In January 1977, the awful day arrived. U.S. petroleum imports passed the magical 50% mark. Yet somehow the world failed to end. Now, with U.S. net imports comprising only 20% of our usage (including NGLs), the supposed energy dominance of the United States found us still turning to Saudi Arabia rather like Dicken’s Oliver Twist asking, “Please, sir, might I have some more?” Needless to say, critics of the president have latched onto the apparent contradiction, but frankly, the U.S. dependence on oil imports has always had a largely symbolic effect on our security.
Years ago, at a conference in France, a government official explained to the attendees that France had oil because its diplomats scoured the world for supplies. The German economist next to me said, “We just buy the stuff,” highlighting the split between statist and free market approaches to energy security. Indeed, as the case of Germany, South Korea and other countries demonstrate so clearly, energy dependence does not necessarily translate into poor economic performance. Some would even argue the reverse is true, that being an oil exporter likely brings on the famed “resource curse.”
And yet fears that imports equate to political vulnerability have played a major role in foreign policy thinking for many years. Concern about reliance foreign oil is nothing new. In perhaps the world’s greatest prescience, the collection of Jewish writings known as the Mishnah, written two thousand years ago, warned Jews against the use of ‘foreign oil’. (See Martin Goodman’s Rome and Jerusalem, pp. 277-8.)
Many point out that Richard Nixon proposed to make America energy independent, but few seem to recall that the report of Project Independence concluded that such independence had little value. Making the country free of energy imports would be extremely expensive, we would still feel an obligation to our allies to protect the world’s energy supplies, and given our extensive ties to the world economy, the U.S. would remain vulnerable to an oil shock, as such would probably trigger a global recession.
Like energy independence, the value of energy dominance is much exaggerated. Russian natural gas exports to the Ukraine (and much of Europe) have not availed it much in its dispute over the Crimea, and certainly did not deter the application of economic sanctions against it. Similarly, the large role of Saudi Arabia in world oil markets has not prevented, for example, the Trump Administration from moving the U.S. embassy to Jerusalem, among many other pro-Israeli moves by U.S. presidents.
In terms of markets, the Saudis have the greatest influence on oil prices of any nation, but can only pressure other producers with (threats of) a price war, and consumers tend to have more power over the long-term price of oil. U.S. oil exports are to be applauded because they are profitable and efficient; otherwise industry wouldn’t make them. And U.S. shale oil producers, by choosing whether or not to invest, do influence prices over the longer term, this is hardly dominance.
The one area where the U.S. might prove to be a decisive factor is the trade in global natural gas. It has long been dominated by the use of oil price-indexed contracts, keeping natural gas prices at uncompetitive levels and reducing displacement of oil and coal in industry and power generation in many parts of the world. There is no economic justification for setting oil and gas prices at equivalent levels, based on heat content, any more than coffee and tea prices should equivalent based on caffeine content. Because U.S. LNG exporters are more competitive-minded (or have more animal spirits perhaps) than most of those involved in the trade (think Gazprom), they might break down this long-standing but ill-advised contract practice, which could have a beneficial effect on the global economy and environment.
Ultimately, the best lesson is that the reduced dependence on foreign energy came about not because of a ‘moon shot’ program such as President Nixon proposed or President Carter’s Synthetic Fuels Corporation, but from American ingenuity and entrepreneurship. Fracking was not developed because of a desire to achieve an intangible like ‘energy security,’ but because George Mitchell and his people saw an economic potential and risked tens of millions trying to achieve it. That should be considered the true spirit of independence.