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Energy Independence Not the Policy Goal

The April 2nd USA Today called subsidies for renewable energy, nuclear energy and new efficiency mandates for automobiles “good, good and good” because “the nation doesn’t have the luxury of instantly wishing away its dependence on oil.” But why is energy independence a policy goal? Economics 101 teaches us that there’s a huge opportunity cost with attempting to become energy independent. The Independent Institute’s Robert Higgs explains:

Suppose a serious policy of “energy independence” were actually implemented, rather than being merely spewed out along with the rest of the political hot air. Would we be better off? Absolutely not. We would be vastly poorer because we would have to sacrifice a great deal more of the non-oil products we now produce and consume in order to acquire the petroleum products we demanded.

In a sense, every good or service we wish to consume raises the same question: make or buy? If we choose to make it ourselves, we must forgo the value of the goods we might have produced had we allocated our time, effort, and other resources in alternative ways—in the economist’s lingo, there’s an opportunity cost. If we choose to buy the desired good or service instead of making it ourselves, the value of the goods we could have enjoyed had we spent the money for them, rather than for the good actually purchased, represents the opportunity cost. So, whether we make or buy, there’s always an opportunity cost. Rational people answer the make-or-buy question by choosing the option with the lower opportunity cost.

Both Republicans and Democrats have called for energy independence and both parties have implemented poor policies (ie the ethanol mandate) to reduce our dependence on foreign oil. It may be a politically attractive thing to say, but only rarely does it lead to good policy.