Panel: Energy independence is unrealistic

Could we survive without Arab oil?

That was the topic of an international forum held Wednesday at Farber Hall on the campus of the University of South Dakota.

Leading the conversation on this topic were panelists Dr. Benno Wymar and Dr. Dennis Johnson, economics professors with the USD.

While no clear cut answer emerged from the hour-long discussion, Wymar observed that when politicians talk about the United States one day being �energy independent,� they are setting a goal that is impossible to achieve.

Wymar responded to a comment by Ralph Brown, USD professor emeritus of economics who listened to the day�s presentation as an audience member, and noted that oil prices are set not just by the United States, but by the entire global market.

�The price of oil is set by the world,� Brown observed. �If the price of oil goes up in the world, the price of oil would go up in the United States, as long as we trade. Energy independence is still not going to insulate us from the world �price shock.��

�When I hear the concern that the United States wants to one day be energy independent � to me, this just sounds ridiculous,� Wymar, a native of Germany, said. �Do you know how much Germany is dependent on oil? One-hundred percent. We are having a big crisis in Japan right now. How much do they depend on foreign oil? One hundred percent.

�It means that Germany and Japan � when you�re that dependent on foreign oil � it means you have to learn how to get along with other people, with other countries,� he said. �I think people should forget about this idea that we have to become energy independent. We just have to realize that we have to get along with everybody else in the world.�

 �Even if we were an oil exporter, what you say remains true,� Johnson said in response to Brown�s observation. �The one thing, if we would ever be independent � the actual physical commodity (of oil) might one day be cut off from us, but we still would bear the price as long as we trade.�

Professor Greg Huckabee, moderator of the event, asked Johnson and Wymar if the current rapid rise of gasoline prices, fueled by unrest in the Middle East and the tragic happenings in Japan, could serve as the �cataclysmic event� that the United States needs to happen to change political policy-making.

�I�d say not yet,� Johnson said.

Huckabee noted that the price of gasoline has jumped 15 percent since the onset of political disputes in Libya. �While the loss of Libya oil only reduced global supply by 1 percent, why is the law of supply and demand not in proportion?�

�The reason for that is basically the elasticity of the demand for oil,� Johnson replied.  �It means that if you reduce the quantity of the supply by a certain percentage, the impact of the price will be a much higher percentage.�

Johnson noted that from 2005 through 2009, the worldwide demand for oil remained flat. Demand for oil began to grow in 2010, and worldwide supply trends have been following that trend.

While it may be difficult to determine whether the United States could survive without oil from the Middle East, statistics offered by Johnson note that by far, the vast majority of oil reserves worldwide are contained in that part of the world, far outstripping every other oil-producing part of the globe.

�It�s hard to get away from the fact that it (the Middle East) is extraordinarily important and is likely to remain so for some period of time,� he said.

Other important global suppliers of oil are the United States, Russia, Mexico and Canada.

Johnson said that domestic production of oil in the United States has tended to decline in recent years, but it has experienced an uptick beginning in 2009.

�That is partly, if not largely due � to oilfields in western North Dakota and eastern Montana,� Johnson said. �In 1995, however, the amount of oil that we imported was roughly equal to the amount of oil we produce domestically. Since that time, our imports have become increasingly important.�

The Middle East may hold the largest global reserve of oil, but it isn�t the main supplier of oil imports to the United States.

�Canada is our main supplier,� Johnson said, followed by Venezuela and Saudia Arabia. �Nigeria, Mexico and Russia are also very important. Those six (countries) together account for almost two-thirds of the oil that is imported by the United States.

�Sometimes it surprises people, but we don�t have a lot of oil that is imported directly to the United States from the Middle East,� he said.

But should something happen in the Middle East that has an effect on oil prices, it will be felt in the U.S., Johnson said, because of the �world market� for that commodity.

�If something happens in some part of the world, then that will impact all other parts of the world as well in respect to oil. Even though we import a negligible amount of oil from Libya, unrest there causes an uptick in the price of crude,� he said.

Huckabee asked the panelists to respond to an article in the March 5 edition of The Economist magazine, which states that the price of oil is determined by two things: 1) the law of supply and demand, and 2) naked fear.

�Is naked fear going to drive the price of oil to new highs?� Huckabee asked.

�I think that markets are not emotionless; it�s possible for markets to react, and I think the oil example is a good one, to fear,� Johnson said.

He added that the fundamental forces of supply and demand ultimately rule.

The unrest in Libya may only be affecting a small percentage of the world�s oil supply, Wymar said, but the revolt in that country is causing a global fear that the large supply in Saudi Arabia could one day also be at risk.

�In Saudi Arabia, something could go wrong,� he said, �and that would knock out a major supplier (of oil) and that would have a major effect. There would be no question about that.�

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