Market swings: global economy plays major role in U.S. energy strategy.

• Author: Frodl, Michael G.
• Position: COMMENTARY - Industry overview

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The United States consumes 25 percent of the world's petroleum but has only 3 percent of its reserves. Many advocates of "energy independence" cite that fact as a reason for abandoning foreign oil and relying on domestic renewable energy such as wind and solar. Others argue that "energy independence" means we should substitute domestic oil shale, natural gas and offshore fossil fuels.

But both flavors of "energy independence" are based on false premises.

Even if by some magic the nation were to possess 25 percent of the world's petroleum and could close its borders, the United States would still be linked to the world's energy economy through trade. Oil is a globally traded commodity.

In the global economy, supplies will go to the highest bidder, and different types of energy that can be substituted will compete, directly or indirectly.

For example, Iran subsidizes gasoline for domestic use, as do many other countries. But by selling gasoline for only pennies on the dollar, Iran invites gasoline smugglers from neighboring countries to poach on the deal. They buy the cheap Iranian gasoline and sell it back home for a handsome profit. This is clearly a big drain on the Iranian economy.

Only by erecting retrograde barriers to free trade, such as stiff tariffs and tight border controls, can such phenomena be stemmed, and only ultimately at great expense to the consumer, and at a considerable loss of freedoms for citizens.

There is a better way.

In the past couple of months, we have seen a dramatic drop in the price of oil from the dizzying $147 per barrel over the summer, partly because the U.S. economy has lost perhaps up to a million barrels a day appetite for the stuff--that's still less than 5 percent of our daily consumption.

If the United States dropped its daily consumption of oil by another 5 to 10 percent, it could well bring oil down to $35 or less a barrel. If gasoline could be had fur $1 and change, what would happen to solar panels, windmills and geothermal pumps?

With oil at $150 there might have been "savings" by going to solar or wind, at around $100 the government would still need to give the alternatives an assist and pass the cost along to the consumer and tax payer, but at $35, the government would be carrying the projects almost entirely in its arms.

In a "renewables only" world where the government would not fund projects and would keep the borders closed to oil and gas, consumers would quickly recognize that compared to lighting their house with coal-based power or heating it with oil, the bill from wind or solar would be much more expensive. Most would probably agree that the premium would not be offset by any feeling of being "safer" be it for national security or climate change reasons.

If the cost of food and other products whose energy price component shot up under the new energy regime, then consumers would probably "vote with their feet" and have...