June 24, 2007
Energy goal should be to diversify
Chicago Tribune, June 24, 2007.
While the U.S. Congress debates the latest energy bill, the eventual outcome amid intense lobbying by all sides is anybody's guess. One part, however, is certain: Calls for energy independence will be aplenty. These pleas will be as passionate as they are misguided. The goal must be energy security. This is most often achieved by diversifying dependence, not by calling for independence.
President Richard Nixon started the craze with Project Independence in 1973. It has been a losing battle from the onset. At the launch of the project, the U.S. imported a third of its oil. Now it imports more than 60 percent. That has not prevented George W. Bush and most major candidates vying to succeed him from pursuing the issue. But regardless of who takes it on, it will be a lost cause.
Energy independence is unachievable -- barring Draconian measures. Economic forces are aligned to exploit the cheapest available energy source, which is not located in the U.S. or in any other major energy-consuming nation. Oil from the Arabian Peninsula comes in second to none.
Moreover, the global nature of oil markets makes weaning ourselves off particular suppliers pointless. If the U.S. uses some oil -- any oil -- produced anywhere in the world, the price it pays will be determined, in part, by potentially hostile regimes. Moreover, U.S. demand for oil will increase that price and -- at least indirectly -- hand money to these regimes.
It would be desirable to shift from oil to alternative sources of energy, but here again, talk of energy independence muddles the issue. Some environmentalists like to link energy independence with the fight to combat climate change. We do indeed need an appropriate, predictable and consistent price on emissions of greenhouse gases, which would tip the balance away from oil and other carbon-intensive energy sources toward cleaner fuels. But decreasing pollution is not the same as decreasing energy imports. Ethanol can deal with the former, but, for the most part, should not be used to address the latter.
Currently the best source for ethanol is sugar cane. Neither the U.S., with its emphasis on corn-based fuel, nor the European Union, with rapeseed and sugar beet as its homegrown sources, can compete with Brazil and some Central American countries, where sugar cane thrives naturally. Cane beats corn, beet and rapeseed by a long shot on environmental grounds. The most sensible environmental policy would be to drop all ethanol tariffs. Given the powerful corn lobby in the U.S. and increasingly strong domestic ethanol lobbies in the EU, this is unlikely to happen. Talk of energy independence only exacerbates this boondoggle. Farm lobbies can now cloak their arguments for maintaining subsidies and import tariffs in the language of environmental concerns and of national security.
Yet slashing tariffs on ethanol would increase U.S. reliance on foreign fuels. Ethanol production shifts to Brazil, which could replace Saudi Arabia as the lowest cost producer of the world's fuel of choice. Energy independence would decline. At the same time, energy security would go up. A democratic Brazil is clearly a better energy supplier than an autocratic Middle East. Nevertheless, relying exclusively on Brazil could undermine supply security just as well. The goal should be to diversify.
Most countries already diversify to some extent in another dimension. The U.S. imports around 10 million barrels of oil directly per day. In addition, the U.S. imports about 1 million barrels a day indirectly, embedded in manufactured goods. China imports oil, burns it to fuel its plants, and the U.S. and others import the final products. If China and other poor manufacturing countries did not produce these goods for export, the U.S. and fellow rich consuming nations would have to import most of the oil or other forms of energy directly to produce the same goods.
Calls for energy independence undermine what really matters. Those arguing for it risk making the nation less secure. Sadly, energy independence is a powerful rallying cry for campaigns. It polls well and motivates people to put energy on top of their political priorities. That agenda-setting factor should not be underplayed. Yet the ends do not always justify the means. Here, the end would be unachievable and, more important, undesirable.
Posted by Gernot Wagner on Sunday, June 24, 2007. 
