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Why energy independence is a terribly stupid idea
Foreign oil is your friend!
Don't tap those reserves just yet.
Don't tap those reserves just yet. David McNew/Newsmakers

Everyone wants energy independence. Politicians, business people, and academics all say that our reliance on foreign energy is bad.

But have we really thought about this? Does it make sense?

I've never really shared the opinion that energy independence today is a good idea (when it comes to oil, coal, and other non-renewables). Neither has Charlie Munger.

Munger is one of the clearest thinkers I know. His talk on the psychology of human misjudgment could be the most profitable hour you ever spend.

At a recent conference he explained (lightly edited):

If energy independence was such a good thing, let's just imagine that we go back to 1930 or something like that and we were hell bent to have total energy independence from all the foreigners. And we just drill and use every technique we can and we produce our hydrocarbon reserves which are absolutely certain to be limited.

Well, by now have way less in reserve and are way less energy independent. In trying to get energy independence we would have destroyed our safety stock of oil within our own borders.

Oil and gas are absolutely certain to become incredibly short and very high priced. And of course the United States has a problem and China has a worse problem.

And China has the correct solution. Imported oil is not your enemy, it's your friend.

Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization.

And what responsible people do with a Confucius ethos is they suffer now to benefit themselves, their families, and their countrymen later. And the way to do that is to go very slow on producing your own (domestic) oil. You want to produce just enough so that you keep up on all of the technology. And don't mind at all paying prices that look ruinous for foreign oil. It's going to get way worse later.

Every barrel of foreign oil that you use up instead of using up your own — you're going to eventually realize you were doing the right thing.

Economists are part of the problem

Why are the policy makers in both countries so stupid on this single issue? Because they are not stupid generally.

I think that it's partly the economists who have caused the problem. Because they have this theory that if people react in a free market that it's much better than any type of government planning but there is a small class of problems where it's better to think the things through in terms of the basic science and ignore these signals from the market.

Now if I'm right in this, there are a whole lot of lessons that logically follow: (1) Foreign oil is your friend, not your enemy; (2) You want to produce your own assets slow; … (3) The oil in the ground you're not producing is a national treasure;

… running out of hydrocarbons is like running out of civilization. All this trade, all these drugs, fertilizers, fungicides, etc. … which China needs to eat with a population so much, they all come from hydrocarbons. And it is not at all clear that there is any substitute.

When the hydrocarbons are gone, I don't think the chemists will be able to simply mix up a vat and there will be more hydrocarbons. It's conceivable, of course, that they could but it's not the way to bet. I think we should all be quite conservative and we should pay no attention to these silly economics and politicians that tell us to become energy independent.

A question

It's 1930. Oil in the United States is in glut. We have cartels to get the price up to 50 cents a barrel in some places. Everywhere we drill we find more oil in our own country. Everywhere we drill in Arabia we find even more.

And what would the correct policy of the United States have been in that time?

Well the correct policy would have been to issue $150 billion in long term bonds and cart 150 billion worth of Middle Eastern oil into the United States and throw it into our salt caverns and leave it there untouched until the current age.

It's easy to see that in retrospect. But who ever points this out?

What should we do?

We have a brain block on this issue. We should behave now to do on purpose what we did by accident. We conserved some of our oil because we were not aggressive enough and smart enough to get it out faster. That was accidentally doing the right thing. Now we should do on purpose what we formally did by accident. We should conserve and subsidize new forms of energy … we should suppose these big national grids.

What do you think?

I'd love to hear what you think. Leave a comment.


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