North America is on the verge of finally achieving the much-vaunted goal of energy independence. In fact, the continent has already achieved that for everything save petroleum, but now the latter is in sight. A combination of increased oil sand production in Canada, shale oil discoveries in the United States, and tightened CAFE standards have certainly made it plausible to believe that North American net energy imports will drop to zero by 2020, if not sooner. In fact, it is possible to imagine a situation where the United States alone achieves energy independence by that date.
But does it matter? Assuming no political reaction, no, it probably doesn’t. North America will still be vulnerable to supply shocks from the rest of the world. If the demand for petroleum rises elsewhere, then domestic prices will rise in line. That said, infrastructural bottlenecks can produce lasting price differentials — it doesn’t matter how much demand rises elsewhere if you can’t ship the stuff to those places — but if North American oil production rises enough, then one can assume infrastructure will be repurposed or built.
Wait ... can no political reaction really be assumed? Consider Argentina. The Argentine government imposes high export taxes on oil. Those taxes partially insulate Argentines from price increases elsewhere. High retail taxes keep consumer prices up, but that is a good thing: policy does not subsidize consumption, but the government captures rents that would have otherwise gone to producers. (The retail gasoline tax runs at 70% of value, with a floor of 53.75 centavos per liter, or 46.9¢ U.S. per gallon. The 21% VAT and 2% provincial tax is then imposed on top.)
Now, the U.S. constitution forbids export taxes. But it does not forbid blocks on export infrastructure. And that is just what you are already seeing in the natural gas space! Last month, the Energy Information Administration reported that LNG exports could raise U.S. prices as much as 54%. Representative Ed Markey (D-Massachusetts) immediately responded: he demanded that the federal government should refuse to certify export projects “before all impacts on American families and businesses are considered,” and stated that he will introduce legislation “that would keep more American-made natural gas in America.”
The same pressures apply to oil, although it will be harder (but not impossible) to stop oil export projects. And while the constitution is crystal clear on export taxes, “No tax or duty shall be laid on articles exported from any state,” it is unclear as to whether the export of a product could simply be banned altogether, under either the necessary and proper clause or as a national security measure.
If the growth of world oil supplies fails to outpace demand, then the result is not likely to be smoothly escalating prices. Rather, the result is going to be ever-increasing volatility in the oil market. Small shocks in either direction will lead to huge price swings. In that environment, export bans would be clearly attractive to consumers ... and some producers might also welcome the market stability that they would bring.
In which case we are back to the pre-1970 world. And let me be clear: I do not think that would be a bad thing. The Persian Gulf would lose its economic significance (at least for North America) even if it continued to grow wealthy from the black gold. The U.S. economy would be insulated from price shocks elsewhere. If imports shrank to a small level (and net imports disappeared) might even be able to get a winning coalition around imposing import duties on oil, which would have all sorts of good effects if the U.S. then again lost self-sufficiency.
If that happens, then the economics and geopolitics of oil will be transformed. The analogy of a big world pool of oil, into which production is poured and out of which consumption is sucked, will no longer hold. A lot of the old-fashioned verities about control of supply will start again to make sense. There is a risk, of course, that as nice as it would be for the United States to insulate itself from foreign shocks, the result might be increased instability and resource conflicts in the rest of the world.
Finally, there is an implication for Canada-U.S. relations: the United States has a vested interest in preventing Canada from building more pipelines to the West Coast. Inasmuch as North American self-sufficiency applies to North America and not just the United States, then the U.S. will only be able to insulate itself from swings in the world oil market if Canada has no other place to send its oil, at least not at a reasonable price and in large quantities. (Oil can be shipped by railroad, but there are bottlenecks, since the number of tanker cars is limited.) Of course, should oil prices become sufficiently volatile, it is possible that Canadian producers would approve of export restraints, in return for steadier prices. But it is just as likely that they will ignore American entreaties and send their oil where it will fetch the highest price. Unless, of course, they can’t.
In short, energy independence does matter, but only in conjunction with political steps that amount to the end of an integrated world market in crude oil.