I have been working on this piece since November 30th. I wrote the bulk of it on the first day, and most editing since has been cosmetic. It is related to a project I am helping a friend with, although that is not the reason I wrote it. I don’t often blog about things that recently happened, and when I do bring up current events it is usually in a very general way. The same is true about this post as well. Still, gas prices have been falling, where I’m located at least, ever since before Thanksgiving. A gallon of regular has been stuck at $2.94 for a week or more now and I begin to wonder if they’re not ready to go back up again. Mentioning that is the best I can do to tie to any recent goings-on to the material below, which I hope you, the reader, enjoy, as it is my very first official Notes on Liberty contribution. Thanks again, Brandon, et al.

What’s so bad about Energy Dependence?

Contrary to what one might be led to think, energy independence need not be the opposite of energy (inter)dependence. Likewise, contrary to what many advocates of free markets and free trade will say, energy dependence (perhaps not their choice of words), is not a good thing. Energy interdependence certainly can be a good thing, but in today’s world I can’t agree that every instance of it always is.

The argument in support of energy interdependence runs, energy is cost-effective so long as it is abundant, therefore, the more suppliers of energy we have, the better. But the statement can also lead to another conclusion: therefore, the larger the size of the supply, the better. What this should mean is a very large domestic supply is as good or better than simply a large foreign supply. This does not mean they aren’t both good. And of course, the more suppliers there are the greater the potential for competition to lower prices, but I suspect that it is much easier to get competition amongst a few suppliers in a free (well, sort of) country than it is to get competition amongst several suppliers in an unfree world.

Now, I have painted the picture to seem as though there is great disagreement amongst pro-market, pro-trade groups and individuals. This is not necessarily the case. What I think the problem is, is that there is a simple misunderstanding. And that is that, when some people (myself included) say “energy independence,” we do not mean “energy isolation,” we simply mean “not energy dependent.”

There is a difference between being very (or entirely) dependent on foreign oil (bad because of the word “dependent,” not the word “foreign”), and merely having foreign oil as part of the larger energy supply (good). By the same token, there is a difference between being very (or entirely) dependent on domestic oil (bad, again, because of the word “dependent”) and having access to domestic oil (good), something we (as Americans) do have, but that which there could be much more of, provided much more efficiently and inexpensively than that it is when (and here is another reason to reject foreign energy dependence) provided by chosen winners such as international oil cartels and transnational oil corporations, who have, it seems, with the help of the military and monetary might of the world (particularly the United States and its many proxies), fixed the price of oil, both inadvertently (the hitherto unforeseen effects of certain policies) and intentionally (by literally stamping out competition through “legal,” or even illegal yet undetected, means).

How do you know I am not exaggerating the Problem?

So you know I am not, here is some data and some numbers crunching, and a few conclusions:

In 2011 the United States imported 3.261 billion barrels of crude oil and (in terms of the crude oil equivalent, I presume) 0.938 billion barrels of other petroleum products for a total of 4.199 billion barrels. In the same year the US produced 2.o61 billion barrels of crude oil and exported 1.09o billion barrels in crude and crude equivalent of petroleum products (these refined products would have originated from both domestic and imported crude). I am having trouble finding all of the numbers, but 2011 was the first year in 60 that petroleum product (rather than crude) exports exceeded petroleum product imports. To me this means that the vast majority of what the US exports is refined petroleum, not crude, because almost all of the exported 1.090 billion barrels (of crude and petroleum products) would have to be refined petroleum in order for it to be more than the 0.938 billion barrels of refined petroleum that is imported. Use of crude oil and petroleum product by the United States, defined not just as domestic consumption (because it is arbitrary to say that refinement for the purposes of trade on the international market does not constitute domestic use at a higher order) is therefore at 6.260 billion barrels, 82.59% (5.170 billion barrels) of which is domestically consumed. From these numbers, assuming imported and domestically extracted crude are refined and exported in the same way and at the same percentages (which is not necessarily the case, so there is a possible margin of error), it seems that the United States keeps 1.703 billion barrels of domestic oil and 3.468 billion barrels of imported oil for domestic use. Meaning, at the end of the day, in terms of finished product, the United States relies heavily on imported petroleum products. Now admittedly, a lot of this comes from our friends and allies, many of whom are as free trading and free marketing as can be hoped within a clearly distorted marketplace, but a lot of it still comes from thugs and racketeers (my choice of words). The truth is that we are dependent on crude oil in general, not just foreign, not just domestic, not just from friends, not just from foes. But we are exceedingly dependent on that which comes from the thugs and racketeers (transnational cartels, state-owned companies).

Source: U.S. Energy Information Administration, Petroleum Supply Monthly.

Notes: Net exports equal gross exports minus gross imports. Negative net export values indicate net imports.

What are some solutions to Dependence on Foreign Oil (and Oil in general)?

1. Drill here, drill now.

I hate to sound crass, but it gets the point across. And that’s just oil. Natural gas, coal, and nuclear energy face similar obstacles. Virtually unobtainable permits, the bureaucratic run-around, Federal land and “nonprofit” land-grabs, copious and unnecessary environmental and energy regulations, etc.

2. Get rid of subsidies.

Whether for frivolous (or downright useless in some cases) forms of energy such as solar, wind, and biomass, or for modes of energy that don’t really need them (but have them anyways because they are essentially kickbacks), such as crude oil, natural gas, coal, and nuclear, just get rid of the perverse incentives already.

3. Repudiate the price fixers and restore market certainty.

Whether cartels or state-sponsored corporations, the best way to do this is not by refusing to do business with them (because there is always the risk of causing a disastrous dearth in supply), but by allowing for competition. Some of this would already be accomplished by cutting back on domestic regulations and removing the moral hazard of subsidization. But there is more to the near stranglehold on the US by these thugs and dictators than their monopolistic power over oil.

I am informed by Richard Muller’s Energy for Future Presidents that other forms of energy currently cheaper than gasoline (especially other fossil fuels; natural gas and coal) are held hostage by countries like Saudi Arabia. Right now, the United States has 100 years worth of transportation energy infrastructure based on extracting, refining, and shipping petroleum. If the energy industry was to risk modifying or replacing this infrastructure to accommodate other energy sources (it would be profitable to do so as there is demand for cheap energy, and the supply of domestic conventional oil has a much shorter lifespan than natural gas or coal) there is a chance (more than speculation, mind you; there have been veiled threats) that some of the nations the US is dependent on would lower the price of crude (it only costs $3 per barrel to extract in places like Saudi Arabia) to below the price of the energy sources that were previously cheaper than crude, thus ruining investments in that new infrastructure. So the artificially high price in gasoline could in theory trigger a bubble in the other fossil fuels, that could be burst whenever OPEC or OAPEC saw fit (like when they saw their profits being dried up by the stiff competition from other energy sources). Fortunately (though the overall situation is unfortunate), the industry is aware of this possibility and knows better than to pour capital into uncertain lines of production. That is not to say that natural gas or coal are being ignored, but just that transportation energy infrastructure is being converted much more slowly than it otherwise would be.

4. Reform the military/monetary regime.

Have you ever heard the term “petrodollar”? I admit I like to use it as a tagline a lot. It sounds like something Michael Moore would say, but even the fat filmmaker hasn’t a clue what it really means. The United States has a history of intervening in other nations (often Muslim or Arab nations) to strong-arm them, and on a few notable occasions, 1939-1945 World War Two (Don’t believe me? Then study our antebellum relations with England, the Dutch government in exile, China, Australia, and Japan and the events leading up to Pearl Harbor), 1953 Iranian Coup, 1980-1988 Iran-Iraq War, 1990-1991 Persian Gulf War, 2003-2011 Iraq War, 2011 Libyan Civil War (perhaps), the reason was oil and later oils’ link to the US Dollar. So is it any wonder that these cartels stay together through thick and through thin? Sure, there’s greed involved, but it also serves the purpose of creating a power bloc that the United States cannot openly defy without risk (i.e., they need to pick sides carefully, like Kuwait and Saudi Arabia against Iraq in the Persian Gulf War).

For example, look at the events of 1973/1974 when OAPEC (Egypt, Syria, Tunisia and the Arab member-nations of OPEC, which was founded in 1960 to “compete” with the Seven Sisters oil companies, transnational corporations of Anglo-American origin, foisted upon the Iranians in 1953), retaliated against the United States for its aid of Israel in the Yom Kippur War by proclaiming an embargo and cuts in the production of oil.

Separate from this, more disastrous, and earlier (August 15 1971, the day that launched Ron Paul’s career, no less), Richard Nixon, in response to rising unemployment and high inflation rates, unpegged the dollar from gold, whereupon OPEC pegged oil to gold (but later pegged it exclusively to the US Dollar, 1975). At the same time he instituted price controls on imports, including crude oil, which gave cause to large oil companies to decrease already constricting supply, leading to shortages. In December, 1971 negotiations known as the Smithsonian Agreement, the international exchange rate was adjusted and the dollar devalued.

The combined result was the 1973 Oil Crisis, which contributed to the 1973-1974 stock market crash.

The US Dollar is currently the reserve currency of the world due to its tie to the price of oil (and were it not for this would likely be in free fall). If recent actions by Russia, China, India, Pakistan, Iran, Japan (and before them the unsuccessful Iraq and Libya) are any indication, this will not last much longer. Better for it to be reformed away gradually by deemphasizing foreign energy, unentangling ill-founded alliances, and opening the doors to stronger, sounder currencies not in need of life-support in the form of reserve-status than to one day wake up and find the whole world has lost confidence in the dollar and won’t accept it, thereby forcing energy “independence” upon us on someone else’s terms.

5. Restore and enforce private property rights.

A thing like the Keystone Pipeline XL expansion, as planned, might not make it under this scenario. But assuming there would be less government intrusion into the plans of the companies behind it, it might still be possible. The route as well as the methods by which some land is appropriated would have to change, of course. Likewise, the necessity of such a pipeline may increase or decrease such that new incentives might make it prudent to either go through with the project or cancel it. If some sort of energy independence (again, defined as “not energy dependent”) is achieved, a Keystone Pipeline XL expansion type project might not even be necessary in the future. On the other hand, such projects may be even more needed, which would increase not only the desire of the companies behind them to comply with property rights (by literally going around those who refuse to sell and buying land from those who are willing to sell only at higher than usual prices) in order to get the pipeline through, but also the desire of property owners to comply with the wishes of the companies (by selling at all or by selling it cheaper than they otherwise might have done because they see the pipeline as a benefit in and of itself).

An extension of restoring and enforcing property rights, though somewhat peripheral, is to lower taxation, and in some cases end it. Taxation (and regulation, that is taxation that produces revenue for no one) is little more than a burden, on the victims short-term, and, indirectly, on the supposed beneficiaries, long-term. That is not to say that no tax has ever funded a purposeful endeavor, but just that, in addition to the fact that taxes decrease incentives to produce, the things they are intended to fund may be best left to some other means (the private sector, voluntary user fees, charity). It doesn’t take an economist to figure out that lower taxes (and less regulations) on energy producing companies and laborers lead to more production of energy and that lower taxes (and less regulations) on energy consuming entities and persons lead to more demand for, and thus increased incentives to produce, energy.

What about Depletion of our Natural Resources?

First, an anecdote. Back on the tenth of June a good friend (who was at that time contemplating making a documentary on environmentalism and energy development) and I were talking about the fallacy of running out of energy just because all the oil is consumed. We were mainly just shooting the breeze, having a few laughs (I recall that we each had at least one beer in our system), so I said, half-joking, something along the lines of, “Well, that’s just like a caveman worrying about future generations of cavemen freezing to death because he thinks the supply of rocks he and the rest of the current generation is using to produce fire (by banging them together over some kindling) might be running out.”

In other words, the fear of depletion is absurd. Not because a given resource can’t be depleted (though some really are unlimited), but because of the incentives (to survive, to live inexpensively, to make a few bucks) that will arise when depletion is in sight (or rather likely long before that due to entrepreneurial vision), that resource will be replaced with something else, and likely something better.

I suspect that long before man’s relationship with conventional oil or coal is on the rocks, he will have made good use of natural gas, other sources of oil, and nuclear. Who knows, maybe even wind, solar, and biomass will be willing and able to pull their own weight someday.