Don’t Worry About Dependence on Foreign Oil

By Ivan Eland | September 1, 2008

Politicians regularly turn public fear into votes. President Bush proved a master at this in his 2004 reelection success. Most presidents who don’t win the popular vote the first time don’t get a second term, but fear pushed Bush over the top in 2004.

In the 2008 election, oil prices are high, and the presidential candidates from both parties are trying to get into the White House by fear mongering about U.S. dependence on foreign oil. Barack Obama and John McCain both seem to think such dependence is a bad thing, and the American public wholeheartedly agrees. Because almost everyone concurs (except many economists) on this questionable proposition, the debate on high oil prices and what to do about them degenerates from there.

The facts are that oil prices are high by historical standards (although at this writing, they have declined somewhat from their peak, and the media has provided less coverage of this downward slide than it did of their upward movement) and the United States imports about two-thirds of the crude oil that it consumes.

In the globalized world, however, the United States is heavily dependent on imports for many important necessities and products – for example, semiconductors. International trade allows U.S. companies and the American public to take advantage of the world market to get better goods at cheaper prices. Thus, when politicians generate fear of U.S. dependence on foreign oil, they are implicitly alleging that oil is somehow special. Oil is heavily used in transportation and the manufacture of such industrial items as petrochemicals and plastics. Yet to use the example of semiconductors mentioned above, imported semiconductors also are key component parts of important items throughout the economy – for example, computers, television sets, other electronic devices, cars, etc. Therefore, the politicians are not only implying that oil is special, but that it is also “strategic.”

Oil is strategic, however, only in the narrow sense that its derivatives help run tanks, aircraft, ships, helicopters, and other vehicles that the U.S. military would use in a war. (Of course, so do semiconductors.) But the United States produces about 1.8 billion barrels of oil annually, almost 13 times what the U.S. military used at the height of its consumption during the latest simultaneous wars in Iraq and Afghanistan (144 million barrels per year). Thus, there is plenty of domestically produced oil to run the U.S. military in times of war.

With the probability of any worldwide conventional war among great powers escalating into a global thermonuclear holocaust being quite high – in which case nobody would be caring about the vaporized imported oil – such a widespread conventional conflict is very unlikely. Thus, in any regional war, the U.S. economy would be able to get oil from the regions of the world not involved in the conflict. The price might go up because of the war, but industrial economies are actually quite resilient to oil price increases. For example, the U.S. economy has not collapsed in the wake of recent record oil prices, and from late 1998 to late 2000, Germany maintained respectable economic growth rates in the face of a 211 percent price increase in oil.

But what if the war occurred in the volatile Persian Gulf region? The United States only gets 21 percent of its oil from the Persian Gulf. Most of it comes from Canada, Mexico, Nigeria, and Venezuela. Of course, a war anywhere in the world will cause the price of oil to go up. But about 80 percent of U.S. semiconductor imports come from East Asia, yet the media doesn’t constantly run hysterical stories on price spikes in semiconductors or on the horrible U.S. dependence on East Asian semiconductors. And the politicians don’t talk about using the U.S. military to safeguard such supplies from East Asia.

But can’t the world run out of oil, especially with developing nations, such as China and India, using more? Theoretically, the answer is yes because there are only finite deposits in the earth. Yet because exploration and recovery technology is constantly improving, proven oil reserves have tended to increase over time. Also, as oil prices go up, conservation increases and alternative energy sources – natural gas, solar, geothermal, etc. – become more attractive economically. For example, the conventional wisdom was that U.S. natural gas fields were in irreversible decline, but the high price of oil has led to a drilling boom to find more of this substitute. New technology to extract natural gas from shale beds has increased production in the U.S. dramatically and will probably also do so around the world. So who knows, similar technological leaps might also increase the amount of recoverable oil around the world.

But one thing is sure: it’s a myth that being dependent on imported oil is bad. As a way to stump politicians who perpetuate this nonsense, perhaps we should ask them this question: If oil is so critical and will become even more valuable when world supplies allegedly dwindle in the future, shouldn’t we use other countries’ oil now and have the U.S. government require that our limited production be saved to use or sell as the shortages worsen and future prices go even higher? Diametrically opposed to the present time, with the prevalent fears of dependency on foreign oil, this “conservation theory” was all the rage in the late 1930s and 1940s when a slowdown in finding new oil deposits seemed to threaten chronic future shortages (similar to the dire predictions after World War I and in the early 1920s before big oil discoveries were made late in the 1920s).

Of course, this is not the right policy prescription either. We should instead treat oil as any other product and let the market provide ample supplies at the lowest cost to the consumer.

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