Why Cheap Oil Is Not Really Cheap

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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John Stossel, a Princeton psychology graduate at Fox News and formerly of ABC News, recently wrote a blog post saying in his typical self-proclaimed libertarian vain, that U.S energy independence is not needed. Perhaps the former psychology major wants to placate our oil exporters from his perch at a major media establishment with words about freedom and free trade to keep the oil flowing. The reality, however, is far more serious than mere psychological machinations to get our way around the world.

The United States can only control what it does, not what others do in other countries and therefore, American energy policy cannot be predicated on our foreign, trade and defense policies as was the case in the past despite Nixon’s Project Independence 1980 after the 1973 oil embargo.

John Stossel’s article, informed to some extent perhaps by his undergraduate Ivy-league knowledge of some psychology and some economics, makes an interesting point which has been the staple of free trade advocates for a long time but misses the point about energy policy. It is indeed true that for buying about half-a-trillion dollars worth of oil from those whose livelihood depends on selling it to foreigners, the U.S economy produces 30 times the cost of that oil or about $15 trillion a year in GDP. Not a bad deal for an outlay of 500 billion dollars a year on foreign oil.

The reasons for the return of 30 dollars on every dollar invested in oil (not counting other domestic energy sources such as coal which produces nearly 50% of the country’s electricity) are technology and consumption, and the financial wherewithal on Wall Street to make that consumption possible. Imports are a very small portion of the U.S economy and so are exports. So, it is indeed correct to say that not many American jobs were lost to countries from which we import except to the extent of the chronic annual trade deficits of about half-a-trillion dollars after deducting the oil portion of those imports. Ideally, those jobs were expected to be replaced domestically by jobs requiring higher, more service-oriented skill sets and largely in the U.S manufacturing sector. These jobs may have been lost forever.

The United States therefore needs oil imports mostly for transportation and petrochemicals because oil is used only to a very small extent in power production. The economic question is: is the allocation of oil for transportation its best use?

The cost to the government to ensure that oil keeps flowing from foreign countries to the United States and American business interests around the world has been rising since the early ’70s to about a trillion dollars a year now in defense expenditures, not counting the loss of human life either because of September 11th or the wars before or after.

If American political principles of domestic and international engagement are individual liberty, democracy, open markets, free trade and economic liberty it is only sensible to expect others around the world to act in their self-interest to enhance their own standards of living before acting in the American interest. The purpose of free trade is to serve as a win-win for all the parties engaged in that trade.

Even if the United States discounted the loss of a few thousands of Americans in the name of spreading freedom around the world with foreign oil (after all, tens of thousands had tied in World Wars I and II and in the Civil War before them to advance or safeguard the American ideals along with the economic interests that are promoted as a result to, on average, raise the well-being of most citizens), there comes a point when that same oil is demanded by more and more people around the world who were not demanding it in the last 100 years if not longer (American oil demand went up for the same reason as the living standards of more and more Americans rose). It is at best unreasonable to expect them not to and at worst delusionary to think that they will put America’s interests above their own.

If for some strange reason, hypothetically, the rest of the world is delusionary and we are not, and they put our interests above their own, there comes a point when we will run out of oil under the ground. At current world demand, the world will run out of it by 2050 raising the price along the way along with inflation which is the real price of oil dependence (see my Pickens Plan blog post titled “Inflation Dynamics“). Because demand only grows, we could run out sooner. Therefore, it is time to begin thinking about oil alternatives at least to extend the life of oil for its most necessary uses, and even those must be met in other ways after oil.

The fat lady’s name is Mother Earth, if not because of global warming at least because of the ill-effects of pollutants and the depletion of natural resources. And she could sing sooner than later to the detriment of all if we do not change our ways to become more efficient in how we use what we have been naturally endowed.

(Thanks to Heather Lauer and Ed Matricardi for alerting me to this frontal attack from a major media corporation on energy independence and the Pickens Plan)


About Chandrashekar (Chandra) Tamirisa

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