Energy independence: Four decades of rhetoric

rokeachby David Rokeach, MBA ’15

This article was written in response to a seminar given by John McNabb, Vice Chairman of Investment Banking with Duff & Phelps Corporation, in an EDGE Seminar on Sept. 18, 2013 at Duke University’s Fuqua School of Business.

In 1973, President Richard Nixon announced “Project Independence,” an effort to make the United States energy independent by 1980.  Nixon defined his objective as “not [having] to rely on any source of energy beyond our own.”  Four decades later, this dream hasn’t yet come to pass.  It never will.

John McNabb spoke at Duke University’s EDGE Seminar Series on Sept. 18, 2013.  He is a seasoned oil and gas executive and is currently the Chairman of Willbros Group, an international energy construction and engineering company.  Mr. McNabb spoke about the extraordinary growth and potential of American oil and gas production.  Increasing production, he argued, would lead to energy independence.

There are many good reasons to remove government barriers to safe and responsible development of oil and gas resources in the U.S.  In this slow economic recovery, growth in the energy industry has been one of the few bright spots.  Thousands of new, good-paying jobs have been created.  Government revenue from oil and gas industry taxes, lease sales, and royalties has grown substantially, helping to reduce the federal deficit.  In areas of new development, like the Bakken and the Eagle Ford, the economic impact expands well beyond direct employment and investment; new hotels, restaurants, and stores have opened to meet the demand of new workers.  Business is booming in these parts of the country.

Mr. McNabb correctly alluded to some of these benefits.  Affordable, reliable energy (historically from fossil fuels) has increased the standard of living for billions of people around the world.  It has provided gainful employment and helped nations grow.  Unfortunately, rather than sticking to these real factors, politicians and industry executives often regurgitate energy independence as the primary justification for relaxed regulation and increased energy production.  Mr. McNabb argued that the U.S. has the opportunity to produce as much energy as it consumes, and posited that this is an end in itself.

Ironically, the appeal for energy independence is often made by those who would most vehemently oppose the systemic changes that would be needed for the dream to come true.  To achieve Nixon’s goal of not having to rely on sources of energy beyond our own, the U.S. would have to nationalize energy companies and shut down all trade of energy products into and out of the United States.  I imagine Mr. McNabb would oppose such actions, as would I.

According to the U.S. Energy Information Administration (EIA), the U.S. consumed 18.6 million barrels per day (MMbd) of petroleum products in 2012 and produced 11.2 MMbd.  That means that the U.S. would have to increase production by more than 50 percent to produce as much as it consumes.  Even if that were to happen, not all of that increased production would be consumed here in the States unless the government closed the borders and took over the oil companies.

Furthermore, increasing U.S. oil production would hardly impact global prices.  According to statistical analysis from the Associated Press, a 50 percent increase in U.S. production would cut gas prices by 10 percent, in the most rosy of scenarios.  And with OPEC countries contributing almost half of gross world production, the cartel could still exert significant influence on prices through its infamous supply management, offsetting the benefits for American consumers.

The point here is that no matter how much oil the U.S. produces, it will still be subject to swings in the global market.  Canada, for example, is a net exporter of oil, and gasoline prices there still rise and fall in relation to significant world events.  If Iran were to blockade the Strait of Hormuz, through which 20 percent of all oil traded worldwide passes, global prices would increase dramatically and Canada would be subject to those costs just like countries that import most of their oil.

To be sure, “energy independence” works wonders as a sound bite, and it’s hard to blame politicians for using lines that resonate.  As a former policy adviser for a U.S. Congressman from oil country, I can attest to how well this argument is received in much of the general public.  And when politicians use those talking points that elicit a strong response, the fallacies are further cemented into public discourse.

There are many good reasons for the U.S. to utilize its bountiful domestic resources.  Thankfully, since 2008, the industry has done quite well and been a major boost to the economy.  However, Mr. McNabb’s appeal for “energy independence” only perpetuates the most pervasive issue in the American energy debate since Nixon’s Project Independence: we are arguing over the wrong things.  Let’s get back to basics, move past the myths, and have a well-reasoned discussion supported by the facts.