The subject of energy received one sentence in the 2004 state-of-the-union address by US President George W. Bush. A year ago, the president used his constitutional oration to elucidate a $1.2 billion initiative promoting the use of hydrogen as vehicle fuel. To anyone troubled by governmental meddling in energy markets, brevity of this year's utterance on the subject will indicate progress.
Here's everything Bush told Congress on Jan. 20 about energy: "Consumers and businesses need reliable supplies of energy to make our economy run, so I urge you to pass legislation to modernize our electricity system, promote conservation, and make America less dependent on foreign sources of energy."
Whatever else he chose to ignore, Bush managed to caress the supreme icon of US energy policy-making. Reducing American dependence on foreign energy holds universal appeal. In political speeches, it's a sure applause line. As a beacon of policy-making, however, it isn't very useful.
Government action
The presumed need to cut dependence on foreign supply underlies arguments for every imaginable government action on energy. Most such actions, because they subvert markets, do more harm than good. The assumption nevertheless persists that foreign energy—that is, oil—supply represents a hazard warranting suspension of economic judgment. Politicians use it to rationalize mistakes ranging from subsidies for uncompetitive fuels to increases in energy taxes and the imposition of consumption controls.
And, still, dependence on foreign energy grows. According to the Forecast & Review report in this issue, all oil imports this year will represent 61% of domestic demand. Imports net of exports will amount to 56% of domestic demand. Imports will make up 63% of crude inputs to refineries. And product imports will be 13% of domestic demand.
While these numbers are little changed from those of 2003, the trend is strongly upward. Consumption rises except during recession and sometimes even then. In the US, holding production of crude even with the period before, as producers almost did last year, is a grand achievement. And product imports, usually about one fifth of total oil imports, are rising steadily in a trend likely to continue. Refining capacity isn't expected to change this year after a tiny rise in 2003. The phenomenon known as "creep," in which modernization projects raise total distillation capacity enough to offset plant closures, seems to have ended—although plant closures probably have not. With capacity utilization rates consistently exceeding 90%, product import levels will have to rise.
For natural gas, too, dependence on overseas supply grows. Consumption is rising and supply falling from both domestic production and friendly and nearby Canada. As planned regasification facilities come on stream, a growing share of US gas supply will arrive as LNG from countries around the world.
So import growth is a powerful trend for each of two fuels that together satisfy 63% of US energy demand. Technically, anything that raises domestic supply or cuts domestic consumption reduces dependence by eliminating the need for an equivalent amount of imported energy. But nothing in prospect can meaningfully change the underlying trends without creating intolerable cost.
Does this mean the US should make no effort to increase domestic supply where it can do so economically? Certainly not. It means the US has reasons to develop domestic supply that are more compelling than its inescapable reliance on foreign sources.
Better reasons
Two such reasons appeared in the paragraph just before Bush's lone state-of-the-union sentence on energy. The reasons are jobs and economic growth. As popular elements of national interest, employment and the economy contribute mightily to the case for increasing domestic energy supply. They also set reasonable bounds for energy policy-making. Yet in critical issues such as oil and gas leasing of federal land, the industry and its political supporters emphasize the supposed need to reduce US reliance on foreign supply. And opponents destroy the argument by pointing out, correctly in most cases, that leasing of this or that area won't meaningfully change the dependency level.
When the US denies itself domestic, economically producible supplies of energy, it cedes jobs, incomes, and government revenues to countries not making the same mistake. That's a definite problem. Dependence on foreign energy is only a potential problem, if that.