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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 31, 2010 at 10:10 AM

Drill, baby, drill: The myth of energy independence

We’re told that President Obama’s political calculus in opening large areas off the U.S. to new oil exploration is to gain bipartisan support for comprehensive energy and climate change legislation. If so, it’s a fool’s errand. Even though presidential candidate John McCain supported the kind of drilling and nuclear power now backed by Obama, the Republican party is united in its unwillingness to support this administration.

The economics of the matter are equally clear-cut and unforgiving. As more of the developing world industrializes and adopts American car culture, demand for oil is rising at a rapid rate, far more than new production can handle. Also, light sweet crude, the cheapest and easiest to extract and refine, is in decline in many regions and is probably in absolute global decline. The remaining oil will be costlier when it reaches end-users, whether manufacturers or drivers. This is no small matter considering that the structure of the global economy, including international supply chains, has been based on a cheap oil era.

Alternatives provide little relief from this reality. They generally require more energy inputs than the new energy they create; even “green” alternatives often require large inputs from fossil fuels. And they can produce unintended consequences, from disrupting the food supply to environmental damage.

As for oil itself, although the world is at or near peak, we’re not “running out.” The remainder of this one-time gift of geology will just be more expensive and harder to find, extract and refine. But because oil tends to trade in a world market, we will find ourselves bidding against every other nation. Some will also try to protect domestic supplies, as was happening before the Great Recession. In any event, most oil is controlled by national entities, leaving the American majors — who sell in the world market — with a small share.

The end result is we’re probably going to need every kind of energy source for the future, but we need to be clear about the trade-offs and adjustments necessary. If we attempt to sustain the current American lifestyle, that, too, will be a fool’s errand. We can’t drill, baby, drill, back to 1965. On the other hand, the recession has provided a breather to make a transition — if we have the will and imagination to make it.

One other thing is clear: Nations will increasingly be in competition in the new energy era. Not for nothing has China declared renewables a strategic industry and is aiming to dominate the market not just in manufacturing but research. China has also quietly lined up its own overseas oil supplies, even as America maintains military in the Persian Gulf partly to enforce the Carter Doctrine (yes) to protect our national energy interests. This portends an uneasy future of global competition for resources. It could also, if we got our act together, mean new jobs and industries — including building more transit and rail to give people choices.

President Obama, like his predecessors, mentioned energy “independence.” Such a thing is not possible, especially since the U.S. hit national peak oil in 1973, and even less so since we were an oil superpower in the mid-20th century — no small element in winning World War II. We will be more interdependent than ever. George W. Bush talked more about peak oil, albeit parenthetically, than Mr. Obama. The president had better start preparing the American people for a very different future than the past.

Today’s Econ Haiku:

Elliott Bay Books

Wishing them the best fresh start

Pioneer Square, too

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