Reducing Oil Imports Won’t Help

This is a guest post from Daniel Ahn, a new adjunct fellow for energy at CFR. As you’ll see from the post, he and I don’t entirely agree on the President’s energy speech. It’s great to have a diversity of views here! Look for more here from Daniel in the coming weeks.

President Obama’s speech on energy given Wednesday on Georgetown University’s campus was disappointing to say the least. In particular, the highlight of his speech, a pledge to reduce the nation’s oil imports by one third by 2025, is both conceptually unsound as well as difficult to achieve physically. Given that the US imported roughly 11.2 million barrels of oil per day (mb/d) in 2008, the pledge would translate into reducing oil imports by 3.7 mb/d to 7.4 mb/d.

First, the goal of energy independence through reducing or eliminating imports on foreign oil is conceptually bankrupt. The integration of world trade in oil makes global oil markets "fungible," exposing consumers to oil price shocks everywhere regardless of origin and import balance.

The recent fighting in Libya amply demonstrates this. The US imported only a tiny amount of oil (less than 120kb/d at its peak in 2007) from Libya. Most Libyan crude goes to European markets. But American drivers were hit with higher prices much as their European counterparts (proportionately more in fact, since Americans started from a lower base due to lower gasoline taxes.)

Even if hypothetically the US were to eliminate oil imports entirely and become a net oil exporter, Americans will still face the same prices set in world markets as everyone else. Anyone who lives in Norway can tell you that. The only way to shield oneself from world shocks entirely is to impose autarky by preventing trade with the rest of world.

Given that the US is currently the world’s largest oil importer, autarky would come at the cost of massively higher energy prices in the US, necessary to equate demand and supply by destroying demand and stimulating domestic production. Even if that were economically and politically feasible, the Coast Guard and Navy would have the impossible task of chasing down every smuggler who would try to sneak in cheaper oil to sell.

Physical oil independence is a nonsensical and meaningless political soundbyte lacking even the most basic understanding of economics. It is tragic to see that the concept still commands such attention three decades after we first heard the term from President Nixon’s doomed Project Independence.

Second, there are grounds to be skeptical whether the goal is even feasible. The US Energy Information Administration (EIA) recently released an advance summary of their 2011 Annual Energy Oultook.

According to their reference projections (which assumes that oil prices continue to rise to $200/bbl nominally or $125/bbl in real 2009 prices by 2035), the EIA sees net imports fall by 1.8mb/d from 11.2mb/d to 9.4mb/d by 2025, before stabilizing thereafter.

So while imports are indeed projected to fall, we are still less than half way to the President’s goal of getting to import levels at 7.4mb/d. An extra 2.3mb/d would need to be wrung from either reduced consumption or more production.

Yet even the EIA’s projections see consumption slightly rising, offset by slight increases in domestic crude oil production. The bulk of the import reduction comes from the category of "other," which includes biofuels and shale oil. More liquid fuel production may come from gas-to-liquids driven by plentiful natural gas supplies.

Biofuels and shale oil indeed show great promise but are still maturing technologically. The picture may change substantially if we don’t count imports from Canadian oil sands as "foreign imports." Hence, reducing imports by 2mb/d sound reasonable, but 3-4mb/d may still be a stretch.

There is also the question of what lower imports would mean long-term. Reserves in the US are notoriously difficult to estimate and are subject to changing economic and technological constraints but the Oil & Gas Journal sees the US holding roughly 20 billion barrels of proven reserves in 2009. If increased domestic production was able to meet all of the 3.7mb/d of import reduction immediately, the 20bn bbls would last a little less than 15 years. So even if imports were reduced by a third by 2025, the nation may face exhausted domestic supplies and much higher import levels thereafter.

President Obama’s speech represented another lost opportunity in a long and sad history of the nation’s energy policy. Even if reducing imports by a third were feasible, it is not sensible nor desirable. The administration needs to move beyond these simplistic and misleading goals of energy independence and move toward a more rational energy policy based on an acceptance of the nation’s integration with world markets.