Yesterday saw the publication of yet another blue ribbon style report on energy policy, this one called Recommendations to the Nation on Reducing U.S. Oil Dependence, from the Energy Security Leadership Council. The press went wild. Color me unimpressed.
The authors of the report are convinced that America’s reliance on foreign oil is a dangerous thing. But why? Panicky narratives abound, but none of them are particularly well informed.
Consider the widespread concern about the prospect of being cut off from supply. Relying on foreign producers for oil means that we might find ourselves without physical access to petroleum if those foreign producers were to decide to shut us out. But that worry is only plausible if you fail to understand and fully appreciate the fungible nature of the global oil market. As MIT oil economist M.A. Adelman once wrote:
Rarely has a word [“access”] been so compact of error and confusion. Nobody has ever been denied access to oil: anyone willing to pay the current price could have more than he wanted. One may assume what he likes about future demand, supply, and market control, and conclude that the future price will be high or low, but that price will clear the market in the future as in the past. The worry about “access” assumes something queer indeed: that all of the producing countries will join in refusing to sell to some particular buyer—for what strange motive is never discussed … it takes only one other country, with a desire for gain, to cure this irrationality.
The 1973 oil embargo proves the point. As Adelman notes,
The “embargo” of 1973–4 was a sham. Diversion was not even necessary, it was simply a swap of customers and suppliers between Arab and non-Arab sources.… The good news is that the United States cannot be embargoed, leaving other countries undisturbed.
In short, the only way for producers to keep their oil out of America is to impose a military blockade of U.S. ports. Market agents – not agents of the producer states – decide where oil goes when it enters the market. As long as someone is willing to buy oil from a producing state and then sell it to the United States, no shut off is possible absent military force.
OK, so physical access isn’t the problem – our vulnerability to producer-induced price spikes is the real worry. Or is it?
Recent macroeconomic studies suggest that the economy is nowhere near as vulnerable to oil-induced recessions as once thought. How else to explain the world’s gangbuster economic performance in the teeth of the present price spike?