Energy Policy:

SAFE's Ori says energy independence a myth



Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Sam Ori, director of policy at Securing America's Future Energy. Sam, thanks for coming back on the show.

Sam Ori: Thanks for having me.

Monica Trauzzi: Sam, SAFE is releasing a report this week compiled by business and military leaders discussing what you say is sort of a myth behind the idea of energy independence. With our domestic oil and gas boom, with renewable use and production on the rise, why isn't energy independence really a feasible idea for the United States?

Sam Ori: All right, well, so what we wanted to do in this report was take a look at how do we define energy security and what's important when we think about energy security and how does that relate to this notion of "energy independence?" And our argument basically to sum it up is, you know, energy security is about the role that oil plays in the economy from a consumption standpoint and that, you know, in looking at this boom, without question a boom in domestic oil production and domestic liquid fuels production, there are enormous economic benefits associated with it and that those should not be discounted. The impact on the trade deficit, jobs, the impact on jobs, keeping more domestic capital within the U.S. as opposed to sending it overseas, all good things for the long-term macro economy without question. But that when you think about energy security what really matters is what is the impact of price volatility on consumers and what is the impact of high gasoline prices and then, ultimately, the crashing gasoline prices on consumer spending and consumer behavior? And what you find is that, if you really look at this from sort of a hard truth perspective, the United States is dependent on oil, which is priced in a global market. We're not really dependent on imported oil versus domestic oil. That's not really the key question. The question is how important is oil in the economy? And as oil prices are spiking due to geopolitical events beyond our control, what's that doing to the economy? And the answer is it's been having, I would argue, a substantially negative impact on the economy and that's not related to how much oil that we produce domestically.

Monica Trauzzi: Is there any way to break free of these global drivers?

Sam Ori: As long as you're a large oil consumer and you consume oil the way that the United States does, I would argue no. That if you look at the trends that have been driving oil price volatility in the global oil market, those trends are very unlikely to abate in the short and medium term. Rising demand from India and China as, you know, more than a billion people take to the road and demanding increasing levels of mobility and then geopolitical volatility in key oil-producing parts of the world, those things are not things that we should have a high level of confidence are going to substantially decrease. And so if you look at the outlook for oil price volatility, I think you have to take that as a given and say how do we then insulate the economy from that, reduce the impact of that volatility on consumers?

Monica Trauzzi: And how do we do that? Can we insulate the impact?

Sam Ori: I think you can. I think there's sort of a…there's a two-step process on the demand side. The first is the fuel economy standards that were signed into law by President Bush and that have been implemented by the Obama administration EPA and Department of Transportation, meaningful impact in reducing the overall energy intensity or I should say the oil intensity of the U.S. economy. Very important for making the swings in oil prices have a smaller impact on household budgets and ultimately the overall economy. And then, over the long term, transitioning to I would say petroleum…or nonpetroleum fuels, but nonpetroleum fuels that are also not substitutes for oil. So, what I mean by that is I would say that, you know, for example, substitute liquid fuels like biofuels and ethanol may have a very important impact in terms of driving additional domestic production of liquid fuels, they also have that positive impact on the trade deficit. They don't really remove consumers from the volatility of liquid fuel prices. So, what you want to look at there are fuels like electricity and potentially also natural gas for heavy-duty vehicles, fuels that are not perfect substitutes for liquid fuels.

Monica Trauzzi: So, are you suggesting a scenario where we're producing a lot more oil and gas than we would possibly ever need to use in the United States because our consumption of those fuels will go down?

Sam Ori: I think that's an extraordinarily long-term goal. I think it's unlikely that we'll be producing more than we'll be consuming, you know, in a time that's measured anything shorter than decades. I think though that fundamentally the logic behind that is correct, which is that you want to produce as much as you can because it does have all these incredibly important positive economic benefits. You want to reduce your level of consumption in ways that are economically efficient and that, you know, continue to grow the economy. I would also say that it is…there are benefits for the oil that we do import, importing from nations that we have a good trade relationship with and that we have a close trading relationship with. There was research that was published by the International Energy Agency about two or three weeks ago that showed that for every dollar of oil that we…or every dollar that we spend on oil imported from OPEC nations today, only $0.30 on that dollar is coming back into the U.S. in reciprocal trade. That's obviously a much different equation for the oil that we import from our NAFTA trading partners. More of that, those petrodollars are recycled into the U.S. economy and, over the long term, that has enormous benefits. I would say not necessarily benefits, however, for energy security.

Monica Trauzzi: Let's talk about politics a bit. Is the idea of energy independence being misused in the United States to sort of promote certain policies?

Sam Ori: I think it's being misunderstood. I think energy independence sounds… it's very intuitive and it sounds very attractive. It has obvious political appeal. I think that the great risk is that we take our eye off the ball and that as policymakers, as policy analysts, that we focus on reducing imports as somehow an end in and of itself and a goal for energy policy, when it's one important thing that we can do. But that to say, well, we're producing more oil. the efficiency standards that we have in place have allowed gasoline consumption to kind of flat line; therefore, mission accomplished. We don't have that much more to do, we're on the right track. You know, let's sort of pack up our policy tools and go home. I think we're at real risk of kind of that sort of shortsighted taking our eye off the ball, when, in fact, the problem is much different than imports. As I said, the problem is the large role that oil plays in the economy. You know, 37 percent last year of U.S. primary energy demand was oil. It's larger than any other fuel. You know, businesses and U.S. households spent almost $900 billion on petroleum fuels last year. It's a huge part of the economy and that's related to consumption. And so I think that to the extent that policymakers and other, you know, analysts say, well, we're going to be energy independent because of our level of production and, therefore, we're in great shape. I think that completely misses the point that really we've got to focus on the consumption side.

Monica Trauzzi: But we could be energy independent by focusing on other forms of energy?

Sam Ori: I think I would hesitate to use the word independent. I think it's true, so for example with electricity, right? It's domestically produced. The prices are regulated. You have a whole bunch of other positive attributes. Electricity, I think electricity over the long, long, long term offers a pathway to some kind of high level of energy security that some might equate with energy independence. But I would say that as long as we're a trading nation, as long as we're fully entrenched in the global market, the global oil market, the global energy market, such as there is one, and trading with other nations, the notion of being "independent" is kind of hard to get your head around.


Sam Ori: Thanks for having me.


[End of Audio]



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