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I came across an old letter, addressed to PhD Economists, from the Union of Concerned Scientists. It was a letter pushing for an expansion in US CAFE standards (i.e. mandating better fuel mileage in the new vehicle fleet). Among the many claims it makes includes:

Our continued dependence on oil puts our economy at risk from the effects of oil price volatility and energy insecurity. Oil price spikes were associated with most of the U.S. recessions in the past 40 years. The United States currently sends $1 billion each day to foreign countries to pay for oil and other petroleum products–that is equivalent to more than half of the average daily U.S. trade deficit over the last decade

Whether we are an importer or exporter of oil says nothing about how sensitive our economy is to oil price fluctuations. But I guess it would be too hard to make that point to a group of Economics PhDs. Oil is sold on world markets and is priced on world markets and so long as this is the case, it doesn’t matter what our net foreign exchange position is. Of course, in a global market, if we allow trade it is likely that international producers are, at the margin, more efficient producers – so that energy is likely cheaper than if we were to ramp up production of our own resources (for example).

There are several additional observations one might make here, but let me focus on two obvious ones.

  1. It would take a little bit more than CAFÉ standards to make us truly oil independent. Unless we raised the CAFÉ standard to ∞ we would still be dependent on global oil markets. No amount of fuel efficiency improvement can alter than unless we eliminated our oil consumption entirely.
  2. I don’t deny that oil price spikes have been related to US real economic shocks. If that is true, then wouldn’t it also be the case that “oil price shocks” of the positive variety (i.e. lower prices) have and can produce periods of economic expansions? If not, explain the asymmetry. By the way, over the previous 40 years, a period of 480 months, the US has been in recession for a total of 72 months. That makes for a total of 15% of the time we were in recession, and therefore 85% of the time we are in expansions. So would it mean that by eliminating this volatility, we’d eliminate the volatility in expansions too?

6 Responses to “More Energy Independence Free Lunches”

  1. Not only don’t they understand economics, they don’t understand energy use either. In a phenomenon known as Jevons’ paradox, making energy use more efficient can often increase total usage.
    A simple example is making deliveries as a business. Let’s say with a 10 mi/gal truck I would lose money on deliveries, but with a 20 mi/gal one I can make money. I’ll make a lot more deliveries with the more efficient truck.

  2. jb says:

    J. Storrs you beat me to the punch. To express it using another example most of us can relate to, if you force me into buying a subcompact car (versus the minivan I have been hauling around in lately), I will be LESS inclined to start carpooling during those episodes when the gas price spikes to $4.50.

    By making it cheaper for me to drive (by decree) I am going to drive more, and car pool less, walk less, bike less, take the bus less, fly less, etc. Net reduction in reliance on foreign oil? I am willing to bet somewhere around 0.

    This is simply another example of the static mentality of central planners, whether the Union of Concerned Scientists (I love that label, what the rest of us don’t give a sh_t?). They cannot fathom that we, the unwashed, could possibly respond to change by thinking, and change our behavior accordingly. They HATE when that happens.

  3. Harry says:

    Great thoughts, everybody.

    When congress passed the CAFE standards the first time, assuming some of them were concerned about fuel consumption by commuters getting to their jobs in and around big cities, one would have thought they would have been transportation cost per person per day. As JB points out, nobody wanted to buy those little underpowered tin cans Chrysler and Ford had to make. If you were in a carpool (I was not) with three other people, you bought a Crown Victoria or a Mercury Marquis, or a Lincoln, and then had to endure the driving and the wear and tear one quarter of the time. This is what happened before and after CAFE.

    But what CAFE did was to extinguish the station wagon and replace it with the minivan and SUV, and, in Texas and Oklahoma, the crew cab pickup.

  4. Harry says:

    What does “energy independence” mean anyway, and why should that be a goal that drives our lives? If somebody in the world wants to sell me cheap fuel oil, a solar panel that generates electricity at $4 per megawatt to power my $1500 electric sports car, let ’em do it.

    Now our sworn enemies wish they could use crude oil as a weapon, and we become vulnerable to them in the short term. But the power of OPEC is greatly exaggerated. The two Arab oil embargoes spawned exploration worldwide, and prices have fluctuated to reflect the cost of production. Every time I see Boone Pickens on television, which has to go back thirty years, he always says that we already know where the oil and gas is, and that the oil business is liquidating. Tell that to Exxon Production Research.

    In the meantime, we do get our oil from foreigners, like Canada. Canada is different from Iran and Venezuela.

  5. chuck martel says:

    Sure, you don’t care if the Canucks take over the country with their near-monopoly on hockey talent, decent beer, newsprint and oil imports. By the way, how come nobody ever complains about Canadian newsprint bearing the ink that makes up the NY Times and Washington Post? We eat a lot of their fish, too. And import their hydro-generated power, especially during the summer. Those darn Canadians.

  6. jb says:

    Harry, I agree the “energy independence” thing grates on me every time I hear a pol use it. Even when it is used to promote off shore drilling or other laudable goals. When we adopt shifty, simplistic and economically irrational phrases to promate rational policies, I fear all is lost.

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