Tuesday

August 14th, 2018

Insight

A crude awakening

Charles Lane

By Charles Lane The Washington Post

Published March 19,2018

A crude awakening

The authoritative International Energy Agency announced recently that the United States will overtake Russia and Saudi Arabia as the world's largest crude oil producer in five years.

To celebrate this once-unimaginable news, how about taking a trip down memory lane? The date is May 5, 2011. Diarmuid O'Connell, then the vice president of business development for Tesla, Elon Musk's electric-car outfit, is testifying before the House Energy and Commerce Committee.

"As a nation, we have arrived at a place where we no longer control our own destiny," O'Connell warned. "We find ourselves overwhelmingly dependent on a dwindling natural resource controlled by inimical foreign actors, under conditions of increasing competition. Oil . . . is now the source of our greatest vulnerability in terms of both national and economic security."

"The facts are clear," he continued. America's growing importation of oil from unstable parts of the globe required Congress to be "proactive" and subsidize alternative technologies such as his company's electric vehicles: "While one might argue (as some do) that policies such as the increase of domestic production ('Drill, Baby, Drill') can improve the basic equation of supply and demand in the short run, such measures are pitifully marginal in the global scheme," O'Connell added. Etc., etc., etc.


O'Connell's speech has not aged well, though it summarized what many right-thinking people believed at the time.

Actually, his jeremiad was already foreseeably wrong when he presented it: In North Dakota and Texas, far from Silicon Valley or Capitol Hill, the shale oil boom was underway. U.S. domestic production was edging higher: It averaged 5.6 million barrels per day in 2011, hit 9.8 million per day by the end of 2017, and will rise to 12.1 million by 2023, the IEA projects.

Rather than being at the mercy of foreign potentates, the United States may now be the world's "swing" producer of crude. American independent producers, nimbler than the state-owned behemoths of the Middle East and Europe, can increase or decrease output rapidly in response to changing market signals.

We're not at zero net imports - probably a meaningless goal in any case, given that crude oil is a fungible commodity - but booming domestic production gives Washington "strategic weapons once unthinkable," according to a recent New York Times analysis. "The United States and its allies now have a supply cushion at a time when political turmoil in Venezuela, Libya and Nigeria is threatening to interrupt flows to markets."

During his 2006 "addicted to oil" State of the Union address, President George W. Bush bemoaned imports from unstable parts of the world and called for replacing 75 percent of Middle East oil imports by 2025. Well, in 2017, the U.S. imported approximately half as much oil from the Persian Gulf as it did in 2000; not too shabby. Overall, net imports accounted for 38 percent of U.S. consumption in November, down from 66 percent in 2007. The annual U.S. trade balance in fossil fuels improved by $233 billion as a result, according to the Wall Street Journal.

There are lessons here, beyond the obvious need for healthy skepticism about expert pronouncements, especially when the expert in question is talking his or her own book, as Tesla's subsidy-seeking executive was in 2011.

Energy pessimists were right that less dependence on foreign oil, and the vagaries of the OPEC-manipulated global market, could be achieved through technological innovation; what they failed to grasp was that the very oil-price volatility that concerned them so much created a huge incentive for innovation in the oil patch.

Domestic crude production was not inherently "limited," as O'Connell told Congress in 2011, it just needed a better mouse trap. Fracking was it.

Entrepreneurs broke the oil-import addiction, even though the main thing they intended to do was get rich.

The government policies - mandatory ethanol use in motor fuels; higher gas-mileage standards for cars - established in the Energy Independence and Security Act of 2007, which a Democratic Congress passed, the Republican Bush signed, and most Americans soon forgot, played a far smaller role.

This in no way changes the fact that fossil-fuel consumption poses serious risks to the environment, but that is a separate issue, which advocates have often combined with energy security for political reasons. Henceforth, environmentalists should make the case for reducing fossil-fuel use on its own green merits, rather than in tough-guy national-security terms.

That case can, indeed, be made, but the strongest version involves higher fuel taxes and other direct incentives to conserve, not wasteful subsidies to government-selected producers such as Tesla, or Iowa's corn ethanol agro-industrial complex.

As for energy independence: It turns out we can drill our way there. The facts are clear.


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