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Are Boosting U.S. Oil Supply and Cutting U.S. Oil Demand in Conflict?

by Michael Levi
March 30, 2011

Perhaps I shouldn’t have been surprised to see strong pushback from some of President Obama’s traditional allies to his energy security speech this morning, but I genuinely was. The main crux of the complaints I’ve heard is that efforts to expand domestic oil supply are fundamentally at odds with efforts to reduce U.S. oil demand. Let me explain in some detail why I think that’s largely wrong. (If you want my broader take on the speech, click here.)

Start with markets and prices. Opponents of increased U.S. production argue correctly that more domestic drilling won’t have a big impact on oil prices a decade or two from now. (They use this to argue against the value of boosting supply.) But that completely undermines their claim that more production will meaningfully interfere with efforts to reduce demand. Same(ish) prices mean same(ish) demand. The real long-term determinant of demand will be broader global supply dynamics, domestic demand-side policy, and technological change, not U.S. production.

The second argument against supply-side efforts focuses on political capital. If the president has limited political capital, shouldn’t he be spending it on reducing demand? That argument might work if the options were, say, effort on health care and effort on energy. But in this case, supply and demand side policies are political complements, not substitutes. Efforts to boost supply should create political capital that can be used to promote policies that reduce demand.

The last complaint focuses on environmental impacts: Isn’t it unwise, some ask, to promote supply when there are negative environmental consequences? Envirnonmental concerns certainly shouldn’t be dismissed. But the right way to address them is through prudent planning and regulation, not by ignoring supply-side policy or blanket hostility to drilling. If, after the additional costs associated with regulatory compliance, increased oil production makes economic sense, it would be silly not to pursue it.

All of this, of course, leaves the question of why we should care about increasing domestic supplies. After all, oil is a (largely) fungible commodity, meaning that increased domestic production should have a minimal impact on long-term prices. But price isn’t everything. More domestic production (without subsidies) means more domestic jobs and growth, and a lower current account deficit. More domestic production also means more resilience in the face of price shocks, since those shocks would redistribute money within the United States, rather than sending it abroad. And more domestic production can have real impacts on mid-term prices, by helping avoid supply crunches; long-term average prices aren’t the only ones that matter.

Let me be clear: no amount of supply push will fundamentally change the U.S. oil predicament. Nor will a good oil policy solve the climate problem. But there are lots of good policies that don’t revolutionize the world. The set of policies that Obama talked about this morning qualifies.

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