Energy policy featured only briefly in the first debate between President Obama and his challenger Mitt Romney. As became evident in the second debate, Romney’s case for restoring strong economic growth hinges on his plans to favour investment by the oil sector, especially in non-conventional sources of oil and gas.
Romney made much of Obama’s proposals to reduce subsidies or tax breaks to the enormously profitable US oil sector. Romney has pledged not only to retain these tax breaks but to double their annual value to $US4.5 billion, by reducing the direct corporate profits tax rate from 38 to 25 per cent.
But a jobs policy based on the demands of Big Oil has major defects. Obama was able to claim the jobs benefits from (climate friendly) stimulus he provided to manufacturers of more fuel-efficient vehicles and the wind-power industry. These policies are not part of the oil sector’s agenda and not favoured by Romney, who is locked into the climate change denialism of much of the oil sector as well as the Tea Party zealots.
Energy policy is important. It interacts with more fundamental policies such as national security, environmental protection, and macro-economic policy. These interactions are often about spin and symbolism as much as the clash of material and vested interests.
The questionable goal of US ‘energy independence’
US ‘energy independence’ is about reducing oil imports into North America to reach zero (net) imports over some period. Such a goal has been professed since at least Nixon’s era in the early 1970s. Like their predecessors, both Obama and Romney profess this goal, but for quite distinct reasons.
Reliance on oil imports can be reduced in two ways. Those concerned about climate change and environmental issues favour demand-side policies and regulations. Some attention is given to ‘renewable’ fuels. These claims can be questionable, as in the case of corn-based fuel ethanol. Proposed ‘alternative’ vehicles such as all-electric cars remain marginal in the immediate future.
Romney, faithful to oil interests, would rather deregulate fuel-saving policies. He proposes enhanced domestic supply through mechanisms additional to tax breaks. He is also committed to removing Federal safety regulations on shale gas, ‘tight oil’, and to unconditionally approving pipe-lining of Canadian tar sands. He also favours unconditional extension of drilling to Federal lands, including ecologically sensitive areas such as the Arctic National Wild Refuge.
Macro-economic aspects of seeking US oil independence
Historically, sharp upward movements in the international price of oil have disrupted the US and global economies, especially in the 1970s and in the years around 2008. But such price disruptions would not be precluded by the US making itself less dependent on oil imports.
Rather (and despite Romney’s somewhat ridiculous attempts to saddle adverse gasoline price trends with Obama), the price of oil is determined by international markets. The share of global production attributable to the US has a limited direct effect on such markets, and hence on the global economy. Subsidised and under-regulated supplies of domestic oil can’t be regarded as especially reliable and stable. The negative impacts of Hurricane Katrina (2005) and of BP’s Deep Horizon disaster (2010) demonstrated that.
Expanded supplies of US non-conventional oil requiring prices not less than $US60-80 a barrel will hardly put downward pressure on world oil prices. The US remains by far the largest OECD consumer of oil in per capita terms, not unrelated to its very low fuel taxes and pre-2008 preference for gas-guzzlers. A determined effort to encourage long-term fuel saving through demand-side measures in the US and elsewhere, especially in rapidly motorising China and India (with fuel taxes also very low), would indeed put downward pressure on international crude oil prices and reduce the risk of macro-economic crisis.
Unsurprisingly, such prudent demand-side policies are favoured neither by OPEC nor by Big Oil. Hence, their conspicuous absence from Romney’s energy and macro-economic policy agendas.
Geo-strategic aspects of the US oil independence myth
US oil independence is also promoted because of its professed political and military connections with the oil-rich Middle East. For US voters wary about excessive and extremely costly military involvement in the region, moving toward oil independence may seem like a panacea. Unfortunately, this is far from the case.
Given US ‘grand strategic’ aspirations to global primacy, its military involvement, globally or in the Middle East, is not closely coupled to any future reduction in oil import dependence.
As long as these US aspirations to continued global primacy persist, ill-judged US intervention in the oil-rich but unstable Middle East continue to threaten world peace. Instead, the US should be retrenching to more defensible positions and it should be seeking to normalise its relationships with Middle East states. These include oil- and gas-rich Iran (for three decades viewed as a permanent adversary) and nuclear-armed Israel (unconditionally supported and exercising a veto power over US policy in the region).
Foreign policy parvenu Romney appears disinclined to break with failed past policies in the Middle East. He has surrounded himself with policy advisers urging ‘preventive’ war against Iran. This would be an exceedingly dangerous and unpredictable course. For example, if the straits of Hormuz were to be closed it would represent a shock to world production that in percentage terms would be three times as big as the 1973-74 OPEC embargo.
The spurious goal of oil import ‘independence’ has passed its use-by date.
Barry Naughten is Energy Economist at Australian National University.