You Decide: Is The U.S. Energy Independent?

By Mike Walden

The Iran war has caused a worldwide shortage of oil, which has been translated into a shortage of all types of fuel, including gasoline for vehicles and jet fuel for airplanes. The result has been significant increases in gasoline and other fuel prices. As this article was written in early May, since the conflict started, gas prices are up over 60% and airline tickets — which reflect the price of jet fuel — have increased an average of nearly 20%. Prices may be even higher once you read this article.

Yet, the U.S. is currently the largest producer of oil in the world. This has caused some to say the U.S. is energy independent, implying we can fulfill our fuel needs from domestic supplies with no reliance on foreign production. But, if this is correct, why have we seen the significant fuel price increases cited above?

One reason is that all oil is not the same. There are two fundamental types of oil, so-called “light oil” and “heavy oil.” The U.S. produces a significant amount of light oil, but our refineries built decades ago primarily were constructed to turn heavy oil into gasoline and other fuels. As a result, our country imports heavy oil from other countries.

A second problem is where the oil is produced and where the refineries are located in our country. U.S. oil wells are in the interior of the country and in Alaska, while refineries are typically on the U.S. coasts. It is often easier for imported oil to reach refineries using the ocean rather than to transport oil from U.S. wells over land to the refineries.

The third issue is the fact that oil is an international commodity sold and bought all around the world. In this kind of economic environment, the price of the commodity tends to be the same wherever the commodity is traded. Hence, if the standard price of oil is $100 a barrel in the Middle East, it will also be $100 in Europe, Asia, and the U.S.

With regards to local gas prices, a corollary question often asked is why gas prices can vary between stations. If oil is oil and gas is gas, wouldn’t this mean gas prices should always be the same at all stations at any given time?

There are two answers to this question. First, stations will not necessarily purchase their gasoline supplies at the same time, which means the wholesale price of gasoline can be different for different stations. Those that purchased wholesale gasoline when prices were lower can afford to have a lower retail price for customers.

The second reason for different retail gas prices is the gas station’s location. Stations that are at a convenient location, such as near a well-travelled highway, close to residential communities, or on the same side of the street where the majority of traffic is flowing, are more convenient and save time for customers. The stations likely will try to monetize this convenience by raising their price a bit. If customers value convenience more than the increase in price per gallon, then the local differences in prices will remain.

Ironically, light oil, which the U.S. has an abundance of, is preferred to heavy oil, which many of our refineries were built for. Hence, it appears a simple way for the U.S. to reduce its oil imports and move closer to energy independence would be to convert existing refineries from using heavy oil to using light oil. This would appear to be an easy fix, so why aren’t we doing it?

A big reason is cost. To convert a refinery from using heavy oil to light oil would likely cost millions of dollars, and possibly close to $1 billion. There are also potential local zoning restrictions, environmental worries and other regulations to address.

A potential solution to reaching energy independence is, of course, to reduce our use of oil, particularly for driving. Currently, 91% of U.S. vehicles use oil-based gasoline for fuel. There have been attempts to use other fuels, such as solar, hydrogen and electric-powered batteries created from alternative fuels. But so far there have been uncertain results from these efforts.

While our county is a big oil producer, we still must import foreign-generated oil, meaning we are not energy independent due to the type of oil our refineries must use. Is it important for us to be energy independent? Should we accept the costs and change the regulations so we can make our refineries compatible with the oil we produce? Or should we increase our efforts to use alternative fuels for driving? These are important questions that you, and everyone, must decide.

Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.