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Reducing Oil Imports Won’t Help

by Daniel P. Ahn
April 1, 2011

This is a guest post from Daniel Ahn, a new adjunct fellow for energy at CFR. As you’ll see from the post, he and I don’t entirely agree on the President’s energy speech. It’s great to have a diversity of views here! Look for more here from Daniel in the coming weeks.

President Obama’s speech on energy given Wednesday on Georgetown University’s campus was disappointing to say the least. In particular, the highlight of his speech, a pledge to reduce the nation’s oil imports by one third by 2025, is both conceptually unsound as well as difficult to achieve physically. Given that the US imported roughly 11.2 million barrels of oil per day (mb/d) in 2008, the pledge would translate into reducing oil imports by 3.7 mb/d to 7.4 mb/d.

First, the goal of energy independence through reducing or eliminating imports on foreign oil is conceptually bankrupt. The integration of world trade in oil makes global oil markets “fungible,” exposing consumers to oil price shocks everywhere regardless of origin and import balance.

The recent fighting in Libya amply demonstrates this. The US imported only a tiny amount of oil (less than 120kb/d at its peak in 2007) from Libya. Most Libyan crude goes to European markets. But American drivers were hit with higher prices much as their European counterparts (proportionately more in fact, since Americans started from a lower base due to lower gasoline taxes.)

Even if hypothetically the US were to eliminate oil imports entirely and become a net oil exporter, Americans will still face the same prices set in world markets as everyone else. Anyone who lives in Norway can tell you that. The only way to shield oneself from world shocks entirely is to impose autarky by preventing trade with the rest of world.

Given that the US is currently the world’s largest oil importer, autarky would come at the cost of massively higher energy prices in the US, necessary to equate demand and supply by destroying demand and stimulating domestic production. Even if that were economically and politically feasible, the Coast Guard and Navy would have the impossible task of chasing down every smuggler who would try to sneak in cheaper oil to sell.

Physical oil independence is a nonsensical and meaningless political soundbyte lacking even the most basic understanding of economics. It is tragic to see that the concept still commands such attention three decades after we first heard the term from President Nixon’s doomed Project Independence.

Second, there are grounds to be skeptical whether the goal is even feasible. The US Energy Information Administration (EIA) recently released an advance summary of their 2011 Annual Energy Oultook.

2011 AEO Projections
Mn b/d 2008 2009 2025 2035
Domestic Crude Oil Production 5.0 5.4 5.8 5.7
Other Domestic Production 3.4 3.7 5.7 6.8
Consumption 19.5 18.8 21.0 22.0
Net Imports 11.2 9.7 9.4 9.4

According to their reference projections (which assumes that oil prices continue to rise to $200/bbl nominally or $125/bbl in real 2009 prices by 2035), the EIA sees net imports fall by 1.8mb/d from 11.2mb/d to 9.4mb/d by 2025, before stabilizing thereafter.

So while imports are indeed projected to fall, we are still less than half way to the President’s goal of getting to import levels at 7.4mb/d. An extra 2.3mb/d would need to be wrung from either reduced consumption or more production.

Yet even the EIA’s projections see consumption slightly rising, offset by slight increases in domestic crude oil production. The bulk of the import reduction comes from the category of “other,” which includes biofuels and shale oil. More liquid fuel production may come from gas-to-liquids driven by plentiful natural gas supplies.

Biofuels and shale oil indeed show great promise but are still maturing technologically. The picture may change substantially if we don’t count imports from Canadian oil sands as “foreign imports.” Hence, reducing imports by 2mb/d sound reasonable, but 3-4mb/d may still be a stretch.

There is also the question of what lower imports would mean long-term. Reserves in the US are notoriously difficult to estimate and are subject to changing economic and technological constraints but the Oil & Gas Journal sees the US holding roughly 20 billion barrels of proven reserves in 2009. If increased domestic production was able to meet all of the 3.7mb/d of import reduction immediately, the 20bn bbls would last a little less than 15 years. So even if imports were reduced by a third by 2025, the nation may face exhausted domestic supplies and much higher import levels thereafter.

President Obama’s speech represented another lost opportunity in a long and sad history of the nation’s energy policy. Even if reducing imports by a third were feasible, it is not sensible nor desirable. The administration needs to move beyond these simplistic and misleading goals of energy independence and move toward a more rational energy policy based on an acceptance of the nation’s integration with world markets.

Post a Comment 5 Comments

  • Posted by Jim Stocksdale

    Even if this fellow’s pessimistic rhetoric were true, all the money Americans would be spending on higher fuel prices, would be staying in the USA, and not be sent to people who want to kill us. That, right there, is reason enough for me to say, “Drill, Baby, Drill!”

  • Posted by Stan

    I think I see. The US should just accept its current role as the world’s largest oil importer, and be the good global neighbor, simply beholden to the international oil market price. What a nice little earner for the current oil producers.

    Thank you, no thanks.

    Or should I have looked closer at the date of this entry?

  • Posted by Dock0

    Based on his actions to date, Obama seems to be totally in the pockets of the ecogeeks – and especially the wealthy ecogeeks. His concerns are not for the average Joe, but for the ever phony climate change crew that has had it in for oil since they got their first wiff of diesel fumes.
    Will we ever see a true statesman, and a true Yankee infidel dog, in the White House before everyone goes to hades in a handbasket?

  • Posted by Dean Hearn

    Your article on reducing oil imports is very good on the effects of the price of global oil. From an economic stand point, you leave out one of the most important factors, where does the money go. It would help our economy and help to stabilize our prices if we could meet our own demands and keep the money at home. Can we? I don,t know. Do you know what is the estimate of our oil reserves? Of course there is also some concerns with refining.

  • Posted by Dr. Jeffrey Everson

    In President Obama’s Blueprint for a Secure Energy Future (March 2011), he recommended expanded drilling and development of one million electrically powered vehicles to maintain reasonable gasoline prices. That will not achieve stable gasoline prices because United States oil reserves are declining, new reserves are uncertain and one million electric vehicles is a small percentage of the total vehicle fleet (i.e., 137 million passenger vehicles).

    Gasoline prices are likely to increase because the United States is now importing nearly 60 percent of its crude oil needs. In 11 years that figure will rise to 100 percent without a combination of large-scale conversion to a new engine technology, massive oil discoveries, or a significant decline in production due to an economic depression.  This situation was totally ignored by President Obama and if not recognized and corrected by realistic, publicly supported planning, it will lead to:

    • U.S. economy and trade balance will become far worse than it is now
    • OPEC will exert even more influence over U.S. policy
    • U.S. transportation and manufacturing will be at risk

    Dr. Jeffrey Everson
    http://www.JHEversonConsulting.com
    jeff@JHEversonConsulting.com

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