Energy Independence Is Economic Suicide

Every single American politician seems to promise energy independence.  When they don't deliver (as they inevitably won't), they get knocked for not following through on their promise.  I, for one, am very glad that they don't proceed down that path.  It's certainly possible to free ourselves from foreign oil, but it would be extremely expensive, not free. It wouldn't even be intelligent.  In fact, given current market conditions, it would be economic suicide. It would be Smoot-Hawley times 100.

What am I talking about?  Let's have a little thought experiment.

Imagine that we had a machine that could, with very little energy, transform 14 bushels of corn grown in Iowa into 1 barrel of oil. Since America is very good at producing corn but not currently all that good at producing oil, we would regard this as a fantastic invention! Well what if I told you we already have this invention, but it isn't a technological one, it's an economic one. One that the great economist Milton Friedman talked about frequently:  free trade.

We send Saudi Arabia, Venezuela, and Canada our corn and they send us back barrels of oil.

Do we really want to break this marvelous invention, which transforms things we don't need but are very good at producing into things we do need and are very bad at producing, just so that we can claim to be "self-sufficient?" We could certainly survive, but our standard of living would go down dramatically because many of our workers, and much of our capital, would have to be diverted from efficiently producing corn (and other things we are good at making) into inefficiently producing energy.

Take this whole problem down a few levels, down to the family level.  Nearly every family in the United States relies on trade with other families in order to meet their basic needs.  In the old days this may not have been quite as true.  My Grandmother, for instance, lived in a sod hovel in Montana for part of her life.  Her family built that hovel.  Her family grew most of the food they ate, they drew their own water out of a well, and they made most of the clothes that they wore.

They were very self-sufficient, and many would consider that a good thing.  But in reality that family was very good at doing some things and very bad at doing others.  Perhaps the father of that family was very good at farming but only an OK carpenter.  Perhaps the mother of that family was very good at washing clothes but only a passable seamstress.  Judging by the fact that they lived in a sod hovel, it is unlikely anyone in that family was a very good home builder.  The reality is that even that family would be better off if they could produce lots of what they were good at producing, in this case probably crops, and trade for things that they were not so good at producing.  And, indeed, they must have traded for some things because it would be impossible for my great-grandfather to, for example, construct all of his own tools:  to mine the ore out of the ground, refine it, and hammer it into shovels, plows, and hoes all by himself.

A family is better off spending most of their time doing the things it does well, and trading for the things that it does not do well.  Today most families take that to an extreme.  Some might have a member who is a very good secretary but no one who is very good at making shoes, so they trade their time as a secretary for shoes.  Some may have a member who is a very good plumber but no one who is a very good dentist, so they trade their time plumbing for the dentist’s time fixing teeth.  Nearly all of us trade some specialized skill for even the basic necessities of life.  Our food.  Our house.  Our utilities.  This strategy, what economists call “specialization,” has lead to an enormous increase in living standards as each person shifts into his or her most productive activity.

The same principle applies to a nation.  We cannot be good at everything, and even if we were we would want to spend our time doing only the things we do best and trading for the other things we want.  At one point we were the best country in the world at producing oil.  But over the years we have exhausted the oil which was very easy to get in Texas and West Virginia.  Today most of the easiest oil to collect is in other countries.   We should do what we’re best at and allow those other countries to do what they're best at.  This would bring prosperity to every country as each is allowed to shift into their most productive activities.

It is often said that we need to become energy independent so that we won't have to fight all of these wars for oil.  I don't accept that argument in the slightest.  If we're fighting these wars over oil, we're shooting ourselves in the foot.  It would be far more ethical, by all moral traditions of the world that I am aware of, to spend an extra trillion dollars on oil in a decade than to spend an extra trillion dollars occupying a country for a decade.  But I don't even think I have to rely on moral arguments to make this case, because these wars have not driven the cost of oil down, they've driven it up.  Wars, it has been famously said, do only two things:  Kill people, and break things.  In this case we've broken the oil infrastructure of Iraq making their oil more expensive.  Additionally, we've crippled the finance sector of Iran,  one of the worlds most oil rich countries, with all of our sanctions and made it much more expensive for them to upgrade their oil infrastructure and bring oil prices down.

Ultimately, these oil-rich countries will charge as much as the market will bear for their oil, and we'll charge as much as the market will bear for our products.  There's nothing wrong with that.  It's just the free market in action.  You can protest, and whine about the OPEC cartel, but OPEC has been just about as effective as any other cartel which hasn't been enforced by the threat of violence (which is to say, not very effective).

In my opinion we would all be better served if our government brought the troops home, stopped meddling in the internal politics of the Arab states, and cultivated a strong trading relationship with whatever government those people end up with. I suppose you could write me off as an “isolationist” but it seems to me that those who would advocate shutting off our country to trade in certain products or advocate large taxes, tariffs, or subsidies in the name of “self-sufficiency” or “energy independence” are the ones who are truly “isolationist.”