Matt Yglesias is wrong!

I like Matt’s work a lot, which is why I am getting frustrated at his continual repitition of the incorrect claim that energy independence is meaningless. This is just plain wrong.

First, he ignores natural gas completely. He needs to stop and state that he is talking about oil independence. Natural gas is extremely difficult to transport across continents, which is why it is so much cheaper in North America than elsewhere. We have already seen big and positive effects from energy independence in natural gas!

So let us focus on oil.

Oil is not some super-fungible instantaneously-transportable commodity. It is much more like lobsters than it is like ... uh ... well, the mythical conception of oil as some super-fungible instantaneously-transportable commodity. Oil prices vary by geography and by quality. There is something called the realization spread, which is the difference between the Brent benchmark oil price and the price actually received by oil producers. In 2011, it was $45 per barrel.

Infrastructure bottlenecks create all sorts of odd overland pricing differentials. (Ocean transport is different: the cost of shipping from Venezuela to China is not much more than shipping to the Gulf coast of the United States.) A Kinder-Morgan report, for example, estimates that if the Northern Gateway pipeline from Alberta to the west coast is built, then the price of crude oil in Canada will rise. (Canadian Western Special fetches a higher price in Asia than it does it North America, where it sells for about $20 less than West Texas Intermediate.) In total, the firm estimates that the pipeline will cost Canadian refiners $432 million a year. If the refiners pass that on to consumers, then it will raise prices by 6¢ per gallon. The converse, of course, is that preventing the pipeline will save Canadian consumers 6¢ a gallon. That is from one pipeline. One unpopular pipeline.

Third, it is completely legal for the United States to stop exports.

Now, in a perfect world, it is true that limiting oil exports would not make economic sense. Why not? Well, a government could limit exports, thereby lowering domestic prices ... or it could sell the stuff overseas and use the profits to subsidize domestic consumers. The problem is that the United States does not practice the sort of socialist resource nationalism that would make the second option feasible. The government does not own the subsoil rights, nor are confiscatory windfall taxes particularly likely. That leaves export restraints as the only way to transfer rents from producers to consumers.

Now if Matt wants to attack the idea that oil independence will do any good, he has many solid arguments:

1. North America (e.g., the U.S. and Canada) will never become oil independent;
2. North America might become oil independent but domestic production costs will be so high that it won’t mean anything;
3. North America might become oil independent but (2) will apply and domestic supply and demand shocks will produce significant price volatility;
4. North America might become oil independent but refiners will capture any and all benefits (there is some evidence that refiners are already capturing the benefits from the price differentials between the central United States and the coasts);
5. The idea that a U.S. administration will use its authority to limit exports is a political fantasy;
6. Limiting exports is a bad idea for other reasons. For example, high oil prices at home help phase out a fuel that is wrecking the planet, and it would be stupid to try to lower them.

In short, Matt Yglesias is wrong! Energy independence will have economic impacts: it already has in natural gas. Even oil independence will have economic impacts. It will (to a small extent) even if we do nothing because oil is not a free-to-transport completely-fungible product. But it will to a very large extent if we do what other oil-producing countries regularly do, which is restrict exports.

What he should do is rephrase . Right now, his arguments are akin to the Republicans who claim that Obamacare will raise the deficit, when what they really mean is that they do not believe that the Medicare reimbursement cuts will actually happen. He claims that energy independence is meaningless, when what he really means is that doing what you would need to do to make oil independence meaningful is a bad idea.

If that is his argument, then I wish he would make it. The conflation of oil and natural gas combined with the silly rhetorical flourish that energy independence is a myth strikes me as most unbecoming.

Comments

[Richard Gadsden]

If you want a good example of a free-to-transport completely-fungible product, then you want something with a very high price-to-weight ratio and also something that is just a mass of a pure chemical (element or compound, it matters not).

The best that I can think of are precious metals. Gold costs over $55,000 a kilo, and any two ingots are completely interchangeable.

Transport costs are so small relative to value as to make it effectively free.

As a result, there is a true commodity market in gold, quite different from the oil market.

[Noel Maurer]

That's a great example. I wish I thought of it!

[Bernard Guerrero]

You are correct that both Matt's argument against oil independence and the GOP argument against Obamacare's impact on the deficit are grossly simplified misstatements of a different argument, but in fairness to both I would note that that's the way the political game is played. As I've noted, those arguing in favor of "bringing back Glass-Steagall" are usually arguing for something that has nothing to do with the _actual_ Glass-Steagall or what it did and didn't do. It's sloganeering, and it works because the simplified (if erroneous) argument makes it easier to strike an emotional chord.

[Bernard Guerrero]

Nit: The realization spread noted in the Bernstein report is Brent vs. BOE (barrel of oil equivalent), so it implicitly includes the growing differential in NG vs. oil, particularly in North America. Don't know that it has a huge impact on your argument, though.

[Noel Maurer]

I agree with you about the game Bernard, but I don't think that Matt thinks that he is playing it. If you look at his blog, it's more like Ezra Klein or Tyler Cowen: you might not agree with these guys, but it is clear that it is important to them (and their readers) that their arguments be intellectually sound. My reading of Matt is that he would take it as an insult to have his argument compared to political rhetoric --- and he would be right!

(You're right about Glass-Steagall, but that's just political shorthand, not a direct attempt to mislead. A better example from the Democratic side is "Social security is fine!" When people say it, what they mean is "social security is fine with a few tax hikes that you will barely notice." That latter is a true statement, but it is misleading to leave out the second clause. That said, I have no problem when Nancy Pelosi does it, but I'd be surprised to see Brad Delong follow.)

Me making sense? Am tired.