Energy Independence: Feasible Only as a Joint IEA-OECD Project

By Ira Straus

Whether pursuing its energy independence or carbon-emissions reductions, it can only be effectively accomplished as a common project of industrialized democracies.

Plenty of policy makers in the transatlantic community, including French President Nicholas Sarkozy, German Chancellor Angela Merkel, and the U.S. House of Representatives, have already pointed out the need for an external carbon-emission s-input tariff to accompany any emissions tax. If this isn’t done effectively, the emissions tax would  encourage manufacturing firms to move abroad to more carbon-intensive producers (all else equal). Sarkozy and Merkel have also pointed out that it needed to be done on a joint basis, because the national economic base is not large enough to  encourage  the international community to adopt higher standards. The industrial democracies of OECD or IEA, with 73% of world GDP, has the economic power needed for this purpose. That is clear enough. We can confine the discussion here to the goal of energy independence, presently put forward by the U.S. Administration.

Energy independence is important as a strategic and economic goal, to secure the economy against wasteful volatility. Since oil/gas is a strategic commodity, energy dependence is dangerous. Since its price volatility is politically induced, often cartel-induced, and carried high economic costs in dislocation and waste, immediate market-clearing efficiency is not the sole economic consideration.

Energy Autonomy: defining what is feasible and desirable, and for whom

Full energy independence is impossible in this period for any of the major energy-importing countries. Relatively greater energy autonomy is the most that can be hoped for.

The logical goal (for the U.S. as well as for a union of democracies) is: a maximum of attainable relative energy autonomy, within a cost not greater at the margin than the savings from it in less volatility and risk. An approximate curve can be estimated to define the target on this level.

The decisive question, is: autonomy for whom?

The only logical answer is: Not autonomy for the U.S. alone, but for the strategically reliable space.

However, the greater space in which we seek energy autonomy, the greater amount of autonomy is feasible. For the entire world, by definition, there is full autonomy. But global autonomy is is irrelevant to the U.S. strategic and economic needs. It does not protect us against the strategic and economic costs of less-than-friendly behaviors of some oil exporting countries. Yet it is the “strategically reliable” space that is relevant for our energy autonomy.

For example, there is little to be gained if  the U.S. is energy-independent of Canada. It does a lot for the U.S., to cooperate with Canada so the two will be jointly more energy-independent of the Mideast. The point does not stop with Canada. It is true for all strategically reliable countries.

“Strategically reliable” countries may be defined, approximately, as: those that do not have major strategic goals against us and wish ill to our power; that pose no risk of using their oil/gas wealth to finance terrorists or anti-Western regimes around the world; that are not going to threaten embargoes; and that are not part of a group or cartel, that does or might plausibly do these things, and do not share a major identity with such a group.

Mapping out the strategically reliable space: OECD, plus and minus a little

Evaluating a country’s risk of doing any of these things has to be done by looking not just at their present and past policies, but at their political spectrum and the potential future government policies. Mexico is not strategically reliable; a left-nationalist anti-American populist opposition, sounding rather similar to Hugo Chavez, very nearly won the last election. Norway and Canada, by contrast, are strategically reliable oil exporters.

A careful evaluation would find that the “strategically reliable” space is the OECD or IEA space, minus perhaps Mexico and Turkey and a couple others, plus a few countries elsewhere such as Asian tigers.

The IEA was formed in face of the OPEC-based oil embargo to create a degree of energy-security among industrialized democracies. It was done from the start on the b asis of an evaluation of them, as defining the “strategically reliable” space, and the one that is also relevant to us for this purpose economically.

Further political and strategic benefits of the goal

Having an official annual evaluation of a “strategically reliable” space, and understanding it as an area safe for strategically-relevant economic intercourse would be valuable. Such an area would help advance and consolidate the awareness of the extended Atlantic grouping — the classical OECD and IEA grouping — as a common space.

This makes it important, in turn, for the Streit Council’s goal of Union of such space as can feasibly be united.

The goal of maximum of relative energy autonomy for the strategically reliable space is one that matters to the U.S. It is important for America strategically as well as economically.

Relative energy autonomy implies a need for a common energy policy, probably formulated through IEA. A central point of it could be a joint tax (tariff) on oil/gas imports from outside the strategically reliable space.

There would be some residual reservations about some forms of economic intercourse within this space. Some technological and military secrets would have to be maintained nationally, as long as there are not effective enough joint means of maintaining the secrecy. But for the most part, the “strategically reliable” space would be one that we should want to be a common turf, for economic intercourse, and for global joint policy and strategy.

An internal tax on carbon emissions for other purposes, as has been proposed in many countries, and the bloc-wide tariff on oil would be mutually reinforcing. It would be necessary to work out the optimal mix and interface between them, but having one policy in place would help get past intellectual blockages to the other and overcome paradoxical political-coordination blockages. Many proponents of an emissions tax-equivalent, including Obama Administration officials, are ideologically opposed to a correlating tariff, despite it being the only thing that would enable it to work; a Left -Right alliances coalesces against it. It is a coalition of destructive forces in pursuit of our self-governance of our problems: the Right using slogans of free market and immediate economic cost, without regard to existing costly market distortions; the Left using a slogan of justice misdefined as meaning simply to take from the First World, without regard to the actual injustice of it, nor to it’s counterproductive effects.  An energy autonomy policy for the strategically reliable space of the world would get us past this coalition; in its own curious way, of false internationalists, who end up in practice supporting nationalism. It would also get us past the opposite coalition of false nationalists, which deforms policy by appealing to nationalist passions, stirring up frenzy for goals that seem both necessary and impossible when pursued nationally, rather than defining a proper space for a policy and doing what can be done.

An IEA-wide tax on oil imported from outside IEA would be far more rational than a mere U.S. national tax on “imported oil” or “foreign oil”.  It builds on a logical definition of what is strategically “foreign” to us, rather than a self-defeating definition of everything beyond U.S. borders as “foreign”. This tax would also be more effective, as it means a common discrimination by IEA, which like OECD holds 73% of the world economy. To be sure, it does not change the fact that oil is fungible and will find customers; but it means those discriminated against will have to sell at lower prices. It drives up the domestic price of oil (sale price plus tariff) in the strategically reliable space, while driving down the international sale price and profit for strategically foreign producers. This in turn reduces domestic consumption of fossil fuels, even while encouraging domestic (intra-OECD space) production. Is it nevertheless market-distorting or economically sub-optimal, as some market theorists believe, or assume? No, because it undoes greater market distortions and their costs: the high military-security cost that we pay for dependence on oil and oil from strategically unreliable sources, the use by these sources of cartel methods and other manipulations to deform the market, and the waste-costs of adjustment to the wide fluctuation cycles of oil prices.

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