When gas prices first started going through the ceiling earlier this year, I was asked about writing a column to explain why. Energy, commodities, and economics are not really my area of expertise, but I did ponder the issue for a while. My thoughts are in a recent column for The Villager.
The United States is the largest oil producer in the world. That might be hard to believe when you’re at a gas station, filling up and watching helplessly as those numbers scroll by. In fact, according to the US Energy Information Administration, America produces nearly double the oil output of its next closest competitor, Saudi Arabia. Thus, when news broke that OPEC, the multinational cartel of oil producing states, announced a cut in daily production of two million barrels, many Americans wondered how that would affect prices at the pump.
Because it’s election season, the price of gas leads to soundbites from candidates who use the oil industry as a campaign issue. Whenever politicians and pundits talk about oil and gas, someone inevitably uses the term “energy independence,” suggesting the United States could free itself from imported oil. However, because oil is a global commodity traded by international corporations, the belief that America could keep all domestic oil and be independent of foreign imports might be a myth rather than an accurate description of oil economics. As one graduate student at Princeton studying global finance and statistics told me, “commodity markets are complex beasts.”
However, regardless of whether energy independence is viable, he does believe “it’s important to have a diversified stream of generally friendly energy suppliers, the friendliest of course, being America herself.” The problem is that while America produces the most oil, it also consumes the most, and it will never produce enough domestic energy to meet its daily needs. Even if it could, oil would not stay within domestic borders because it goes wherever markets demand it. Guaranteeing the oil stays domestic would mean nationalizing the industry, and no one wants that. Even in countries where the industry is owned by the government, there are still exports and shortages. In fact, the Iranian government claims it pursues atomic energy because it exports much of its oil.
Shannon Osaka of the Washington Post reports, “even if U.S. production exactly matched U.S. demand, the country would still be importing and exporting oil constantly. Crude oil can be heavy or light, sweet or sour, and those qualities affect how much it needs to be refined and for what uses. U.S. oil companies constantly export crude oil and import refined oil, and vice versa.” Obviously, oil is an international commodity bought and sold across national boundaries. Thus, it’s somewhat of a myth to believe the United States would or could ever drill and refine all the oil it needs, effectively eliminating a need for imports and achieving what the public is told is “energy independence.” Osak also notes that while President “Biden has urged oil producers in the United States to drill more to help lower prices, the president simply doesn’t have authority to order companies to produce more. And oil companies, recently burned from price crashes in the beginning of 2020, are hesitant to repeat the same mistakes.”
Dan Haley of the Colorado Oil and Gas Association often uses the term “energy security,” as opposed to independence. It seems more accurate to develop policies around being “energy secure.” Haley explains that “For many people, energy independence means domestic energy production – the need for the United States to produce more of its own resources so we can rely less on foreign countries.” And the issue is not simply producing oil, but turning that raw material into usable consumer products. Haley points out that “our refineries were built at a time when we were importing more foreign crude, and they are designed to process that type of oil. I don’t believe we have built a new refinery in this country since the 1970s. So we will always rely on a certain amount of foreign oil, but the idea is to rely on trading partners and allies, not those who are hostile to our country.”
In terms of the global market and America’s role, the supply/demand of oil is truly a “complex beast.” America has been exporting oil for many years, even when supply seems short and prices at the pump skyrocket. That can be troubling for consumers to understand. Regardless, in talking about the health of the domestic industry, Haley explained that “In 2018, the U.S. became a net exporter of energy, and I think that’s good for the world.” I think we can all agree with Dan on that one.
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