How energy independence could undo globalization

 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.

Comments

[setty]

When the dealer also happens to be an addict, it's tempting to think that ending the addiction will eliminate the dealer's urge to control the flow of the drugs. I suspect that your hope is ill-placed. Take a read of this, for example. With or without US domestic oil addiction, why would the US ever give up its control over China? I don't see any major geopolitical change automatically following from reduced US oil addiction.

[Noel Maurer]

Interesting! Let's think it through.

Right now, the U.S. wants China to stop buying Iranian oil because it fears an Iranian nuclear weapon. Saudi Arabia is offering carrots to help make it easier for the Chinese to join the boycott.

Imagine a world where North America is self-sufficient, but still integrated into the world oil market. OK, no change, done.

Now let's imagine a world where North America is partially insulated from big oil price swings. How do the incentives change?

Saudi Arabia's incentives don't change, except inasmuch as it will offer even more to the Chinese.

The U.S. is no longer worried that Iran will wreak havoc on the U.S. economy should it get control of more oil supplies.

But ... the U.S. is still concerned that Iran would get access to more resources that it could use to build a military machine and expand its influence. Back in 1990, that was the real worry regarding Iraq, not that Saddam would cut Kuwaiti output and send prices soaring.

And the U.S. is still worried about an Iranian nuclear weapon, both in-and-of-itself and with regards to Israel.

The U.S. also has some stake in keeping the oil market stable, so as not to hurt Europe, Japan, Korea, India, and even China.

So, yes, I have to say that I agree with you. It would be nice to disengage from the world oil market, but it probably won't allow the U.S. to disengage from the Persian Gulf any more than it is already disengaging.

[setty]

The whole "no blood for oil" thing has always been an intentional oversimplification. Since before Gulf War I, US policy in the region has arguably been less about securing its own supply of crude and more about keeping a relaxed but confident, unchallenged grip on many other countries' jugular. To put it another way, think long-term about the "strategic" threats to the USA, like a potential China superpower with multiple nuclear-armed fleets. That's not much of a threat as long as the US can control China's fuel supply.

From this line of thinking, suddenly the interests all look different. Rather than being an end in itself, Israel looks like a pretext (oh hei, just defending my interests here, my people really care about this whole Israel thing, and being a democracy and all I really care about what my people think, except when it comes to all the other foreign interventions) -- and the whole legendary "power" of AIPAC and the "Jewish lobby" etc suddenly makes structural sense without having to invoke some secret Illuminati conspiracy. Israel does well in Washington because Israel is a pawn of Washington, just one square off from the other side's line of pawns.

Similarly, the worry about Iran nukes, as Tom O'Donnell writes in the last note, is probably secondary, with the main concern being that an independent-minded Iran gain flexibility to trade independently of US desires. Nukes are the particularly inflammatory means to that end. But as we know from Israel, Pakistan and India, nonproliferation has never been a serious concern for US military authorities. It's the strategic part that matters.

[Noel Maurer]

I'm not sure about the "control fuel supplies" part of U.S. strategy, to be honest.

I am not aware of the U.S. using the oil weapon against any of its allies, partly because we had better arrows in our quiver, at least pre-1971: Suez and all that.

Europe and Japan were rather unhelpful when U.S. companies faced nationalization in the 1960s and 1970s. (How much we needed help is a different story, of course.) That might be consistent with a fear of U.S. oil control, but the converse would be consistent with the reality of U.S. control, no? I'm not sure where that leaves the argument.

The Soviet Union, of course, was an oil exporter. In fact, the Soviet empire as a whole was an oil exporter. So we certainly weren't trying to control off their oil supply.

With the exception of a few unfortunate weeks in 1973, Saudi Arabia has been extremely helpful to U.S. policy goals. But those goals haven't included using oil to sanction anyone; mostly Saudi has offered carrots (viz current behavior with China) or insurance (re worries in Venezuela or Nigeria or Iran).

It is certainly true that the United States wants to retain control of the seas. But to do that all you need is the Navy we've got --- with that, we can cut the oil supply to any country that depends on sea routes should it come to an all-out confrontation. Short of an all-out showdown, however, I don't understand what it means to say that the U.S. can "control [another country's] fuel supply." Nor is it clear to me what that has to do with the Persian Gulf.

Am I missing the argument?

[Bernard Guerrero]

Original question: "Why? Assuming you kept the stuff on-shore, it's just going to keep world prices a bit higher and thus (presumably) tempt some Canadian crude to go elsewhere directly rather than through our pipes."

Answer?: Well, your last major para above kind of dances around it. You say Canadian producers might look to export restraints themselves, which sounds deeply unlikely to me. Then you end with "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." This makes sense to me, but I don't see where the "can't" is going to come from. They have plenty of coastline, and if there's one thing they know how to build (besides comedians), it's pipes. NOPEC?

[Noel Maurer]

I'll whomp up a post. Short answer: there is a lot of opposition to Enbridge's pipeline project in B.C. It's an unholy coalition of First Nations, environmentalists, and American refinery owners. The project could very easily be stopped.

(I see that that the Calgary Herald link is dead.)

Pipelines going east face similar problems, and building an export terminal in the Maritimes would be a major undertaking. You could try to export through the U.S. of A., but once that happens the export prohibitions in the Energy Act apply.

[Bernard Guerrero]

Would BC really shut down an export project, though? They're basically a resource extraction economy, right? I'd no sooner expect that than, say, pressure in TX to quit shipping crude to OK. (Assuming they could, of course.)