It’s not merely the political Left that wants to intervene into the marketplace. Even some otherwise clearheaded individuals have fallen for the argument that “energy independence” is necessary on “national security” grounds, or because we are “transferring wealth” to Middle Eastern terrorists. The same arguments against intervention by liberals, however, are no less valid here. They’re actually even more persuasive because it is a matter of national security.

T. Boone Pickens, in his efforts to validate (and obtain government money - “ensure [his voice] will be heard by the next administration” - for) his huge natural gas holdings and recent $2 billion investment in wind turbines technology, argues that we are “transferring wealth” out of the country and it’s “crushing our economy”. Nothing could be further from the truth. When you go to the store to buy a loaf of bread, you aren’t “transferring wealth” to the grocer. He already owns the bread. You exchange money for product because you value the bread more than you do keeping the money. This is true for any purchase even if the seller happens to live overseas or is otherwise engaged in unsavory activities. Oil producers already own the oil, a valuable commodity for which there is worldwide demand. That oil is purchased for consumption in this country means that some American is willing to pay more (marginally) for that next unit of oil than a comparable consumer in Europe or China. From the perspective of the consumer, the source of the commodity makes no difference.

The reason so much oil is imported to the United States is that demand has outstripped domestic production because of the relative strength of the US economy. Consider that the only countries coming close to meeting their Kyoto targets are those of the former Soviet Union whose demand for oil dropped precipitously when their economies collapsed (conveniently after the base year set in the Protocol, but that’s another issue).  We import oil because other countries have a comparative advantage producing oil. We can therefore buy it from them at a lower price than at which we can currently produce it ourselves. The resources we would otherwise have expended on greater oil production are invested in more productive endeavors.

If the market operated normally, that would be the end of it (excepting the national security concerns addressed below). Unfortunately, the government has chosen to interfere by placing constraints upon production, primarily in ANWR and the continental shelves. It is abundantly clear that there is ample interest in developing these resources, which would both increase production (reducing prices to a level below what they would otherwise be) and inject the return for such investments into the American economy. Make no mistake: cost effective development of available resources yields a huge benefit to the US economy and would increase, perhaps substantially, the percentage of US energy consumption that is produced domestically … but that’s not the same thing as energy independence.

Understand: a societal goal of “energy independence” requires nothing less than government intervention to prevent the use of foreign oil (or even some other energy resource) even when it is economically beneficial to do so. In order to justify such an action, one must demonstrate that the benefits of independence are at least marginally greater than the costs. They are not.

The alleged benefits of an energy independence policy are usually expressed two-fold. First is the benefit of favoring the American producer and second is eliminating the national security risk associated with reliance upon foreign producers for a product considered vital to the economy. The first “benefit” simply doesn’t exist. Again, in the absence of government interference, American producers will deliver the optimal amount of oil (as determined by the interaction of supply and demand). Government intervention to either increase domestic production or inhibit domestic consumption yields economic inefficiencies and incents malinestment in otherwise too-costly endeavors that harm the economy rather than helping it.

That leaves the national security argument: What if a hostile nation (or nations) upon which we depend for oil chose to cut us off? How much damage would that do? How would our military function without oil for tanks and planes? Shouldn’t we eliminate that risk? In a word: no. The risk is largely imaginary. Neither the nature of US imports nor the functioning of the marketplace would allow such a crisis to manifest itself.

To understand the scope of the potential crisis, one must examine how much (or how little) of our oil consumption is subject to disruption by any single entity or group. According to the Department of Energy (source for each of the figures referenced), in 2007, the US consumed 7.55 billion barrels of crude oil and petroleum products. Almost exactly 35% of that amount was produced domestically, meaning that 65% (4.91 billion barrels) of our consumption was supplied by imports (alarmist rhetoric always rounds in such a way as to make things sound as dire as possible which is why we hear that we rely on imports for “nearly 70%” of our consumption).

The largest exporters of oil to the US are not from the Middle East. Canada, which sends us more than the entire Persian Gulf combined, and Mexico together exported 1.45 billion barrels to the US last year (19.1% of consumption). Another 1.28 billion barrels (16.9%) were provided by other non-OPEC sources. All told, this accounts for 71% of US oil consumption, which, of course, leaves OPEC.

Is that production is at risk? Not really. OPEC is a cartel created to restrict supply in order to increase revenues for member countries (and even that hasn’t worked). To exclude a potential customer from the market – particularly the largest customer – would work directly against that goal. Moreover, and this is the most important point, unless the country or countries wishing to stop supplying the US ceases production entirely, all that happens is that oil that would otherwise have come to the US is purchased by consumers in other countries and US consumers purchase the oil those other buyers would otherwise have gotten elsewhere. Excluding a relatively short term market adjustment period, the ultimate net impact would be negligible.

If either Saudi Arabia or Venezuela, the next two largest suppliers after Mexico, each supplying about 7% of US consumption, cut us off, we would simply purchase more from Russia or Norway or some mix of the other 95-odd countries from which we purchased oil in just the last year alone. In the interim, we’d tap the Strategic Petroleum Reserve, which holds about 16% of annual production (more, by far, than is necessary). By restricting consumption of foreign oil by governmental fiat (or tax or subsidy, which amounts to the same thing) we incur all the harm of such a cut-off while abandoning the option of seeking another supply source. If we don’t want others to do this to us, why should we do it to ourselves?