Directions for U.S. Energy Conservation and Independence

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Many analysts and policy makers see energy conservation and independence as desirable goals for U.S. energy policy. These were among the stated goals when the Clinton administration proposed the so-called "Btu tax" in 1993. Yet, virtually all forecasts of U.S. energy market conditions indicate increasing energy consumption and oil imports in the absence of strong government intervention in domestic energy markets. Are these free-market trends a cause for concern, or are energy conservation and energy independence undesirable goals for U.S. energy policy?

An economist's perspective is to view free market forces as generally producing the most desirable outcomes. In the absence of market imperfections, the voluntary exchange that characterizes free markets produces an efficient outcome - one in which no single individual can be made better off without at least one other person being made worse off. The economist's approach imposes a discipline on policy analysis that is most closely aligned with the preservation of individual liberties that occurs in a free-market economy characterize by voluntary exchange.

Under this approach, the burden of proof falls on the analyst who argues for government intervention in the energy markets to produce greater energy conservation and independence than would be produced by free-market forces. To justify government intervention, the analyst must find market imperfections that can be addressed by government policy. Using this criterion, environmental concerns justify some government intervention in U.S. energy markets - and that intervention may result in reduced energy consumption and reduced energy imports. Nonetheless, the evidence does not support the view that energy conservation or energy independence should be at the heart of U.S. energy policy.

ENERGY INDEPENDENCE

As a matter of public policy, energy independence means oil independence. In meeting overall energy consumption, the United States has remained fairly independent over the past twenty years. That picture is likely to change somewhat by 2015. In 1975, net energy imports accounted for nearly 17 percent of total energy consumption. By 1995, net energy imports accounted for just over 20 percent total energy consumption. U.S. Department of Energy forecasts show net energy imports accounting for about 25 percent of U.S. energy consumption by 2015. On the other hand, net oil imports accounted for nearly 95 percent of net U.S. energy imports in 1995 and are forecast to do so in 2015.

In meeting its oil consumption, the United States has grown increasingly dependent on foreign sources over the past twenty years. This trend is likely to continue through 2010. In 1975, imports accounted for just under 40 percent of U.S. oil consumption. With growing oil consumption and declining domestic oil production, imports accounted for nearly 50 percent of U.S. oil consumption by 1995. U.S. Department of Energy forecasts show imports accounting for more than 60 percent of U.S. oil consumption by 2015. Other forecasters reach similar conclusions.

Oil Imports and the Trade Deficit

Trade deficits are frequently given as a reason for concern about rising oil imports. In fact, intervention in the free market to reduce imports is unlikely to improve the U.S. trade deficit. Trade deficits are the consequence of a country's preferences over present and future consumption, as well as the productivity of its new capital investments (Gould and Ruffin, 1996). In this sense, trade deficits are the mirror image of international capital flows, and neither is likely to be affected very significantly by restrictions on oil imports.

Furthermore, restrictions on oil imports would actually cost the United States more than it currently pays for the imported oil. Some of the reduction in oil imports would result in reduced US. oil consumption, but that use of oil would have a higher value than the United States would have paid for the imported oil. …