are as addicted to the money we pay them as we are to the oil they sell us. The citizens of those countries would riot if they were suddenly forced to become poor to spite the U.S.

3. The harm done by leaving the oil in the ground would hurt those at both ends of the oil transactions precisely equally. Those on the oil buying side would scramble to find ways to do with less oil from the country in question by finding more elsewhere, taking mass transit, wearing sweaters at home, and so on. To an extent, the oil selling country in question would permanently lose some of their market with the result that when they resumed selling oil to whomever at the world price that price would be permanently lower. During the period of leaving the oil in the ground, the oil producing country and its citizens lose all that revenue and the related jobs.

4. Cartels always break down in terms of discipline. The cartel decrees that each country may only sell X amount of oil. Inevitably, some countries are less able than others to do without the oil revenue. So they cheat by secretly selling more oil than they are allowed to sell, or they openly flout their allowed quantity. If the rest of the cartel maintains its discipline, the cheater-flouter actually makes more because less supply means higher price. Some oil-producing countries, like Canada and the U.S. and Norway are not in the cartel. They can and do step up their production of oil during boycotts because the higher price justifies opening wells that had been closed, new drilling, and so on.

Basically, the fear that oil-producing countries that “do not like us” can hurt us by withholding oil is nonsense. Any attempt to do that will hurt themselves at least as much as it hurts the rest of the world. Just as trying to become energy independent is our cutting off our nose to spite our face, so is oil-producing countries leaving oil in the ground cutting off their noses to spite their own faces. It’s dumb, and when the emotion of the moment passes and the lack of revenue starts to be felt, cooler heads prevail.

Wars that disrupt the production or transportation of oil do indeed raise prices temporarily. But the cost of that is finite. We cannot justify infinite expenditures on alternative energy to protect ourselves from such problems. The proper solution to that risk is hedging in commodities markets, the strategic petroleum reserves, contingency planning, and so on.

Becoming energy independent because there are occasionally wars that disrupt oil flow is like moving the population of earth to mars to avoid earthquakes. Better building codes and earthquake insurance are far more sensible and feasible risk management techniques.

Running out of oil?

What about the “fact” that we are running out of oil?

I tried to research that once. Turns out, we never run out. When it starts to become scarce, the free market raises the prices. That, in turn, causes people to work harder to find new oil and work harder to figure out new ways to extract it. Higher real prices also cause consumers to search for ways to use less of it like higher mileage cars, working at home, video conference calls instead of in-person meetings, and so on. Bottom line, we never run out.

Think about it. We have never run out of any commodity in the history of the world. [Note: A reader says that’s incorrect, then lists animal species—two types of elephant—that went extinct. Not analogous. Cavemen apparently taxed themselves enormously to develope alternative, hybrid elephants. And I do not believe oil is covered by the Endangered Species Act.]

I know that oil production in the U.S. peaked, then started falling. But was that caused by running out of oil—or environmental restrictions on drilling? Other oil fields have peaked then declined in Texas, the North Sea, etc. But if you look at the proven reserves worldwide figures, they seem constant since around 1948. We use some. We find some. And so it goes.

I predict that as the real (after inflation) price goes up, the world will gradually, imperceptibly switch to non-subsidized, non-mandated alternatives and technology will find more efficient ways than continuing to use increasingly expensive oil.

150 years ago, we were harvesting whale oil for lantern purposes. We never ran out of whales. We switched to a more efficient oil: petroleum.

Former OPEC oil minister Sheikh Yamani said, “The stone age did not end because we ran out of stones.” True. And the oil age will not end because we ran out of oil. It will end because we switched to other things naturally, not artificially because of federal subsidies and mandates. The free market will take care of it at the appropriate time. The government will try to do it too soon, and waste our money in the process—as it has been wasting our money on this pusuit of the non-fossil Fountain of Youth since the Nixon Adminisration..

Trading partners

I read a very persuasive article somewhere—maybe the Economist—that said the trade between the oil exporting countries and the U.S. and its non-oil-producing allies actually had made the world a safer place. Very simply, the fact that we are their customers and they will get real poor real fast if they do not sell us oil causes the Arabs and Persians to moderate their behavior toward us. You may say it’s not enough, but it’s more than it would be if they had no need whatsoever of us.

Similarly—and no American would doubt this—the U.S. is more careful when making decisions about relations with oil-producing countries than we are with countries that sell us little of value.

That incremental care we show toward each other’s nations because of the oil supplier-customer relationship is a very good thing when you stop and think about it and research it.

I appreciate informed, well-thought-out constructive criticism and suggestions.

John T. Reed