As long as we run our economy on oil, we'll still be vulnerable to the world market.
This just in: The United States is about to be the new Saudi Arabia. Not the Saudi Arabia of wind, or natural gas, or some other nerd energy source nobody fights wars over, but of old-fashioned oil!
That's an easy conclusion to draw from reading the International Energy Agency's new report, which projects that the U.S. will replace Saudi Arabia as the world's top oil producer by around 2020, and lends a massive dose of establishment cred to the idea that North America is en route to energy independence within the next decade or so. Assuming that the prediction is correct, this is the sort of news that can, and will, be easily misconstrued -- probably in Congress by people responsible for setting our national energy policy. Because here's the thing: While we may soon produce as much crude as Saudi Arabia, we will not actually have the same power over world markets as Saudi Arabia, and thus oil will continue to be a political and financial thorn in our side.
For simplicity's sake, here a few key points to remember if you hear the Saudi Arabia line.
(1) We'll NEVER Be Like Saudi Arabia
Saudi Arabia is special for a few reasons. First, it has the world's second largest proven oil reserves, behind Venezuela. Second, it pumps more crude each day than any other nation. Third -- and this is the important fact about Saudi Arabia -- what gives it enormous sway over the international oil market is that it could pump more if it chose.
As a net oil exporter, the country's only goal is to maintain a stable market that yields the maximum profit per barrel. It accomplishes this by leaving a couple million barrels of oil a day untouched as an insurance policy. That way if, say, a major pipeline explodes in Africa, or Iran decides to drop mines along a major oil shipping route, the country can increase its production and calm everybody down. At the same time, if oil's price drops too low, the Saudis and the rest of OPEC can choose to decrease production and stabilize its value.
Even if we do eventually outproduce Saudi Arabia, we won't be able to get the world oil market under our thumb. We don't have a compliant state-owned oil company that the president can dial up. We're also going to need whatever oil we produce domestically, along with imports from Canada and Mexico. We're not going to get to be the conductor waving our baton at the global oil market like the Saudis have been in the past.
(2) More Drilling Won't Make Us Energy Independent
Another way to put it is that producing a ton of oil in the United States isn't going to insulate us from the rest of the globe. Mexico and Canada still aren't going to give our refineries any special neighbors-only discounts. Nor are the privately run oil companies pumping out crude in North Dakota, Texas, and the Gulf of Mexico. And because oil is a mostly fungible commodity traded worldwide, what happens to supply and demand in one corner of the planet impacts prices everywhere. If China and India start growing wildly again, or some sort of war causes prices to spiral, we won't be immune.
This isn't to say that producing more oil doesn't have it's advantages. It will bring more money and jobs into the states where rigs are popping up. It will shrink our import tab and also keep a cap on prices as developing countries grow and get thirstier for fuel. Beyond that, it will shrink the power of OPEC a bit. After all, the more oil that's around, the harder it is for any one country, or group of countries, to manipulate the market. These are real benefits that shouldn't be undersold. But we shouldn't act as if an oil boom will be our geopolitical or economic salvation.
(3) The Key Is Still Conservation
This can't be repeated enough: We can't drill our way to oil independence. But by conserving our usage, we can insulate ourselves from rising gas prices. Here's the IEA's economist talking to the New York Times:
Dr. Birol said the agency's prediction of increasing American self-sufficiency was 55 percent a reflection of more oil production and 45 percent a reflection of improving energy efficiency in the United States, primarily from the Obama administration's new fuel economy standards for cars. He added that even stronger policies to promote energy efficiency were needed in the United States and many other countries.
If we want to stop buying oil from places other than Canada and Mexico, we need to cut our usage. Same deal if we don't want to see prices spike as 1.3 billion Chinese inch closer to our standard of living. The scary thing is that more oil we produce, and the more our economy comes to rely on hydrocarbons, the harder it will be politically to promote sane green energy policies that move toward that goal. There's nothing like short-term profits to make you forget your long term interests.