Energy independence is a disaster in the making
By Justin Fox, FORTUNE editor-at-large
March 1, 2006: 11:24 AM EST
NEW YORK (FORTUNE) - It may be one of the most dangerous phrases in the English language. It certainly is one of the most expensive.
I speak of "energy independence," a rallying cry since the oil crisis of the 1970s and one that has been getting a ton of ink (and pixels) lately, especially since President Bush brought up the subject in his State of the Union address.
The president didn't actually utter those words, saying instead that he wanted to "make our dependence on Middle Eastern oil a thing of the past." But lots of other people have, most notably Tom Friedman of The New York Times, who has been arguing for a while now that the president should make energy independence our generation's Sputnik -- an excuse to spend tons of money on scientific research and education.
Investing in R&D and handing out scholarships for science and engineering students are good things, mind you, and many of those calling for energy independence are driven by similarly wholesome motives. But I'm a big believer that words count, and the words "energy independence" are potentially disastrous ones.
To put it most starkly: We could have energy independence tomorrow if Congress simply slapped a huge tariff on energy imports (would $250 per barrel of oil do it?). Meanwhile, skyrocketing fuel prices would shift the economy into reverse, throw tens of millions of Americans out of work, and what oil and natural gas we have left under our territory would be rapidly depleted.
Yes, homegrown energy alternatives like wind, solar and ethanol would get a big boost. But the biggest boom would probably be in mining and burning coal -- the dirtiest and least efficient of the fossil fuels, but one the United States possesses in abundance. Meanwhile, the other energy-importing countries of the world would go their merry way, paying vastly lower prices for oil and natural gas and gaining a huge competitive advantage as a result.
Nobody's seriously proposing such drastic action, of course. But the scenario above ought to make clear that energy independence isn't really what we want. What we want is the most possible economic bang for our energy buck, plus freedom from the feeling that a handful of oil exporting countries hold our national interest in their hands.
It also would be nice if our energy sources polluted as little as possible -- although you can include that under getting economic bang for the buck, since pollution clearly has a long-run economic cost.
Why sentence ourselves to more expensive energy?
The simplest way to get the most out of what we spend on energy is to keep energy costs cheap, and the best way to do that is to take full advantage of global energy markets. Right now it costs less to pump oil from the sands of the Arabian peninsula than from pretty much anywhere else on earth. Why exactly would we want to punish ourselves by cutting ourselves off from the cheapest oil?
Especially since, as University of Chicago economist Austan Goolsbee pointed out
in FORTUNE in August, efforts to conserve oil will, by driving prices down, increase our dependence on Middle East oil in particular at the same time that they're decreasing our dependence on oil in general.
Of course, using energy more efficiently is another way to get more economic value out of it. And if we really want to feel less dependent on Middle East oil, we need to develop cost-effective alternatives to oil. This is presumably where the government should come in. But government programs to reduce dependence on foreign oil tend to devolve into boondoggles only a lobbyist could love. (See this week's issue of Time for a particularly scary example
Taxes -- on gasoline, or on the carbon-content of fuels if it's global warming you're most concerned about -- are a much less messy and market-friendly means of achieving the same goals. By making energy more expensive, of course, they do cut into economic activity.
But there is surely a happy mean: In an article in the September 2005 American Economic Review titled "Does Britain or the United States Have the Right Gasoline Tax?" economists Ian Parry and Kenneth Small calculated that the economically optimal gas tax for the U.S. would be about $1.01 a gallon, up from 40 cents now, while for Britain (where roads are more congested, and the economic value of getting people out of their cars is thus greater) it would be $1.34, down from $2.80.
Of course, achieving an economically optimal result doesn't sound nearly as exciting as achieving "energy independence." But it would be a lot less of a pain.