Living Economics

Slippery Oil
Oil is a fungible world commodity that should be sourced where it is the cheapest and sold to the highest bidder regardless of national boundaries.

When the Trans-Alaska Pipeline was authorized in 1973 to open Alaska's North Slope oil fields during the Arab oil embargo, Congress banned exporting the resulting oil overseas to protect domestic consumers. The ban was overturned in 1995.

When Congress debated on the merit of opening the ANWR (Arctic National Wildlife Refuge) to oil exploration, some legislators again proposed that the resulting oil output should be banned from the export market for the sake of energy security.

Despite political rhetoric, oil will remain a world commodity traded in the open market. If west coast oil refineries cannot handle all the Alaskan oil, the excess oil must be sold somewhere to avoid depressing its price. The oil could be sold to other parts of the U.S. far away from the West coast or to closer Asian ports across the Pacific. If the selling price is the same, the oil company would make more profit selling to Asia due to lower transportation cost. And if other domestic refineries can get their oil cheaper from overseas sources, they would not be interested in the Alaskan oil either.

For the same reason, there is no point in developing any domestic oil fields that have higher production costs than overseas sources. Forcing domestic refineries to use more expensive domestic oil is just shooting the American consumers in the foot. Instead, the domestic reserves should be saved for later development when the cost of overseas supplies is higher than domestic sources.

Failure to realize that oil is a fungible world commodity can lead to illogical arguments that appeal more to one's emotion than one's reason. One of them is to achieve energy independence through conservation. The idea is that if oil consumption is reduced, less oil needs to be imported leading to a lower percentage of foreign oil consumed. This scenario is unlikely to happen unless domestic oil is less expensive than foreign oil. If domestic oil is more expensive, it is likely to be the first source that is going to be cut when oil consumption goes down. The end result is a higher rather than a lower percentage of foreign oil consumed. In other words, conservation would make America more dependent on foreign oil than before.

If it makes sense to buy a cheaper imported shirt, why doesn't it make sense to buy cheaper foreign oil? Maybe energy independence is more important than garment independence?

References:
  • Goolsbee, A. "Dependency paradox." Fortune. 8/22/2005.
  • Seattle Times. 4/19/2005. "Where would ANWR oil go?"
  • Seattle Times. 7/31/2004. "Foreign oil flowing into state's refineries."
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