How conservation could actually make us--gulp--even more reliant on foreign oil.
(FORTUNE Magazine) – EVERY
ADMINISTRATION SINCE Richard Nixon's has railed against foreign oil--at least
when prices are high. President Bush recently called our dependence on the
stuff a "foreign tax on the American dream." Indeed, the promise of
energy independence helped the Energy Bill land on President Bush's desk at the
end of July. As Senate Majority Leader Bill Frist chimed in, "When we rely
on other nations for more than half our oil supply, we simply put our security
at risk."
A basic tenet
underlying such comments is that, quite apart from the need to stimulate new
domestic energy sources, we must reduce our overall demand for oil if we are to
reduce our dependence on foreign sources of the stuff. To that end the bill
provides more than $1 billion of subsidies for hybrids and home energy
conservation. But there's a problem with this line of thinking. It ignores the
way oil pricing really functions, and put simply, it won't work. The costs of
pumping oil in the U.S. are among the highest in the world, and the costs in
the Middle East are the lowest. So in fact any significant reduction in U.S.
demand would hit domestic sources hard but do little to change the amount of
foreign oil we buy.
At first glance,
weaning the country from foreign oil through conservation seems
straightforward. The U.S. imports about 25% of its oil from OPEC. Reduce demand
25%, and we could cut OPEC loose. Though consumer-goods analogies are
imperfect, think of the oil market as a bit like going out on a hot day with
sodas you bought at the grocery store for 50 cents a can, when they cost $1 a
can from a vending machine at the beach. If the grocery store is the domestic
supply and the vending machine is the foreign, then reducing demand for soda to
the number of cans you brought yourself will end your dependence on foreign
soda. But unfortunately, it wouldn't be the OPEC oil we would stop buying if
our demand fell. In today's oil market, it's as if the grocery store sodas cost
50 cents but the vending machine sodas cost only 10 cents. In that case, reduce
the demand for soda enough, and you will stop buying soda from the grocery
store entirely. You would buy cans from the grocery store only if the vending
machine couldn't serve all your needs (or if a cartel of vending machines was
restricting production, as it were).
In the world of
oil, we're the proud sellers of some very high-priced soda. Most oil that was
cheap to produce from the U.S. was used up long ago. Today the largest
potential sources of oil in North America, be they the shale deposits in Utah
and Wyoming, the oil sands of Alberta, or the deep-water offshore pools in the
Gulf of Mexico, are all much more expensive than the cheap oil coming out of
the Middle East. Our average production costs in some places are as high as $15
per barrel. Cost estimates for places like Iran and Saudi Arabia go as low as
$1.50 per barrel.
If U.S. demand
(which is the largest of any country in the world) falls substantially, it will
drive down oil prices. When prices are low, many U.S. oilfields become too
expensive to keep open. That is why our lowest share of foreign oil imports in
the past three decades came in the early 1980s--when oil shocks drove prices to
record highs and encouraged development of the higher-cost U.S. sources.
Without question,
driving down oil prices by reducing our demand could reduce the total amount of
money going to the Middle East. We should be aware, though, that this reduction
will cause far greater damage to the world's high-cost producers of oil, such
as those in the U.S. than it does to OPEC, and there is little chance it will
reduce the share of our oil that comes from abroad. If we are to seriously
contemplate lowering our dependence on foreign oil, we must find a way to
reduce the cost of producing alternative energy sources. Hopefully, sources
like wind, solar power, or hydrogen fuel cells will eventually get to a point
where they become cheaper than fossil fuels. But the sad reality is that while
we might be able to cut greenhouse gas emissions by reducing our demand for
oil, Bush's "foreign tax on the American dream" is not getting cut
anytime soon.
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