We tend to throw around the phrase “energy independence” a lot, but what we really mean is "energy security". It is an important distinction and an easy one to miss. Therefore, I was pleased when two panelists made the distinction at SAFE’s Oil Embargo +40 conference today.
Energy independence implies that a country, say the United States, would produce as much energy as it needs and not be affected by global markets or events around the world. It would control its own energy prices based on domestic supply and demand.
That’s not how oil markets work. Oil is a globally traded commodity and just because America produces more oil doesn’t mean it is insulated from what happens when production is taken offline somewhere around the world, either intentionally through decisions by OPEC members, or in unforseen circumstances like the Arab Spring and other unrest.
Instead, we really want energy security. We want more slack in the system so that when production is taken offline we can respond by increasing our own production to stabilize prices. We want to be less affected by others using energy as a political or military instrument, or less vulnerable to strategic choke-points like the Strait of Hormuz. We want more control over our energy decisions.
Texas used to play this role in the global oil markets up until the oil embargo in the 1970s. Texas produced so much oil that it basically controlled world oil prices, which in turn made the Texas Railroad Commission (the agency that regulates Texas oil and gas production) the world’s defacto first oil cartel. And when OPEC tried to stage an embargo on world oil in 1967, Texas responded by flooding the market with more oil to stabilize prices. That lasted until Texas’ oil production peaked in the 1970s while production increased from other countries.
That power now rests largely with OPEC member countries like Saudi Arabia. In August, Saudi Arabia increased its production by over 1 million barrels per day to offset global supply disruptions. But it works both ways. The EIA expects Saudi Arabia and other OPEC members to cut back as some of the disrupted production comes back online and supplies increase from non-OPEC countries (like the United States).