A recent commentary “Actually, America Isn’t ‘Energy Independent.’ (And That’s a Good Thing.)” at Cato Institute provides a comprehensive, data-forward dive into the fundamental facts and market dynamics of fossil fuels. It firmly debunks the idea that we are (or ever will be) energy independent as long as oil dominates our transportation system. That underlying message is the good part. Where the article goes off track is suggesting that petroleum dependence is a good thing, and that generic smaller government proposals like regulatory streamlining, eliminating barriers to petroleum market entry or expansion, and freer trade are sufficient to overcome either the monopolistic status quo or its economic consequences.
It’s worth reading the whole piece for a detailed look at the energy system at large, but in particular to take in the economic realities of our oil-dominated transportation system. Debunking false claims of ‘energy independence’ is a message worth reiterating as often as possible. But a few key graphics from the piece paint a clear picture of how oil’s virtual monopoly in transportation distorts the market.
First, U.S. domestic drilling does not lower gasoline prices. There is no relationship between U.S. oil production and gasoline prices at the pump. On the contrary, as we’ve repeatedly seen in the gyrations of the shale oil boom, U.S. production waxes and wanes according to crude oil prices. Relatively higher oil prices are necessary for economic returns on shale and other unconventional supplies. That’s bad for consumers.
Reducing oil imports does not lower gasoline prices, either. No surprise given the above, but to confirm with more data: fluctuations in the relative portions of domestic and imported petroleum do not move the price needle.
And rounding out the visuals is something that can never be stated often enough or loudly enough: No matter how much we drill, we import the world oil price. Any price deviations are temporary aberrations that trend in the exact same direction.
The commentary goes on to argue for the merits of our lack of oil independence, from a free trade perspective. That’s where I diverge. Petroleum dependence is neither good nor desirable. A graph of crude oil prices versus gasoline pricesshows why. Notice any trend?
These data make it clear that ‘drill baby drill’ is not the answer to the economic consequences of oil dependency, no matter how you look at the numbers. Oil enjoys about 90% market share of transportation fuel in the U.S. and higher in the rest of the world. That simple fact accounts for the uniform global price, and further highlights the hard reality: the petroleum industry enjoys a de facto monopoly in transportation.
The market does not break up monopolies on its own. Absent anti-trust action (though that possibility has been discussed in Congress and at DOJ), we need policy mechanisms to diversify and correct the market imbalance. The article’s conclusion that corrective mechanisms require mandates, subsidies and/or taxes overlooks a better approach.
Clean fuel standards are performance-based and technology-neutral. Critically,they do not rely on politicians or regulators to pre-determine winners and losers. Rather, the standards establish an annual carbon intensity target to measure against. Each fuel is scored based on its full lifecycle. Fuel producers that beat the annual target receive credits accordingly. The credits are then banked or sold directly to companies that need to offset deficits for not meeting the target. Fundamentally, clean fuel standards are effective because they rely on companies to decide which decarbonization investments make economic sense, and on the market to decide which clean fuels consumers prefer.
Our modes of transportation are diverse, but our fuels are not. Technical innovation has tapped into a wide variety of renewable and waste feedstocks to produce fuels that can power them all. We just need policy solutions that unleash investors and entrepreneurs to bring them to market and economic scale. Let’s make petroleum compete for our fuel dollars. Then we REALLY can talk about ‘energy independence’.