The policy of trying to achieve economic self-sufficiency, thus eliminating the need for foreign trade, is called “autarchy” and is associated with warlike regimes, such as Nazi Germany, since war may cut off a nation from foreign markets in products essential to a nation’s war machine. Germany made long strides toward energy self-sufficiency, essential to its blitzkrieg tactics, by manufacturing oil from coal; Germany had coal reserves in abundance, but no oil reserves. The only source of oil, besides its coal, that it could count on was the Romanian oil fields, and their output was too limited to supply the German military’s fuel needs.
Autarchy is a very costly policy for a nation to pursue, because, to the extent the policy succeeds, the nation loses the opportunity to substitute foreign products for inferior or more costly domestic output. A nation that has no exports will have nothing to trade for superior or cheaper foreign products.
Nevertheless it can be sensible to be concerned about the reliability of foreign sources of commodities that are important to a nation’s power or welfare. Most of the world’s oil resources are owned either by unstable countries, ranging from Nigeria and the Sudan to Iraq and Iran, or by unfriendly countries such as Russia, or by countries that are both unstable and unfriendly, such as Venezuela, or by potentially vulnerable countries, such as Kuwait and the other Persian Gulf sheikdoms, and Saudi Arabia.
Anxiety about the supply of oil, coupled with increased demand by rising countries such as China, have driven oil prices very high. That is actually a good thing because it both limits demand and stimulates exploration and development, including development of substitute energy sources. High oil prices have stimulated increased U.S. production of oil, although it has left us far from self-sufficient—we still import about half of all the oil that we consume. And this despite the fact that for reasons that Becker explains, such as substitution of very cheap natural gas (very cheap because of increased supply attributable to hydraulic fracturing [“fracking”]) for oil in power plants, the economic downturn, and the high price of gasoline as a direct consequence of high oil prices, domestic demand for oil has declined.
Should we worry about our continued if slightly diminished dependence on foreign oil? Probably not. Advances in technology, which include fracking, which is used to increase production of oil as well as gas, and deepwater drilling, should offset supply interruptions caused by foreign oil nations’ instability or hostility or vulnerability. Moreover, there are substitutes for oil and oil products as fuel and power sources, and the higher oil prices are, the faster those substitutes will come to market. Among attractive substitutes is simply less commuting—more working from home or living closer to work—and therefore less highway congestion, a negative externality. High gasoline prices, by reducing demand, have the same beneficial environmental effects as high gasoline taxes, which many economists recommend.
High gasoline prices may be a social boon, but they are a political problem. The contenders for the Republican presidential nomination are blaming those prices on Obama. They want the Administration to authorize more deepwater drilling and take other measures to increase domestic production. But unless those measures led to a significant increase in the world supply of oil, which is hardly likely, since the United States has only 2 percent of the world’s oil reserves, oil prices and therefore gasoline prices would be unaffected because, as Becker explains, those prices are set at the intersection of global demand and supply.
Moreover, there is a difference between authorizing new drilling and expanding supply. If the authorization leads to new production sufficient to reduce oil prices significantly, further increases in production are discouraged. Lower prices make it more difficult to cover the costs of increased production, especially since those costs may rise as oil companies are forced to explore for and develop oil in less favorable terrain, as older fields become exhausted.
If we do wish to lessen our dependence on foreign oil, the best instrument is probably a tariff. A tariff would increase the price of imported oil, and therefore encourage more domestic production. Moreover, it would weaken oil exporters, by reducing their output (the United States is a huge market for foreign oil—it consumes about 20 percent of the world’s oil, and half of that comes from abroad). It could actually lead to a reduction in oil prices. If a product has a positively shaped supply curve, meaning that the cost of production rises with output, then a reduction in output reduces the cost of production and therefore, given competition, the price.