Naturally we would be better off if we could somehow isolate ourselves from the risk of oil price shocks, but reducing oil imports does not automatically reduce our exposure to price volatility. Oil is a fungible commodity meaning that its price in the United States will be driven by worldwide oil market conditions. The only way to reduce the economic disruptions from world oil price shocks is to either reduce the overall oil intensity of GDP through enhanced energy conservation, or to lean against oil price volatility itself through more active use of the Strategic Petroleum Reserve.

Americans would also be a lot better off if world oil prices were determined competitively rather than being manipulated by Middle East countries, acting through OPEC. But again, the ability of the United States to counteract the abuse of market power by OPEC is limited. Most likely, a reduction in US oil imports would have only a moderate effect on the world price, and it is difficult to reduce oil imports, as opposed to total US oil consumption, or to favor imports from secure suppliers (e.g., Canada), without running afoul of WTO trading rules. Moreover, many analysts argue that a modest reduction in US oil imports would not produce much of a dividend in terms of reduced military spending, in part because Middle East military expenditures serve other objectives (e.g., the security of Israel), in addition to oil security.

Is the risk of higher oil prices, and accompanying oil price shocks, likely to increase as production becomes ever more concentrated in Middle East? This is difficult to answer. The Energy Information Administration and other mainstream bodies do not predict a rising trend in future oil prices over the next twenty years, and Middle East governments that did cut off their oil supplies would inflict considerable economic damage on themselves by forgoing a major revenue source. On the other hand, we cannot rule out the possibility of a political takeover by radical groups, determined to harm the United States, no matter how impoverished they make themselves.

Although, in our opinion, calls for radical policies to make the United States self-sufficient in energy are wholly unrealistic and misguided, oil dependency is still a legitimate cause for concern. Leaving aside environmental issues, studies suggest that some modest taxation of oil consumption, perhaps in the order of $3 to $6 per barrel, is warranted on economic grounds, to address the risk of economic disruptions from oil price volatility, and certain market power issues. And a case can be made for more R&D to diversify our energy portfolio thereby making us less oil-dependent over time, and perhaps more active use of the Strategic Petroleum Reserve in coordination with other oil-importing regions.