Larry Summers: U.S. Energy Independence Tied to Europe and Japan

Economist Larry Summers talks oil prices in today’s featured Big Think interview, viewable below:

Summers hits on two key points in this short interview. The first is that U.S. oil prices are down and should remain that way for at least the foreseeable future:

"The main reason why oil prices are falling is that we had a stretch of time where we had rising supply from North America matched by falling supply from other places because of developments in Libya and developments in Iraq, developments in Iran. And the run of bad supply developments has largely stopped and the positive supply developments in the United States have continued. And the expectation that that will continue in the future is leading to a significant decline in the price of oil. "

Summers explains that there's more reason to expect positive supply developments than there is for negative supply surprises, thus his tepid expectation for prices to remain low. This comes with the caveat that the market for oil is extremely difficult to pin down. Volatility is just part of the game.

Energy independence is the topic of Summers' second point. Many Americans associate the pursuit of energy independence with an increase in domestic production and a decrease in reliance on foreign oil (typically from the Middle East). While this is a sound beginning, Summers notes that the concept of energy independence is far more complicated than a simple 1:1 relationship between where oil used in America comes from. Even if the U.S. ceases to be a net importer, its close-knit ties to Europe and Japan mean an inextricable link between the price of oil and issues in the Middle East:

"Japan and Europe remain dependent on Middle East oil and it is hard to believe that we could ever allow a situation to materialize where there was a vast difference in price between the price of oil in Japan and Europe and the price in the United States. And so if one asks the fundamental question: "is the world price of oil vulnerable to what happens in the Middle East?" the answer to that question is probably somewhat less than it was, but it is still very vulnerable to what happens in the Middle East."

Unless the United States has enough oil to supply its major allies (it doesn't), the price of oil in the U.S. will always be tied to the Middle East.