TCS Daily


Myths of Oil Independence

By John Baden - February 19, 2008 12:00 AM

A friend recently passed on a chain letter urging independence from Middle Eastern oil. It's a seductive idea. Here's the gist: "Every time you fill up the car, you can avoid putting more money into the coffers of Saudi Arabia.

Just buy from gas companies that don't import their oil from the Saudis.

Nothing is more frustrating than the feeling that every time I fill-up the tank, I am sending my money to people who are trying to kill me, my family, and my friends."

The letter goes on to list companies that import Middle Eastern oil.

Shell - 205,742,000 barrels
Chevron/Texaco - 144,332,000 barrels
Exxon/Mobil - 130,082,000 barrels
Marathon/Speedway - 117,740,000 barrels
Amoco - 62,231,000 barrels

Here are some that do not: Sunoco, Conoco, Sinclair, BP/Phillips, Hess, and Arco. He urges us to patronize them.

The letter concludes by urging the recipient to send it on. "If each of us sends this e-mail out to ten more people within one day, all 300 MILLION people could conceivably be contacted within the next eight days!"

Alas, there is no easy solution to our problems of energy dependence. This proposal is predicated on a fundamental error, not understanding that oil is a fungible commodity; it moves around when entering the world market. I'm not referring to its viscosity but rather its tradability. Many types of crude oils are interchangeable and refiners substitute among them.

This substitutability of oil wrecks the proposal for eliminating revenue to Middle Eastern producers. If we had a law against importing, say Saudi oil, and switched to a basket of other suppliers, the Saudi oil would go, perhaps indirectly, to these suppliers.

We import about 60 percent of our consumption, a quarter comes from the Middle East. There are only two ways to eliminate Middle Eastern revenue from this demand; either prohibit imports or eliminate consumption. Neither option is possible for a long, long time. Buying from Sunoco, Conoco, or any firm that claims not to buy Middle Eastern crude, might make us feel good, but it would have no serious effect on Middle Eastern producers.

The blunt reality is that all developed nations, especially the U.S. and Canada, have become fundamentally dependent on cheap oil. Our residential, business, and recreational lives are predicated on it. If the policy goal is to reduce demand, a large fuel tax is the most effective means.

Consider this mental experiment. Assume the administration elected next November imposes a $3 per gallon tax on fuel with a 20 percent increase each year for 4 years. In four years, the tax would be over $6/gallon. At current prices this would make gas and diesel about $10/gallon in 2013! (It's now $7.50 in Iceland.)

The behavior of vehicle producers and fuel consumers would rapidly change.
Even if politically sustainable, a most unlikely prospect, adjustments would take years. And of course the poor would suffer most. Who buys hybrids such as the Prius? It's not those who must conserve for reasons of poverty.

Five years ago, Arnold Kling, an economist I greatly admire, addressed the topic of the chain letter: "I am conditioned by experience to expect proposals supposedly aimed at those problems to turn out to be ineffectual.... But the worst refuge of scoundrels, in my opinion, is the line that 'we need to reduce our dependence on foreign oil in order to fight terrorism.' When I hear that, my baloney-sandwich detector really starts vibrating. I am ready to reject whatever is on offer, whether it be oil drilling in Alaska, regulations on SUV's, or some new synthetic fuels program."

The blunt fact is that regardless of what we want, or what politicians recurrently promise, for the foreseeable future we are locked in a petroleum based economy and society. This is a real problem on multiple dimensions.

There are no easy answers; buying petroleum products from companies that don't import from the Middle East isn't one.

Adjusting to reality won't be easy and there are no cost-free solutions. We will see many promises and prospects offered by politicians, other opportunists, and sincere but naïve others. Arnold's phrase, "I am conditioned by experience..." warns us to be careful in accepting proposals for energy independence.

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119 Comments

Right up Bobjones' alley
Hey Bob!

If you want to come clean that you're the original author of that chain email, now's your chance.

Who spends the fuel tax?
And upon what would it be spent?

How would a fuel tax be any better than market forces to drive replacements for crude oil and improve efficiency?

The market seems to be responding quite well. Hybrids are hitting the market. Even luxury hybrids and SUVs. Chevy will introduce an electric car soon and many Toyota hybrids have kits to charge them from the grid.

The market is doing what it is supposed to do.

Siphoning off that revenue and letting government get its grubby fingers on higher fuel taxes will only make government larger and more socialistic, not improve fuel efficiency or diversity.

What goes around comes around.
The Saudis can't eat or drink all their money. And there are only so many luxury goods and fancy airplanes they can use at one time.

They invest most of their revenues in companies around the world.

"Al-Walid began his business career in 1979 upon graduation from Menlo College. Funded by a $30,000 loan from his father and a $300,000 mortgage on his house, he initially brokered deals with foreign firms wishing to do business in Saudi Arabia.[citations needed] This was followed by land deals in the 1980s, along with major investments in the Saudi banking industry, which proved to be undervalued at the time.[citation needed]

The Prince's activities as an investor came to prominence when he bought a substantial tranche of shares in Citicorp in the 1990s when that firm was in difficulties. With an initial investment of $550 million to bail out Citibank caused by underperforming American real estate loan and Latin American businesses, his holdings in Citigroup now comprises half of his wealth worth US$10 billion.[2] He has also made large investments in AOL, Apple Inc., Worldcom, Motorola, News Corporation Ltd and other technology and media companies.[citation needed]

His real estate holdings have included large stakes in the Four Seasons hotel chain and the Plaza Hotel in New York. He sold half of his shares in the latter in August 2004. He has made investments in London's Savoy Hotel and Monaco's Monte Carlo Grand Hotel. He currently holds a 17% stake in Euro Disney SCA, the organization which manages and maintains the Disneyland Resort Paris in Marne-la-Vallee, France.[3][not specific enough to verify]

In January 2005 Al-Walid purchased the Savoy Hotel in London for an estimated GBP £250 million, to be managed by Fairmont Hotels, in which Al-Walid owns an estimated 16% stake. In January 2006, in partnership with the U.S. real estate firm Colony Capital, Kingdom Holdings acquired Toronto, CA-based Fairmont Hotels for an estimated $3.9 billion.

As of 2007, he was believed to be in talks with Robert Earl, founder of Planet Hollywood, about taking a controlling stake in the English Premier League's Everton FC[citation needed]."

http://en.wikipedia.org/wiki/Al-Waleed_bin_Talal

The author's point
is that the outrageous tax would be the only conceivable action that government could take to cut Middle Eastern oil imports. He does not endorse it nor does he say it is the right thing to do, and his point about its harming the poor most of all illustrates that he does not favor it.

Question still not answered.
The government could also ban oil from the middle east. Demand radioactive tracers be added to mid east oil and any shipment that has that tracer must be rejected at US ports.

The socialists have been proposing increased fuel taxes for conservation for decades without answering the question about what to do with the money.

Cigarette taxes are supposed to fund health care just as the tobacco shake down money was supposed to be used for 'education'.

We agree it's a bad solution, but why would anyone think it would be a good idea?

interesting
I would like to know how producing more energy domestically (specifically, drilling in Alaska) would not lesten our dependence on foreign oil in general?

chain letters
Every few years I see a chain letter that is similar. In it the person declares that we need to protest high oil prices by having everyone in the country not buy gas on a particular day. The letter writter reasons that this drop in income will bring the oil companies to their knees.

What they don't realize is that unless everyone also forgo driving on that day, there isn't a scintilla of difference in how much oil is bought. Some of the purchases are time shifted to the day before, some are time shifted to the day after. The only one hurt by such a move are the small jobbers who own the corner gas stations. When people don't come in for gas, they also aren't buying the snacks and other goodies that these stores sell. Many of them make more money from the snacks then they do the gas.

still wouldn't work
Such an idea would only work if everyone in the world would agree to ban middle east gas.

Let me work up an example.

Assume two consuming countries (C1 and C2) and two producing countries (P1 and P2). For simplicities sake, we will assume that C1 and C2 consume the same amount and P1 and P2 produce the same amount.

C1 gets half it's oil from P1 and half from P2.
C2 gets half it's oil from P1 and half from P2.

C2 decides that it will punish P1 by refusing to buy any of it's oil. Since C2 is not willing or able to use less oil, it is now required to buy all of the output of P2. You might think that P1 is now suffering because half of it's sales are gone. But this is not the case.

C1, who used to get half of it's oil from P2, is now crowded out. What is it to do. It looks around and finds that P1 now has half of it's production available.

The end result is now C2 gets all of it's oil from P2, and C1 gets all of it's oil from P1.

Same amount of oil is sold, same amount of oil is bought. The only difference is who's buying what from whom.

You can add more consumers, more producers and have each consumer and producer consume and produce different amounts. The resultant adjustments are that much harder to figure out in advance, but the result is still the same.

Don't disaree but still no answer.
Still waiting for how the proponents of higher fuel taxes plan to spend their windfall.

And, what will happend to such taxes when oil consuption drops?

It would not work
to bankrupt or even curtail production in the Middle East. That's certainly true.

But this isn't about punishment of Middle Eastern oil lords. It is about enticing Americans to cease and desist from all Middle Eastern oil importations.

I certainly agree that it would not work to that ends either, but your scenario does not illustrate the "why". As you say within it, "the only difference is who's buying what from whom".

I'll answer Marjon's question with a question.

How does the Left (and it would be the Left that would propose such a silly tax) ALWAYS spend its ill-gotten gains...er, that is, a tax-windfall?

Socialist power
That's what they want with more control of the economy.

About this
"Still waiting for how the proponents of higher fuel taxes plan to spend their windfall"

Remember Robert Redford's last line from the movie "The Sting".

"And, what will happend to such taxes when oil consuption drops?"

That's easy. The tax will go up to meet targeted revenue requirements. Unless, that is, any of us here are silly enough to believe any claims of 'revenue neutrality'.

It might, but so what
Even if we produce more domestic oil, it will do nothing to take away from production from the Gulf Oil States, as they're the world's lowest cost producers. All such a policy does is knock off the highest marginal cost producers, ie the Canadian tarsands production and ventures of that nature. As a result, US dependence on imports declines, but revenue flows to the Arab states continue.

Saudis know this
That's why they have a vested interest in keeping the price of oil at reasonable levels. Levels which prohibit more production elswhere or stimulates more conservation.

The fact the prices are high is that they can't meet demand, the dollar is too low and/or they believe they are running out of oil. Or a combination of all.

What it would *really* take to gain "energy independence"
Nuclear power and a viable synthetic petroleum industry. We have the necessary coal for the latter, but the process is not terribly efficient. Hydrogen generated by nuke plants during non-peak hours is a possible feedstock, together with the coal, for synthetic petroleum.

Technically it can be done, but not quickly or cheaply.

Solar might be a useful supplement, at best. Other non-fossil fuels cannot possibly provide the power levels required to maintain our present standard of living. Not even close.

I calculated once that powering the country by solar alone would require paving over an area the size of Massachusetts with solar cells. While the idea of paving over Massachusetts is not unappealing, there are obviously serious practical difficulties with this as a power scheme.

The prices are high
because it takes a certain amount of time to adjust to large, new demand. Specifically that's China and India. Second, much of the increase in the price of gasoline has to do with refinery limitations and regulations which are entirely the manufacture of US governments, federal and state. Third, as a result mostly of the first item, some transportation bottlenecks are becoming more difficult, at least in the short term.

These two minor additions aside, your post is entirely correct. The notion that US domestic purchasing or regulatory or tax policy can prevent the flow of oil revenues to the middle east is utterly absurd.

Just as a side note there is another reason for the sustained price increase. The Saudis may now be aware that the price level that would make alternatives more attractive is much higher than previously and hence could let the price of oil rise without triggering increasing moves to other technologies. In short, doing what any good owner does, charging what the market will bear.

There's also this
Just to turn the Greenies' arguments against them, what do you suppose would be the environmental impact of a solar panel the size of Massachusetts?

Would it surprise you that the Egyptian government conducted such a study in 1993 and rejected large scale solar power on environmental grounds for deployment in the Sahara Desert? Turns out, the loss of habitat under solar panels is virtually total.

"Technically it can be done, but not quickly or cheaply."

Quite right. The least cost way to do it and the one with the lowest technology risk is with capital stock turnover, but that's much too slow for the Greenies' stop-the-world-now ambitions.

what so
The fact that the ME is the low cost producer is irrelevant. Not with prices this high.

More US production will drive down the market price of oil. This will decrease the amount of money they are receiving. Even if they sell the same number of barrels, getting less for each barrel will cut down their revenues.

"paving over...... Massachusetts"
I like this idea. Let's build on it. I would think, however, that the Carolinas or southern California would be a better location. I'm sure the current residents would understand the need for their sacrifice.

There's only one way to remove the Saudi oil weapon:
Bomb their oil fields!

Lunar Solar power
"Two general concepts have been proposed for delivering solar power to Earth from space. In one, Peter Glaser of Arthur D. Little, Inc. (Cambridge, MA), proposed in 1968 that a huge satellite in geosynchronous orbit around Earth could dependably gather solar power in space. In the second concept figure (1), discussed here, solar power would be collected on the moon. In both ideas, many different beams of 12cm wavelength microwaves would deliver power to receivers at sites located worldwide. Each receiver would supply commercial power to a given region. Such a receiver, called a rectenna, would consist of a large field of small rectifying antennas. A beam with a maximum intensity of less than 20% of noontime sunlight would deliver about 200 W to its local electric grid for every square meter of rectenna area."
http://www.acm.org/ubiquity/views/v7i28_kumar.html

Until we fabricate a Dyson sphere and there is no energy shortage.

Of course the issue with satellite solar power is that terrestrial governments can't control it well.

Imagine, DPRK, China Indea, Africa could all the power they wanted by building an antenna.

Not necessarily
Increase in US production would in large measure offset declines in production happening in the US and elsewhere such as Mexico and Venezuela. If as you suggest it would seriously reduce the price of oil, the principal victims would be those nations and oil suppliers most friendly to the US, namely Canada. In that respect, the principal adverse economic effect would be reduction or elimination of tarsand investment. Given the profitability of Saudi oil revenues at $20/bbl, it is not reasonable to suggest declines from the current level are likely to be of any significance to them. All it does is knock off some competitors.

Guys! Guys! Guys! (and any Gals reading this)
The answer to Marjon's question is the answer to this question: What will the government types do with the proceeds of any carbon taxes? Will they lower the equivalent revenue amounts elsewhere? (as Colin alludes to)

Short answer: HAHAHAHAHHAHAHAHA! Yeah, right!

One way to cure a headache, cut off your head.
Great idea!

Its not the oil, its the oil sellers
The problem that the quest for oil independence seeks to solve is that we are sending billions of dollars to several muslim countries who turn around and use the money to try to kill us and our friends. So the real problem is not that we are buying foreign oil, the problem is that we are buying foreign oil from people who are trying to kill us. Under these circumstances the obvious solution is to take the oil away from our muslim enemies. Our muslim enemies (however many we choose to allow to continue living) will then be without the oil revenues with which to finance their global mischief and we will have access to substantial global oil reserves at cost, thus driving down the world market price of oil to the benefit of other oil importers like Japan and Europe and to the detriment of other oil exporting non-friends like Russia and Venezuela. The question the author should be asking is: why haven't we done this already?

or worse
Sometimes the worst thing that can happen is for Congress to actually do something!! Let's hope this is one "something" that doesn't get done.

Chain letter and Bill Maher ignorant
Bill Maher used to promote this as well and it is just as dumb then as it is now.

I lay the blame squarely on the socialist baby boomers who want everything but don't want to pay for it.

All their demands require energy but they lobby to stop new nuclear power plants, new oil refineries, new oil field development, new waste incinerators.....

declines
First off, the declines in Mexico and elsewhere are already being offset by new finds.

I agree, that whether the Saudi's are making a profit of $70/bbl or mearly $60/bbl doesn't sound like a lot, but they have lots of bills as well. They have a very large royal family that has grown used to their luxuries. The population of the country has grown used to the benefits provided by the govt. In that country, even the poor have Phillipino maids. They just have one instead of four.

As to Canada, the investment in tar sands, etc. will continue, even if the US opens up every location we have to drilling. With the rising demand in China and the third world, US production won't hold back the tide. Additionally, the Canadians have lots of sources for wealth. They aren't dependant on oil alone, the way the GUlf States are.

A drop in oil prices will help in other ways, since the US is a net importer of oil.

Blood Diamonds
If we don't buy oil from the M.E. someone will.

And unless we do something to try and separate the evil oil from the good oil, we will still be buying evil oil.

Oil is a worldwide commodity and flows where the market is regardless of the source.

US oil is shipped to Japan. Why? The pay for it.

Go ask politicians
Thats who your question is for.


But I'll pretend I'm a politician for a second. Seems to me we have a deficit and debt that could use some money to reverse our direction toward bankruptcy. We're fighting a war that we're not currently paying for, except the interest on our borrowing. Additional tax incentives for alternative energy development would be a good thing. After the deficit is reconciled I'd push for some tax cuts, even including corporate taxes perhaps.

Nice, thanks for thinking of me
I think the author is correct. As long as we're dependent on oil we'll be dependent on the Middle East. Its a red herring to say we need to end our dependence on the Middle East but still rely on oil. The answer is to develop alternatives to oil, and thus will lead us to break our servitude to Saudi Arabia. It would weaken Iran too. And Hugo to our south. The fundamental problem in the equation is our dependence on oil. There are security implications as well, the only valid answer is to develop new sources of energy.

I would support raising the gas tax. Not as much as the author proposes, but it would indeed give the market more determination to change. We're heading in that direction already, I think marjon mentioned that, but we're moving too slowly in my opinion. The reason we're moving that direction is because gas is more expensive, so raising the tax would push us faster. This is a better solution than mandates on vehicle manufacturers, don't you think?

I acknowledge it would put additional hardship on the poor, which is unfortunate, but, I think its got to be done. The American poor are better off than the poor of the rest of the world, so they have some room to give.

I wonder if you guys are aware, after he left the Administration, Paul Wolfowitz was on the bandwagon early in talking about our energy issue as a national security issue. As much as I'm loathe to say, he is right.

When has the government ever picked the RIGHT technology to develop?
And how do you GUARANTEE ALL the money consficated from consumers from a gas tax will be use for alternate energy?

What will you tax when the revenue from a gas tax evaporates when gas consumption falls?

whats the point of the question?

"When has the government ever picked the RIGHT technology to develop?"

I have no idea. Do you? Are you implying thats what my comment expresses, that the government would pick the technology to develop? Because thats not the case.

"And how do you GUARANTEE ALL the money consficated from consumers from a gas tax will be use for alternate energy?"

Well, you look at how much is coming in from the new tax and then make that the amount that goes for alternate energy. I'm not concerned that 100% exactly goes to alternatives. I'd be ok with the government using some of it to reduce deficits. I just don't want additional spending in general, thats just as important, more important actually.

"What will you tax when the revenue from a gas tax evaporates when gas consumption falls?"

Nothing. We'll reduce spending.

"We'll reduce spending." What mythical world is this?

the mythical world where I'm a politician
You may recall, or not, thats the context within I offered those comments. I have little real hope they would do this, but it is part of the change I want from our government.

Name me one
just one tax that in the history of mankind was ever 'revenue neutral'. What's depressing is that people keep believing it.

There will be life after oil !!
There will be life after oil. At least we'll adapt. Arab countries in total have less exports than Finland. Without oil they have nothing.

Chain Letter That Works
Dear Suckers!

As you know, Global Warming is going to disrupt all our iPods, make Viagra impotent, and raise sea levels so the sea monsters can more easily grab us as we fiddle with our broken iPods while walking along the beach.

So, I've started a new grass-roots chain letter to save the planet! Even if you don't want to save the planet, think of the Viagra! (if you don't need it now, you very well might someday in your future)
This is how it works!
1) You send PayPal contributions of $3 each to all the folks listed below.

2) You remove the person at the bottom of the list and add your PayPal account id to the top of the list.

3) You email the revised letter to as many people as you can. SPAM services work best! (Chain letters that save the planet are exempt from Can Spam! laws, so don't worry)

If you don't have a PayPal account, go to www.paypal.com to set yourself up. It's easy!

Here's the list to send contributions via PayPal!

===============================================
1) osama@aljazeera.net
2) osama@aljazeera.net
3) osama@greenpeace.org
4) osama@dnc.org
5) osama@clinton2008.com
6) osama@obama2008.com
7) osama@usstatedept.gov
8) fidel@castroretirementfund.com.cu
9) osama@eucommission.eu
10) roy_bean@cpusa.org
===============================================

$4/gal by Memorial Day?
There's talk on the pundit shows of the price reaching $4/gal by Memorial Day again.

Of course, I've long since learned to discount most news sources when it comes to economics. Especially when the news folks forget to ever mention when the prices go down.

Anybody else hear of this $4/gal thing?

How do you expect anything to change when you do the same thing?
The only peaceful way I can work for change is to promote liberty and attack socialism.

The Chinese will buy their oil.
It does not matter who sells the oil as long as we need to buy it.

Dubai has little oil, knows it and is building Dubai into a middle east financial and business center.

Spending Cuts
Like a good liberal you never mention spending cuts. Until I see some real intent to control spending I refuse to support one penny of tax hikes.

Just Because
The Arabs refuse to invest in their economies. Had they invested the oil money in the latest technologies, in world class technologies, in science and drugs they have the funds to lead. Being in business is always looking to the future. However, the Arabs have 2 problems. One, they are stuck in a religion that does not allow free thought and second, investing in a modern free market economy means losing control. It means wealth for the people but loss of control.

Some day the money will run out and then nobody will give them the time of day. They have the chance.

If they blow it they can blame no one. I do not expect them to wise up.

It is a waste.
Some day the money will run out and then nobody will give them the time of day. They have the chance.

They are missing a rare chance but they are stuck in a 7th century mindset.

Yep, and I believe it too
All the stars are aligned; high crude prices, maximum refinery output, a lack of any real energy policy, etc. The fact is, since bottoming out here at about $2.75 a gallon in December-January, the price has been creeping up already. Depending on where you are, it is now between $3 and $3.15 a gallon here. When the normal spring bump hits in April/May I see $3.50 to $3.75 and $4 by Memorial Day is certainlu going to be within reach here.

Of course, prices vary around the country, so the national average may not top $3.75; but some areas will almost certainly see $4.

Oil is fungible, but distribution systems are not
The chain letter is unlikely to result in real behavior change by consumers but if it did the oil distribution companies would certainly take notice and reduce their purchases of middle east oil, replacing it with oil from other sources. That would marginally reduce the value of middle east oil as it marginally increased the value of oil from other sources.

The most important effect would be on distribution systems. Companies would over time invest more in facilities to bring oil to the US from other sources and less in facilities to bring oil from the middle east.

The Saudis would still sell their oil but their choke hold would be weaker around our neck and stronger around the necks of the Chinese, Indians and Europeans. As a result those countries would need to come to us when the Arabs act up rather than the other way around as it is today.

Who cares about loss of habitat in the Sahara?
Solar isn't ready for prime time yet, but when or if it ever becomes useful on a large scale there is plenty of useless land to put it on.

And who knows, maybe someone will find he can grow mushrooms under the panels.

It's not that they refuse to invest in their economies
The problem is that a big fat sheikh in the capital makes the decisions about how to "invest" the money. Just the same way a big fat bureaucracy in Washington makes the decisions about how to "invest" the money that our government pours into alternative energy.

Witness the fusion project that is always 20 years from the next breakthrough after nearly 60 years of "investment". Witness solar power providing less than 1% of our electricity after nearly 40 years of "investment" started by Jimmy Carter. Witness the total preposterous debacle of corn to ethanol.

Lunacy that openly displays its face
So the idea is to launch megatons of equipment into space and spend trillions on the generating equipment and then build rectennas over an area 5 times the area of Massachusetts (assuming that previous poster was correct about solar power collection area). This idea can only have been thought up by the idiots who conceived of the space shuttle and have been in charge at NASA ever since the agency finished with the last moon mission 50 years ago.

It's very hard for me to see how space generated power can ever be competitive with solar power generated on the ground in deserts once solar cells get more efficient and transmission methods improve.

Including Roy Bean at the end of the list made me get coke all over my keyboard
And now my nose and sinuses are all tingly from the carbonation.

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