The price of crude oil currently hovers around $100 per barrel. This price matches highs reached two years ago and - adjusted for inflation - in early 1980s. Because of turmoil in the Middle East and North Africa, it is likely that the price will rise further.
High oil prices can wreak havoc on American businesses and consumers. But if they lead to improved energy efficiency and to greater investment in alternative sources of energy, such as natural gas and nuclear power generation, they contribute, albeit in a clumsy and painful way, to reducing our dependence on hostile and unreliable oil-producing countries.
The positive features of higher prices manifest themselves in two ways. First, in a market economy, higher prices signal that demand for a good is outstripping supply, providing producers with incentives to increase production of that good in the hopes of maximizing profits.
Second, higher prices provide incentives for producers and consumers to shift to relatively cheaper substitutes. For instance, a alternative that is uneconomical when the price of oil stands at $50 a barrel may be a viable substitute when oil is $100 a barrel.
Unfortunately, current U.S. government policies short-circuit the market, negating the two positive features of higher oil prices. Regarding the first, state and federal governments effectively hamstring the ability of domestic oil producers to increase output by denying them access to substantial reserves. For example, producers are prohibited from exploiting federal lands that are not in parks in the West, Alaska and under the waters off our coasts. Those areas hold an estimated 635 trillion cubic feet of recoverable natural gas - enough to meet the needs of the 60 million American homes fueled by natural gas for more than a century - and an estimated 112 billion barrels of recoverable oil - enough to produce gasoline for 60 million cars and fuel oil for 25 million homes for 60 years.
Regarding the second, high oil prices have led advocates of “renewable” energy to push for a shift to “green” energy sources, such as wind and solar. But even with the price of oil in the vicinity of $100 a barrel, such alternatives remain uneconomical without massive government subsidies. Heavily subsidized alternates are not true substitutes in the economic sense.
The mantra of those who stress “renewable” sources of energy is “energy independence.” But in this age of global interdependence, energy independence is a chimera. What the United States should be seeking is “energy security,” the goal of which is to increase the supply of energy by exploiting all of the sources available to us, rather than pursuing the mirage of energy self-sufficiency.
A sensible U.S. energy policy based on the principle of energy security would leverage both functions of the pricing system in a market economy. First, the government should lift most restrictions on domestic production of oil while continuing to import oil from Canada, Mexico and other reliable oil suppliers.
Second, the government should get out of the way of producers trying to shift to true substitutes for oil - not illusory and uneconomical alternatives like wind and solar, but economically viable alternatives such as nuclear power, oil from shale, the conversion of coal into liquid fuels, and the exploitation of the vast deposits of unconventional natural gas available domestically.
Freeing up domestic energy resources and exploiting economical substitutes for oil will do today what the same steps have done in the past: cause oil prices to fall, thereby enhancing U.S. energy security.
Mackubin Thomas Owens is a professor of national security affairs at the Naval War College and editor of Orbis, the journal of the Foreign Policy Research Institute.