For decades, U.S. policymakers have been preoccupied with the notion of energy independence as a means to increase national security and protect the country from adverse economic effects of turmoil in the world oil market. But the concept arises from a misunderstanding of how the market works, Senior Fellow Joel Darmstadter argues in his recent Issue Brief, "Energy Independence: Fantasies, Facts, and Options" (IB 06-02). Instead of focusing on how the country can reduce its dependence on oil imports, he says, it is important to look at how the United States can reduce its dependence on oil.
Oil constitutes about 40 percent of U.S. energy consumption, and of that, 60 percent and rising is imported. But because the world oil market is so tightly integrated, the price per barrel of oil is the same no matter where it comes from. So while reducing our dependence on imported oil has relatively little impact on how vulnerable we are to oil-market volatility, reducing oil-import dependence in conjunction with our dependence on oil can make a difference. Darmstadter discusses supply- and demand-side options to this end.
On the supply side, Darmstadter looks at the opportunities and limitations of such measures as responding to short- and long-term supply disruptions, diversifying the geographic source of our oil, adding new sources, and finding alternatives to oil. On the demand side, he explores how market-based policies such as taxes and increased Corporate Average Fuel Economy (CAFE) standards can curb oil consumption.
But while these options can help reduce our vulnerability to economic impacts of oil price shocks, Darmstadter warns, national security can still be endangered despite the United States' role as a significant consumer: if just fraction of the world's petrodollars falls into hostile hands, it can provide them the means to do us and others harm.