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Politicians, commentators, and some fellow Richochetti often mention “energy independence” as a solution to the conundrum of Middle Eastern politics. Dealing with the complex mess of that region is a thankless and dirty job, and we’ve been stuck doing it because of the importance of Persian Gulf oil to the world economy. I raised this issue last night in a comment to a post by Claire Berlinski, and it seemed to me that it warranted further discussion.
The United States is not involved in the Middle East because we import oil from the Middle East. Rather, events in the Middle East can have a major impact on the worldwide price of oil. This would be true even if the US doubled its oil production and became a net exporter, as the Middle East would continue to produce a large proportion of the world’s oil. Simply put, American “energy independence” will not change the political importance of the Middle East, nor will it insulate the US from oil price shocks resulting from events in the Middle East.
This is true because a large percentage of the most easily-accessible oil is located in the Middle East. This is a matter of geography, and is not something that we can change (assuming conquest of the oil fields is off the table). In fact, I would not be surprised if falling oil prices increase the proportion of oil produced in the Middle East, as I suspect that the more marginal wells (which tend to shut down when prices drop) are located elsewhere.
The figures for 2014 are as follows: US field production of crude oil & petroleum products was about 12 million barrels/day. Total imports were about 9 million barrels/day, but net imports were much lower at about 5 million barrels/day. About half of those net imports (2.6 million barrels/day) were from Canada. Less than 2 million barrels/day were from the Persian Gulf area. Thus, supply from the Persian Gulf accounted for about 12% of US consumption.
Worldwide, the Middle East accounted for about 30% of global supply (27.5 million of about 91 million barrels/day, using 2013 figures).
I see no reason to believe that increased US oil production — on any reasonably foreseeable scale — would make Middle Eastern oil less important to the global economy. The same holds for any reasonably foreseeable decrease in US consumption, whether due to lifestyle changes (e.g. driving less), use of alternative energy sources, or use of more efficient cars.
From the figures above, note that the US consumes about 21% of the world’s oil supply (about 19 million of 91 million barrels/day). Even draconian reductions in US oil use would have a relatively small effect on the global market.
In considering this issue, it is critical to understand that there is a global free market in oil, which makes questions of import/export rates largely unimportant. For non-economists, this reality may be difficult to grasp. As a simpler example, consider the global wheat market. A drought in, say, Ukraine would reduce world supply, making it a little harder for everyone to meet their demand. This drives up prices everywhere even in places like the United States that are net exporters of wheat. Supply disruptions in the Middle East have the same effect on the global price of oil.
This price effect, incidentally, is not a failure of the market. Rather, it is the defining feature of the market. When supply decreases due to an outside event, prices increase so that the quantity demanded is reduced by the same amount, bringing the market back into balance. In the absence of such market adjustments through government price controls, the result is either a shortage due to a price ceiling (think of the 1970s gas lines when price controls were imposed, or New York housing shortages after rent control) or oversupply due to a price floor (think of the government warehousing cheese in order to prop up the price of milk).
In short, there is little or nothing that we can do by changing US domestic policy, regarding either oil production or consumption, that will solve the problem of the Middle East and its disproportionate effect on the global oil market.