Energy Independence is a Terribly Stupid Idea

oil

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 explains (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 cartel’s 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 do you see ever points this out? Zero.

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.


Comments

  1. vijay says

    we need to find a alternative energy to run vehicles or we have to modify the blueprint of the vehicle . To run on other sources . like water , Air , vegetable oils .

  2. says

    You are right; energy independence is a bad idea. We are interconnected, have been since the first fish was traded for animal skin.

    Yet, the end of our resources has been foretold before. In 1865, the British economist, Stanley Jevons predicted the end of coal. In his book, The Coal Question, he wrote that Britain’s easy ride was over and soon coal, which, powered their industrial revolution, would be gone. It was “physically impossible” to continue. Therefore Britain needed to decide “between brief greatness and longer continued mediocrity.” William Gladstone, the Chancellor of the Exchequer, found Jevons’ argument so compelling he begged Parliament to pay down their national debt while they still could.

    The ink had barely dried on Jevons’ book when the output of coal rose and the price fell. The first oil well was sunk in Pennsylvania six years later. Today, Britain still produces coal. The U.S. still produces oil.

    Resources are not anything until humans find something useful or interesting about them.

    Here are some articles on the topic that you might find interesting:

    Peak Everything? – Reason Magazine
    http://reason.com/archives/2010/04/27/peak-everything

    Wrong about running out | The Rational Optimist
    http://www.rationaloptimist.com/blog/wrong-about-running-out

    The dash for shale oil will shake the world – Matt Ridley
    http://rationaloptimist.com/blog/the-dash-for-shale-oil-will-shake-the-world.aspx

    The Limits of The Limits to Growth – Reason Magazine
    http://reason.com/archives/2012/04/18/the-limits-to-growth-40-year-update

    Where’s the Peak for Oil Reserves? – The PERColator
    http://percolatorblog.org/2011/05/04/wheres-the-peak-for-oil-reserves/

    The R/P Ratio
    http://sppiblog.org/news/the-rp-ratio

    Political Peak Oil – Reason.com
    http://reason.com/archives/2007/01/05/political-peak-oil

    Peak Oil Panic – Reason.com
    http://reason.com/archives/2006/05/05/peak-oil-panic/singlepage

    http://world-nuclear.org/info/Nuclear-Fuel-Cycle/Uranium-Resources/Supply-of-Uranium/

    Apocalypse Not: Here’s Why You Shouldn’t Worry About End Times | Wired Science | Wired.com
    http://www.wired.com/wiredscience/2012/08/ff_apocalypsenot/

    Everything you’ve heard about fossil fuels may be wrong – War Room – Salon.com
    http://www.salon.com/news/politics/war_room/2011/05/31/linbd_fossil_fuels

    New drilling method opens vast oil fields in US : PERC – The Property and Environment Research Center
    http://www.perc.org/articles/article1336.php

    U.S. Oil Output to Overtake Saudi Arabia’s by 2020 – Bloomberg
    http://www.bloomberg.com/news/2012-11-12/u-s-to-overtake-saudi-arabia-s-oil-production-by-2020-iea-says.html

  3. says

    In retrospect Munger is correct, but the future is far less certain than hindsight. A country that thought like Munger may have bred and hoarded a bunch of whales for several decades for their oil, but there did turn out to be substitutes…

    • Carlos de Souza says

      On the dot, Saj. Munger is an over-rated thinker. There will always be substitutes. Solar, for instance, could be really huge, going forward. Besides, energy dependence has a huge cost, not just financial.

      • J.D. says

        How do we use solar energy to produce the fertilizer required to feed billions of people?

        • Roberto says

          Why not skip the fertilizer and use those wonderful solar energy capturing devices known as plants…the point being is to eat less meat. If that happens then the somewhat illusory problem of feeding the current and growing human population diminishes hugely.

          J.D. – you seem to be overly negative towards alternatives to hydrocarbons. Why is that?

      • J.D. says

        So as an argument you’re saying: Historical arguments that we would have no substitute for our required resources were wrong. (e.g. coal, whale oil). Therefore the same arguments today about there being no future substitutes for hydrocarbons is wrong. Is that your argument?

        Comparative advantage is irrelevant to Charlie’s point.

  4. Adam says

    Energy independence will be determined by hyrdo, solar, etc. Oil is a depleting resource. Renewable energy is the future.

  5. bob smith says

    The call for energy independence is more of a realisation of the shift in world power. The securing of energy supply is having a greater & greater financial & political cost.

    If great energy independence was achieved by a greater use of nuclear & renewable power, the cost of oil would decrease along with the power of the states who control the supply. Currently most oil is used for energy production rather than as a raw material. Energy independence provides a degree of freedom from external influence on the affairs of the state.

  6. ATB says

    “A Question
    It’s 1930. Oil in the United States is in glut. We have cartel’s 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 do you see ever points this out? Zero.

    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.”

    Does he think that Arabs are stupid or something to let something like that happen? I don’t think so, this is nothing more than wishful thinking. America will fill the world with Oil and prices will still go up. That’s just the way things will be, because nations like China will buy it all.

  7. Mike Hoy says

    Mr. Munger ignored the massive political problems that have resulted from imported oil. Imported oil has been paid with the blood of our youth over and over again.

    The ability to be energy independent is a huge lever that can be used to our advantage if only we could find the political wisdom to use it.

    • J.D. says

      “Imported oil has been paid with the blood of our youth over and over again”

      Can you explain when/where our youth has died for imported oil?

      • MRR says

        Good point by J.D.

        I cannot see anywhere that people die for causes not related to food or money. The only other reason is offensive, of course.

        Though very expensive to start with, renewable energy is a source which can be pursued more seriously.

  8. Dokan says

    Are you talking about energy independence or hydrocarbon independence?
    The best goal accomplished by politicians and economist was, and it’s been, to mix up both until the people don’t understand where’s the difference.
    Hydrocarbon it’s a powerful lobby that has no sense without energy use of it.
    About that question, the correct policy would have been to issue $150 billion to research new energy models, and still it is.
    About if hydrocarbon independence is an stupid idea, it only depends on the viewpoint, on the pocket viewpoint.

  9. Terlen says

    I have great respect for Charlie Munger – he is one of the great clear-headed thinkers. However, on this one i disagree with him. He is right that all things being equal you are better off using up someone else’s supply of a scarce resource but he doesn’t mention the cost of that path at all. Our concerns with the middle east are primarily oil based. Our military adventures there would probably not have happened were it not for the oil under their ground. To be free of the concern for their oil would liberate our foreign policy.

    Now that being said, if we could achieve energy independence (with a growing part played by alternatives i hope) we could still import oil AT OUR OPTION. It is a lot better (and cheaper) than remaining perpetually prepared to fight wars to protect out sources of foreign oil. In addition, do you think countries like Venezuela would be poking their fingers in our eye at every opportunity if we were buying their oil AT OUR OPTION?

    Sorry Charlie, this time i think you got it wrong you old curmudgeon.

    • J.D. says

      “Our concerns with the middle east are primarily oil based. Our military adventures there would probably not have happened were it not for the oil under their ground.”

      Can you explain the evidence for this?

      • Terlen says

        Evidence – as in court (eye witnesses, finger prints etc) is a tough requirement when it comes to world events. However, a strong reasoned case can be made. The first time into Iraq was to protect Kuwaiti oil and, indirectly, Saudi oil. Messers Cheney and Bush didn’t give much reason for the 2nd visit to Iraq but they did make the case that Iraqi oil would pay for the visit and if you believe the lobbying from big oil was discouraging them i have a bridge you may wish to buy.

        Afganistan has no oil – we attacked there because the country harbored the perpetrators of 9/11. – But why were we attacked on 9/11? Primarily because of our presence in the middle east and most particularly Saudi Arabia. Why were we in Saudi Arabia? It isn’t for the beaches.

  10. says

    Yes, as others are noting, for many, it’s not about energy independence per se. If we were importing energy from Ireland or Brazil, it wouldn’t be a huge deal. It’s that we get our main non-renewable resource largely from petrocracies whose interests tend not to be aligned with ours, and our way forward is to lead the way with renewable resources.

  11. Roy says

    “And China has the correct solution”

    He lost me there.

    In the past month I read several articles about real break- troughs on the way to alternative energy. Necessity is the mother of innovation.

    “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.”

    Really. That would be the BEST thing. If people would really believe that soon there will be no more oil than THAT would be the tipping point.

    In fact, we are in the shale boom BECAUSE just a few years ago the news media was full of “peak oil” and the “200USD per barrel any day now.”

    There are already known alternatives, it’s only a matter of cost.

    And this is without going into the second level thinking of what happen when you pass your time/money/wealth to other countries who use this resource against you.

    Just as a thought experiment: where would some Arab states be now without the wealth from oil? Either still in the 14th century, like Yemen, or maybe, just maybe they’d have to progress and we’d be in a far better world now.

    • J.D. says

      ““And China has the correct solution”
      He lost me there”

      He is saying China’s correct solution is their policy of using foreign hydrocarbons.

      Charlie doesn’t argue that nations should not move to alternative energy- he’s actually a huge proponent . He is saying that if you must use hydrocarbons (a finite resource), use someone else’s.

  12. Jeff says

    There is no such thing as energy independence. Anyone using that phrase proclaims themselves the fool, with no understanding of physics or the laws of thermodynamics. You might as well wait for someone to deliver a perpetual motion machine to your home. If you aspire to energy independence then by all means lead the way, have your electricity shut off begin walking everywhere and forage for potable water, fruit and berries. We should be using the least expensive most readily available form of fuel, period. Anything else is a combination of human arrogance and politics.

  13. Stan Fraser says

    I think a balanced approach to being more energy independent through a heavy investment in energy conservation and renewables would be a wise strategic move.

  14. stephen q shannon says

    Shane reply. Stephen,

    Generally, I believe it’s wiser long term to use other people natural (non-renewable) resources and keep our own.

    Feel free to leave a comment on the article. there is a great discussion going on.
    Cheers,
    Shane

    Farnam Street (I once worked on a Farnam Street in Omaha, NE) has hit a home run with this discussion. As I said via e-mail to Shane, I am fine arts major. I did not mention that for 10 years I served as a “contract employee” at rocket plant here in Florida. Rockets use exotic fuels. Another idea, maybe flawed like a lot of the rest, is to draw upon that experience as is the case with better known experiments, and apply this country’s apparent high tech ability to “create” a fuel that will power engines not dependent upon un-recyclable devices such as the “big batteries” employed by non-combustion, so-called “hybrid” vehicles. Our barrier, I think, is gradualness associated with bureaucratic-ness. Rock on.

  15. andrea says

    i really consider Munger the brightest mind around but in this case i disagree . in my opinion natural resources as oil or gas have to be seen in a global perspective and not just from the point of view of a single country. this because the exaustion of resources creates perfect conditions for the development of new technologies and discoveries . lack of oil or gas in China would make the Us richer just in the short span but a global solution would be in the interest of both countries

    • J.D. says

      Are you saying we should consume the world’s hydrocarbon supply because it will force the world to innovate? Hydrocarbons are required to produce fertilizer, and as Charlie points out it’s not at all clear scientists will be able to create more hydrocarbons in some vat.

      Let’s assume that exhausting the world’s fossil fuel does create the perfect conditions for development of new tech. If those perfect conditions do not actually create a working solution you will, in Charlie’s words, “run out of civilization”. Is that a worthwhile risk?

  16. Brad says

    Munger has a Brain Block. A government that cannot control it’s spending is going to invest and hold something for 80 years? Not realistic. The government is going to pick commodities to invest in while they have shown they cannot even hold their strategic reserves when the price goes up? The government track record on investing in green energy is dismal. Let’s be real here.

    • J.D. says

      He is pointing out what the correct solution was. He did not say it’s an action we can expect the Gov. to take now or in the future.

      • Brad says

        I don’t mean to be negative, but a solution that will never work in the real world can only be correct under the most generous of definitions.

        • Ian says

          “In theory, there is no difference between theory and practice. But, in practice, there is.” – Jan L. A. van de Snepscheut

          PS: that Munger quote should have been edited heavily, not lightly. In it’s current form, it reads at a 4th grade level. Proper punctuation is seriously needed! (I’m not judging on the content, merely expressing my distaste for poor writing technique.)

  17. yargo says

    I agree 99% with Charlie Munger.

    Currently there exists no technology to substitute fossil fuels and hydrocarbons in general which could be deployed on a large enough scale (let alone economically) to just mantain the status quo, and there is none in sight for the foreseeable future. (electricity however could be doable in a decade or two if we were to cut usage by 2/3)

    For details see for example:

    http://physics.ucsd.edu/do-the-math/2012/02/the-alternative-energy-matrix/

    or

    http://physics.ucsd.edu/do-the-math/2011/09/got-storage-how-hard-can-it-be/

    I wonder however if it really is the confucius ethos thats making the chinese do the right thing, iirc most of the newly available hydrocarbons in china are located around coastal ares which are heavily populated and extraction could necessitate massive relocations. its similar for example in france where they banned fracking, since most of them are located below and around paris.

  18. Jason Shah says

    Charlie’s comments are spectacularly ironic. He says to protect a state’s ability to be independent (rhetoric of national treasure and protection of civilization) they should first exploit the oil reserves of some other states. So, in essence, use interdependence as a tool to be independent yourself? And, what about the concerns of the other state – not all can import? So, Charlie’s idea is pretty much an argument for rich powerful countries like US and China, and not necessarily for Nigeria and Ghana (oil rich less powerful countries), and totally irrelevant to Nepal and Tuvalu. Of course, I can preempt responses along the lines of the economic rationale of trading and how trading oil to China and US would be a voluntary rational choice of maximized utility for the exporter state.

    But, perhaps, we can take a look on the global scale, where energy independence could serve as a thought paradigm to ask states and societies to look at their consumption pattern and the dynamics of resource use and production. Not saying that we should remove ourselves from market; far from it. I think that we might be more independent if we focused on decentralized energy production (the current solar, wind, and other tech offer the possibility) and look at the embodied energy of daily utilities which we have the ability and the information to produce in our own communities. In a sense, let’s make ourself antifragile by meeting our essential living needs of shelter, energy, food, and water in a local market without making others fragile to meet their own needs.

    And, I am not going to enforce these ideas as a government entity, so I guess we do not need to go to the conversations of how the idea of energy independence – as a consumer choice – undermines market.

    • J.D. Bird says

      He is not arguing that the nation should try to “protect its ability to be independent”. If he’s talking about protecting anything it’s the world oil reserves.

      If you reference Charlie’s 2010 conversation at U of Michigan on YouTube (starting at minute 32.5) he describes his view on national energy policy in clear fashion.

  19. Kurt Schoeneman says

    We could become energy independent and reduce domestic hydrocarbon use at the same time. Munger says use other folk’s oil and save ours for the dark times. I say reduce our population by 50%, or so, and the problem goes away. 50% fewer animals of the non-homo sapien variety, too. Hydrocarbons for fertilizer? Won’t need them with fewer people. We can farm sustainably. Let’s stop worrying about economic growth and figure out how to achieve economic security. Should have plenty of oil for plastic bags then.

    Just some thoughts from an actual farmer.

    • J.D. says

      An interesting thought. How do we go about reducing the population by 50%? Or 10% for that matter?

      • Ian says

        Female empowerment and education. There is a clear causal link between birth rates and level of female education. BUT, this would seriously jeopardize some basic tenants of economic theory (infinite growth in a finite world…)

  20. Meatball says

    I wonder if JD is Munger himself or his loyal friend or family member. Anyone’s comment that disagrees with Munger’s position is shot down by him or questioned with a vague ? I suggest JD read the latest blog entry about effective listening.

    • J.D. says

      I haven’t said anyone’s argument is wrong. I have pointed out the differences between Charlie’s view and some misinterpretations of it. Maybe that’s a poor approach to dialogue- I’ll reconsider.

      • Terlen says

        Appreciate the explanation – however – everyone you questioned didn’t “misinterpret” Charlie – they just flat out disagreed with his position – nothing wrong with asking for clarifications – but the number and nature is what i think led JD to ask what may have been on the minds of some of us

  21. scott says

    Not too knowledgeable on petroleum, but I’ve always wondered if even thinking about oil from an energy standpoint makes sense. What if we need oil for plastics or fertilizer? Aren’t there more substitutes for gasoline than there are for plastics and fertilizer? Is food security possibly more of an issue than oil independence, especially with the methods of farming that are widespread today?