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Reducing Oil Consumption will Hurt our Friends and Us More than the Middle East

Many people believe that national security would be advanced if we reduce our petroleum usage, because, goes this theory, we would be funneling less money to the Middle East which then would reduce, if not eliminate, funding for terrorists who wish to harm the U.S. (more on this in the future).  Ex-CIA Director, James Woolsey, for instance, is reported to have said that we need  “destroy the strategic power” of petroleum by making us not less dependent on foreign oil, but less dependent on oil, period. See, also, here

But if we reduce our oil demand — whether by subsidizing or mandating renewables, tightening CAFE, or hiking gasoline taxes — the first barrel of oil that would be withheld from production will most likely be the barrel with the highest marginal cost of production, and the last barrel of oil that would be displaced would be the one that has the lowest marginal cost of production.  This means that the first barrel of oil that wouldn’t be produced is probably oil from the Tar Sands of Alberta and deep/ultra-deep waters in (or near) the United States, and, possibly, Brazil, Angola, and Nigeria. The last barrel to stop production will probably be from Saudi Arabia. In other words, subsidies for alternatives to petroleum will probably do more harm to our friends and ourselves, before they hurt the people from whom we are trying to gain “energy independence”.

We could hurt ourselves in a variety of ways.  First, mandating renewables would increase our energy bill.  Second, subsidizing petroleum alternatives would reduce our take home pay because the government would have to pay for the subsidies, and guess who will have to pay for that!. Third, we may have to shut production down in deep and ultra deep waters in the vicinity of the U.S.

Talk about cutting one’s nose to spite another’s face.

3 comments

1 Allen { 02.09.09 at 11:44 am }

Oil has it’s issues. But as a source of energy it’s hard to beat. It’s relatively easy to transport, extract, refine and found all around the world. We need energy to sustain our wealth. To date there isn’t a single other energy option that works as well as oil. And the ones that could possibly fill a niche, such as running our cars on natural gas, still require huge amount of imports.

2 jae { 02.09.09 at 12:55 pm }

You will never make it in politics, because you are far too logical and credible.

3 quanticle { 02.21.09 at 1:23 pm }

But if we reduce our oil demand — whether by subsidizing or mandating renewables, tightening CAFE, or hiking gasoline taxes — the first barrel of oil that would be withheld from production will most likely be the barrel with the highest marginal cost of production, and the last barrel of oil that would be displaced would be the one that has the lowest marginal cost of production. This means that the first barrel of oil that wouldn’t be produced is probably oil from the Tar Sands of Alberta and deep/ultra-deep waters in (or near) the United States, and, possibly, Brazil, Angola, and Nigeria. The last barrel to stop production will probably be from Saudi Arabia.

From a strategic perspective, though, that doesn’t matter, since the issue is aggregate rather than marginal demand. Simply put, (according to those promulgating this view) the issue isn’t that we import oil from the Middle East, but that we import oil at all. They want us to “live within our means”, in other words, reduce aggregate demand to the point where we could fulfill it with 100% domestic and allied (e.g. Canadian, Mexican) production if necessary. Essentially, they want autarky in the field of energy.
Of course, such a view is laughable, and has been ever since Adam Smith published Wealth of Nations, so they disguise it to appeal to the environmental lobby.

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