8 Jan 2014

American energy independence

The fracking revolution has dramatically increased America's supply of oil and natural gas. Prices have dropped; industries and consumers are switching from coal and renewables to oil- and gas-powered machines and generators.

American industrial firms now enjoy a significant cost advantage over international competitors. American politicians claim that America is finally reaching the "dream" of energy independence. More Americans are working in energy-related -- and energy-intensive -- jobs. Consumers pay less to keep themselves warm and their laptops charged.

The big debate now is whether politicians will end the ban on American oil and gas exports. (Yes, there's a ban, but it hasn't mattered for decades, due to a consistent need to import oil.)

I'm guessing that the ban will not end, due to a baptists and bootlegger coalition of "consumer advocates" who like lower energy bills and industrial bosses who want to pay less (and make more) than their competition. The most likely reason they'll lose is that oil companies with better lobbying more money convince politicians that oil exports will help the country, reduce the trade deficit, and make big profits, but they may also lose to common sense.

A ban on exports keeps domestic energy cheap, but such a ban is harmful because:
  • People use more energy when it's cheap. That's not bad per se, but it's bad when long-run (3+years) efficiency and competativeness fall. Remember how bad US cars were in the 1970s before the Japanese kicked butt and disrupted the cozy industry?
  • Neighbors are unlikely to respond well to an ongoing ban. They may impose tariffs and taxes "to level the field" on US exports
  • It's not a great idea to use more energy if you worry about climate change
  • The US -- and the world -- needs integrated energy markets to minimize the impact of disruptions -- everything from battles in Nigeria to exploding rail cars in North Dakota
  • Energy firms focussing on "cheap" are less likely to spend the money it needs to prevent environmental pollution. Export profits will make it easier for them to produce without ruining the country
Bottom Line: The fracking revolution can help everyone if it's not turned into a subsidy for American industrial firms. Integrated, world energy markets help the US achieve real independence... from energy disruptions and inefficiency.


Edward Lambert said...

The trade deficit has been falling mostly due to less imports of oil.
Exports have actually increased by 17% since pre-crisis. Imports are down just a little since pre-crisis.

My view is that this is a result of low domestic demand which creates more national savings, which creates more exports through the Balance of Payments mechanism.

Low domestic demand in the US comes from a 5% drop in labor share. Labor share has dropped in many other countries too.

Could energy prices be cheap because there is weak consumer demand throughout the advanced countries?

RD said...

The ban on exports of petroleum has been a sore one for Alaska.

Although we export our oil to Long Beach now, the refinery capacity there is limited.

We could export significant crude to Japan or South Korea at a significantly higher price and not seriously harm the Long Beach economy.

This is why Alaskan members of Congress are talking about this.

M. Wein said...

The price of gasoline and diesel in the US is tied these days to Brent as opposed to WTI or any other domestic crude. Therefore, it is likely that if you allow exports of US sweet crudes to the world market you will bring down the price of Brent, which would in turn bring down the price of gasoline and diesel in the US. One strain of thinking on the subject anyways ... I think it makes the most sense.

freude bud said...

"Could energy prices be cheap because there is weak consumer demand throughout the advanced countries?"

Is $100/b oil cheap? It is an order of magnitude higher than the price of oil for most of 1998 for example. I think that that may be a contributing cause to weak consumer demand throughout the advanced economies.

David Zetland said...

@M.Wein -- not sure if gas prices are "tied" to oil benchmarks as much as the cost of oil at the refinery, which can vary. traded gasoline may be different.

@freude -- higher prices def. reduce "quantity demanded" but "demand" has shifted in, due to the weak economy. The effects reinforce. (There's also the extra impact of higher prices on economic activity, but that force is much smaller than other factors affecting the macroeconomy). In sum, higher prices do not drive economic growth, but they may not hinder it, esp. if they RESULT from demand outpacing supply.

Note that water prices would be similar IF they reflected market forces!

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