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The pros and cons of energy independence

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29 October 2008 13:21

One thing John McCain and Barack Obama seem to agree on is the need for 'energy independence'. In fact, the need to wean the US from dependence on Middle Eastern oil has been something of a staple of US politics since at least the 80s, and economists are fond of pointing out the sheer dopiness of it.

One recent example I found (via Will Wilkinson's excellent blog) by David Henderson from the Hoover Institution makes an admirably clear case for treating oil like any other commodity. No economically rational country wants to be self-sufficient in bananas or coffee if others can produce those goods more cheaply. Why should oil be any different? Cutting foreign supplies by raising the tarriff would massively raise the price of domestic oil to consumers. And government subsidies for oil substitutes aren't the answer either, since subsidies are just a hidden and costly tax.

All good stuff, but on the geopolitical issues, the argument is a little weaker. Energy independence advocates argue that American dependence on Middle Eastern oil puts it at the mercy of unfriendly regimes like Saudi Arabia. Henderson is right that this is a poor argument for independence, since Saudi Arabia has absolutely no interest in cutting off this supply and couldn't selectively target America through an oil boycott even if it wanted to.

But is this really what people like John McCain have in mind when they refer to buying oil from regimes that 'don't like us very much'? I would have thought that their fear is not about economic strangulation at the hands of Saudi Arabia, but about the fact that Saudi Arabia funds Islamist extremists who wish to do the US great harm. By buying Saudi oil, the argument goes, the US is indirectly funding such activity.

Not that this makes the case for energy independence any more plausible: cutting oil imports from Saudi Arabia would just free up the supply for somebody else. Saudi Arabia would still get its petro-dollars, and hence so would the extremists. The US would just be penalising itself for the sake of a useless feel-good gesture. So in neglecting the terrorism angle, Henderson's argument is incomplete, but the substance of his case still holds.

Where Henderson does fall short is in failing to acknowledge the massive levels of US government intervention in the present oil economy. It is true, as Henderson says, that ending Middle Eastern oil imports would require hugely distorting government interventions of one kind or another to replace that oil. But there is already a huge role for government, in the form of the US military presence in the Persian Gulf, which helps keep various Sheikhdoms stable and the oil flowing. So cutting off that oil supply and focusing on domestic energy production would not introduce massive new government activism; it would just be swapping one kind of intervention for another.

Moreover, shifting the government activism from a foreign military focus to a domestic energy research focus might have massive environmental payoffs, and would reduce the chances of America going to war. That's not a bad trade-off, is it?

Photo by Flickr user Dancing Deer, used under a Creative Commons license.

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