by Jurgen Brauer and Daniel Harper, April 2006
Copyright: J. Brauer. No reproduction without permission.

Are we running out of oil? With the war in Iraq still raging and gasoline prices rising, that question is not just on the mind of the American people - but on the President's as well. In his State of the Union address, in late January, he even promised us "to make our dependence on Middle Eastern oil a thing of the past." To assess where we stand, let's look at some energy-related numbers.

According to the Energy Information Administration, an agency of the U.S. federal government, energy usage per dollar's worth of production in the U.S. has declined by half between 1949 and 2004. Per unit of output produced, we are twice as energy efficient as we used to be. However, because of population and economic growth, energy consumption in absolute terms has gone up from about 30 quadrillion British Thermal Units (qBtu - a standardized measure of energy across all energy sources) to about 100 qBtu. Most of that, namely 87 qBTU, is derived from fossil fuels such as coal, oil, and natural gas. Only 8 qBTU comes from nuclear power, and the remainder from renewable sources.

Prices matter. Four of the five energy guzzlers (ND, AK, LA, WY) are the four states with the lowest energy costs (TX comes in seventh place). And four of the five least wasteful states place in the top-8 in the energy price rankings.

On a state-by-state level, energy consumption per person (for 2001) is highest in Alaska, followed by Wyoming, Louisiana, North Dakota, and Texas. The most miserly energy-per-person users are in Rhode Island, followed by New York, California, Hawaii, and Maine. The economist suspects energy prices may have something to do with this. And indeed, four of the five energy guzzlers (ND, AK, LA, WY) are the four states with the lowest energy costs (TX comes in seventh place). And four of the five least wasteful states place in the top-8 in the energy price rankings. The average Hawaiian pays twice as much for energy as does the average North Dakotan, wherefore Hawaii ranks as the most energy-conserving state and North Dakota as the least.

U.S. production of energy has been outstripped by consumption since the late 1950s, hence the increasing need for net imports of energy, about 29 qBtu in 2004, nearly all of which, 26 qBTU, are in the form of petroleum (crude oil). That's one problem. The other is that although greenhouse gas emissions have been cut nearly in half per dollar of GDP produced, GDP itself increased by a factor of 6.6 (in inflation-adjusted terms) from 1949 to 2004, so that total emissions, in spite of improved energy efficiency and better pollution controls, are higher than before. "Independence" from oil will not solve the emissions problem. We do need a better mix of alternative, or at any rate, cleaner energy sources as well.

How dependent are we on the Middle East? Contrary to the general impression in the public, of the 3.7 billion barrels of crude oil imported in 2005, only just over one fifth (0.8 billion barrels) came from Middle Eastern states. Less than half of our imports (1.7 billion barrels) came from OPEC states (they are: Algeria, Indonesia, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela, only some of which are located in the Middle East). No imports came from Iran. Our largest crude oil suppliers, in 2005, were Canada (600 million barrels), Mexico (566), Saudi Arabia (525), Venezuela (449), Nigeria (387), Iraq (190), Angola (164), and Ecuador (101), together accounting for just over 80 percent of our crude oil imports.

The recent high price of crude oil and other energy sources actually carries several advantages. First, since the U.S. is among the richest states in the world, we can be confident that we can out-compete others for scarce supplies. Others will have to conserve quicker and faster than we will have to (and they already do). Second, high prices make the exploration and development of hitherto uneconomical natural energy resources profitable. Thus, Canada is now experiencing a boom in oil-tar development. According to a recent page one story in The Wall Street Journal, Canada has the world's third-largest oil reserves when oil-tar supplies are counted. Third, high energy prices also make the further development of emissions-free and renewable energy sources more profitable, such as nuclear, solar, and wind energy. And fourth, as we have seen, high energy prices make residential, commercial, and industrial users more willing to reduce energy-use, with the useful side-effect of reducing pollution costs as well. Prices discipline our behavior, and in free markets that is the primary role of prices.

Unfortunately, the price system of the free market is being subverted by government intervention. For example, the U.S. oil and gas industry is subsidized to the tune of several billion dollars a year by taxpayer money. Without subsidies, heating oil, natural gas, and gasoline at the pump would be even more expensive. This would induce us to reduce our use of these resources and would make producers of energy alternatives more willing to test the market. Thus, government policy actually undermines our search for energy "independence," and it has done so for decades. The way to break an addiction is not to make the addiction easier.

When government prevents the price of fossil-fuel from reflecting its scarcity, it is contributing to the problem rather than helping to address it.

Congress and the President should commit to a 5-year phase-out of all energy-related subsidies and harness the free market to solve the energy problem for us. We will never "run out of oil" for the simple reason that when oil becomes scarcer, its price will rise and alternatives will become more economical to use. But when government prevents the price of fossil-fuel from reflecting its scarcity, it is contributing to the problem rather than helping to address it.