Wednesday, August 06, 2008

More on Boone Pickens' "Boone Doggle"

Boone Pickens says we spend $700 billion a year on foreign oil, which he calls a "transfer of wealth." But exchanging money for oil at the market price is an exchange of things of equal value. If we didn't value their oil more than our dollars, we wouldn't participate in such a bargain (MP: ECON 101).

He laments that the U.S. consumes "25% of the world's oil." The phraseology is common, and misleading. Oil is produced to meet demand. He might as well complain that, with 25% of the world's GDP, we consume 25% of the world's advertising.

As Mr. Pickens says, we can't drill our way out of the dilemmas of living in the world. But drilling is one of many things we can do that are worth doing. Over time, the price mechanism and technology will tell us how to harness the energy that is infinite around us. There's the sun, the tides, geothermal and nuclear -- energy is not in short supply; only know-how is. And a shortage of know-how is a problem that our society, as long as its basic incentives remain intact, is constantly solving every single day.

~Holman W. Jenkins in today's WSJ

57 Comments:

At 8/06/2008 9:40 AM, Blogger Sophist said...

The view is very simplistic. It is a transfer of wealth and it has been one already. It is because the price at which the exchange happens has side effects on the economy. Linear thinking in these issues is a mistake. As an example:

Rising oil prices caused many home owners to default on their loans because they had to spend double or triple on gas (combined of course with rising payments on variable rate loans). Next, institutions like Citicorp got into trouble and, guess what, the Arabs purchased a stake in those corporations that originally belonged to Americans using the dollars they received from Americans.

Thus, Americans transfered their wealth to Arabs.

It's so simple, I wonder why so many people fail to understand it.

What is important is the price at which the exchange takes place. If the price is too high and the buyer is forced to sell other assets to purchase the goods, then there is tranfer of wealth involved, especially when the assets are bought by the seller, and in this case it is a direct transfer.

Who is having problems understanding this?

 
At 8/06/2008 9:59 AM, Anonymous ej said...

Sophist,

I see what your saying, and i agree with you if you look at "weath" i that light. But I think the point was that it is an exchange of wealth in the ense that equally valued items are transfered. Even in t he case of a forclosed home, the money flows to the "arabs" was still done for in an exchange of another good that was equaly valued to us. Though oil is at a higher price, the marginal cost benifit analysis that the consumer does still decies that it is worth it to him or her to exchange a larger amount of money for the utility that the oil product brings. True, in dolar terms there is not a greate monetary flow to other nations, but int he inverese there is now a greater value of oil transfered to the US. We may compain about higher prices but we are still willing to buy it at that level.

 
At 8/06/2008 10:00 AM, Blogger Walt G. said...

Sophist,

How do I quantify using $20 worth of gas to drive to work and make $1500 using your methodology? It seems like a more than a fair exchange to me, and also an exchange of wealth from imported oil to American dollars in my favor. I’m sure I don’t want to trade back.

 
At 8/06/2008 10:05 AM, Blogger Mark J. Perry said...

Q1: Ten years ago when oil was $12 per barrel and the U.S. economy was booming, was that a transfer of wealth back then when we bought foreign oil, or did the transfer of wealth phenomenon start just recently for buying foreign oil when the price went up?

Q2: Are all of our imports a transfer of wealth, or just oil? For example, when we buy bananas from Honduras, is that a transfer of wealth?

Q3: When the U.S. exports $1 trillion of our goods and services to the rest of the world, is that a "transfer of wealth" TO the U.S.

 
At 8/06/2008 10:22 AM, Blogger the buggy professor said...

This is an informative and stimulating exchange, especially between sophist's and Mark's views.

A problem, I believe, with Mark's is that the oil market isn't a fully competitive market: the supply output for OPEC is set by the cartel. That then sets a price that is further influenced by demand for oil world-wide, and other, non-oil export-countries like Russia and Norway and Indonesia (since March 2008) don't seem to have much impact on the price set by OPEC (about 36% of oil production, virtually all exported)and global demand for oil . . . which is highly inelastic in the short-run.

Then, too --- to consider other oil-producing countries, above all the US (non-exporting oil overwhelmingly) -- oil prices set by OPEC countries and importing demand-side countries don't seem to be influenced by domestically consumed oil produced in, say, the US.

And of course another bottleneck seems to be refining capacity world-wide, though how much has never been clarified publicly.

.....

All this can be adjusted over time, through substitution, income-effects, alternative energies, and recycling. But in the meantime, a cartelized core set of countries.

......

In the upshot? Just as cartels are undesirable in a home country on the production side, so globally OPEC, as a cartel, looks very much like absorbing more wealth from abroad than would be justified in competitive markets.

In short, a wealth transfer.

....

Not to mention an even bigger problem: the vulnerabilities of supply in Middle Eastern oil, which has sucked the US, militarily and diplomatically --- in very costly ways --- into a huge over-commitment to protecting gangster Arab regimes in the Persian Gulf.

Those same gangster regimes, along with their counterparts in Russia and (to an extent) Venezuela with its free press, are able to fund foreign and security policies hostile to the US's national interests.

Which includes continued Saudi subsidies for extremist Wahhabi Islamist hatreds world-wide.

.....

Michael Gordon, AKA, the buggy professor, http://www.thebuggyprofessor.org

 
At 8/06/2008 10:26 AM, Blogger Sophist said...

John and Peter are the only two inhabitants of an island.

John has a nice house, his only asset, but he is sick and needs a blood transfusion to survive.

Peter is poor but is healthy and can give blood to John in exchange for his house.

The exchange: Peter offers blood and takes the house.

The question:

Is there transfer of wealth involved?

 
At 8/06/2008 10:30 AM, Blogger Mark J. Perry said...

You go to the grocery store to buy $100 of groceries, because you and your family need food to survive. Is that a transfer of wealth?

 
At 8/06/2008 10:36 AM, Blogger Walt G. said...

sophist,

How much is not being dead worth to John?

 
At 8/06/2008 10:39 AM, Blogger Sophist said...

To MP:

Q1 answer: it was a transfer of wealth that was balanced in yjr sense that neither the seller got overly rich at the expense of the buyer, nor the buyer was forced to liquidate wealth to complete the exchange.

The point being, that exchanges are dynamic systems that involve several equilibrium points that are functions of price. IMO the current price of oil gives rise to instabilities that contribute to direct wealth transfer, meaning they are not balanced exchanges.

Q2 answer: Simple said, some imports are transfer of wealth. In your example, people would not sell their house to buy bananas but they will to buy gas.

Q3 answer: Part of that is. Some countries are forced to privatize resources to buy weapon systems from the US to protect their boarders. There is transfer of wealth when a stake ends up in foreign hands.


MP,

From one hand you argue for drilling and from the other you argue oil imports do not cause wealth transfer.

If oil trade does not involve wealth transfer from buyer to seller at this point, there is no reason to drill.

We can only convince people to start drilling when we demonstrate that eventually they are transferring their wealth to oil producers.

Otherwise, there is no point.

It seems, you want your cake and eat it too.

 
At 8/06/2008 10:40 AM, Blogger Sophist said...

walt g,

that's not the point. The question is: is there transfer of wealth involved?

 
At 8/06/2008 10:41 AM, Blogger matt said...

I propose simple answer to a complicated question.

It matters not if it's bananas, oil, or financial services. Imports vs Exports. Trade Deficit. If you run a trade deficit, you're transferring wealth out of the country. When oil was cheaper and we had some semblance of manufacturing in the US, the trade deficit was lower and wealth transfer was minimized.

 
At 8/06/2008 10:44 AM, Blogger Mark J. Perry said...

Sophist:

As I understand it then, YOU get to decide: a) which transactions are a "transfer of wealth," and b) which transactions are an "exchange of wealth" or an "exchange of equal value"?

 
At 8/06/2008 10:48 AM, Blogger Sophist said...

MP asked:

"You go to the grocery store to buy $100 of groceries, because you and your family need food to survive. Is that a transfer of wealth?"

IMO, if you have to sell your gold watch to buy the gorceries then there is transfer of wealth.

There is no transfer of wealth when the system is at equilibrium, meaning that you make enough money to buy food to keep you alive to work and be productive so you can buy more food.

However, if food costs more than you make, then you start liquidate your assets. Now there is transfer of wealth when you buy food.

 
At 8/06/2008 10:49 AM, Blogger Walt G. said...

sophist,

I'm not sure how wealth is defined. Is it the same as net worth? I understand that term.

 
At 8/06/2008 10:55 AM, Blogger Sophist said...

MP asked: "As I understand it then, YOU get to decide: a) which transactions are a "transfer of wealth," and b) which transactions are an "exchange of wealth" or an "exchange of equal value"?"

That is a good question, To answer it you need a quantitative model of the impact of the various exchanges on wealth.

In the absence of a model to quantify these things, everyone can say what they think.

I think however, that matt proposed a simple model but some also object to that as you know, arguing that trade deficit is good, not bad.

It boils down to the lack of an axiomatic foundation of economics as you know.

From a common sense PoV, if the buyer of an exchange can use the goods to peoduce more wealth to make up the cost then one can argy that there was vistually n wealth transfered eventually.

 
At 8/06/2008 10:58 AM, Anonymous Ryan S. said...

I think the argument over the "transfer of wealth" in this comment thread fails to recognize the subjectivity of the whole thing. Wealth is not really anything objective, like saying any amount of something represents a specific amount of "wealth".

Dr. Perry, I have a slight nitpick with part of what you bolded in the original post. You wrote, "But exchanging money for oil at the market price is an exchange of things of equal value. If we didn't value their oil more than our dollars, we wouldn't participate in such a bargain (MP: ECON 101)."

Those two sentences seem to contradict one another. You write that the trade of oil represents an exchange of equal value, but then say the exchange would not have occured if the two parties did not have differing values for the dollars and oil. As I'm sure you already know of the arguments concerning the nature of value(with you being the PHD in all), value is a nebulous thing. There is no real "value" that remains universal for all people or in all times. It ultimately depends upon the tastes and preferences of the individual. However, I think my confusion stems from your use of the same word, value, to convey two different concepts. The value is equal in economic terms (exchange ratios between goods), but different in a how-much-does-this-thing-mean-to-me way. Again, just a minor nitpick.

Thanks for the very interesting and informative posts Dr. Perry!

 
At 8/06/2008 11:04 AM, Anonymous Ryan S. said...

"It boils down to the lack of an axiomatic foundation of economics as you know."

Sophist, pick up a copy of Human Action by Ludwig von Mises if you have not already read it. You'll find your axiomatic foundation there, and if it is not satisfactory to you, I still think you'll gain much enjoyment from the book.

 
At 8/06/2008 11:42 AM, Blogger Sophist said...

ryan s,

You can read it for free here

The problem is not coming up with an axiomatic foundation as such. The major problem is coming up with set of a priori definitions to be used in the axiomatic system. these definitions must be grounded in fact and be indisputable.

examples: what is value, wealth, etc.

Also, Goedel's incompletness theorem cats shadows. Do you want a complete but inconsistent economic theory or a consistent but incomplete one?

Long way for economics to become a rigorous science, if ever.

 
At 8/06/2008 12:29 PM, Anonymous Ryan S. said...

Sophist,

I think you're making the same mistake Dr. Perry did by conflating two different conceptions of value.

As far as economics is concerned, there is only value in exchange. Exchange value can, almost by definition, never be constant and absolute. It is ever fluctuating as the tastes and preferences of individual actors change and become redefined. Since wealth is derived from value, it, too, can never be constant and absolute. So, whenever you argue over transfers of wealth and value, it can only be done by focusing on a specific moment in time, and the result cannot be generalized for other points in time.

I had more written but erased it as there are too many aspects of the value problem that must be touched upon for any coherent presentation.

I think you're looking for absolutes where there cannot be any. The economy is in a constant state of flux. You are, I believe, trying to apply a general equilibrium conception of the system when that is inherently impossible. I could be wrong though. Do read Mises if you have not already.

 
At 8/06/2008 12:40 PM, Anonymous Anonymous said...

IMO, if you have to sell your gold watch to buy the gorceries then there is transfer of wealth.

But, not if you have to sell your labor to buy the groceries?

There is no transfer of wealth when the system is at equilibrium, meaning that you make enough money to buy food to keep you alive to work and be productive so you can buy more food.

Again, selling labor means no transfer of wealth. Selling gold watch means transfer of wealth.

However, if food costs more than you make, then you start liquidate your assets. Now there is transfer of wealth when you buy food.

So, because some make more than others, buying the exact same amount of goods would be a transfer of weath only for those that have to sale something tangible to pay for those goods.

What if I pay for a gold watch with bananas?

 
At 8/06/2008 1:21 PM, Blogger the buggy professor said...

After looking over the posts that followed my initial post, I find that no one has dealt with the security and foreign policy spillovers of our dependence on imported oil, directly or indirectly, from the Middle East.

The US has spent nearly two trillion dollars, not to mention the blood of American soldiers, in two Persian Gulf Wars . . . plus all the strains on our military that follow.

.....

Why aren't Europeans, Japanese, and Chinese sending large troops to the Persian Gulf to protect oil fields? Quite simply, they are free-riding on our defense efforts.

.....

Please note one final comment: I do not believe that we intervened in Saddamite Iraq in 2003 ONLY because of oil resources or even mainly. Oil there and in the nearby Gulf states threatened by Saddam was not a sufficient condition --- sufficient and necessary --- for the intervention. But it was a strategic necessary condition.

Without our dependence on oil imports, Iraq under Saddam, and the Shi-ite terrorist regime in Iran wouldn't even have the money for funding WMD programs. Similarly, we would not be obliged to protect the gangster regimes in the rest of the Persian Gulf area.

.....

More generally, I as both a Ph.D. in economics and political science find that cost-benefit analyses offered by most economists tend, often badly, to neglect wider social and foreign policy externalities.

...

Michael Gordon, AKA, the buggy professor

 
At 8/06/2008 1:22 PM, Blogger juandos said...

"It is a transfer of wealth and it has been one already. It is because the price at which the exchange happens has side effects on the economy"...

ROFLMAO!

Wrong as usual...

Since when is it a transfer of wealth when money is spent for a good or service received?

Transfer of wealth is the government extorting from the productive so as to continue to pander to the parasitic...

Welfare is a failure and has been known to be for quite some time...

Extorted money was spent but NO goods or services (for the vast amounts of money extorted) was received...

There's your 'tranfer of wealth'...

"Rising oil prices caused many home owners to default on their loans because they had to spend double or triple on gas"...

Suprise! Suprise! Wrong again...

Home owners defaulted on their loans NOT because of gasoline prices rising but due to the incompetence of the defaulting home owners...

"It's so simple, I wonder why so many people fail to understand it"...

Yes it is simple and apparently you still didn't get it...

"the supply output for OPEC is set by the cartel"...

Hmmm, I think that OPEC would disagree with your statement...

 
At 8/06/2008 1:41 PM, Anonymous QT said...

Sophist,

Blowing smoke rings as usual.

The premise of your argument is based upon the following statement "rising oil prices caused many home owners to default on their loans because they had to spend double or triple on gas (combined of course with rising payment on variable rate loans)"

What evidence have you produced to support the assertion that people are defaulting on their mortgages to pay for gas for the family car?

Rising fuel prices do not make life easy but people make trade-offs. Any financial planner or accountant can tell you that discretionary spending is an area that offers tremendous opportunities for saving. ie. buy fewer new clothes, eat out less often, go camping rather than taking an expensive vacation, buy fewer lattees, cancel your cable TV, use public transit, reduce consumption of gas, work in a home office for a couple of days each week, etc.

The bursting of a bubble in the housing market does not represent a loss in value but a price correction completely unrelated to the price of oil.

Without proving that there is a liquidation of assets to pay for gasoline, how can you prove that there has been a transfer of wealth in terms of hard assets?

 
At 8/06/2008 2:31 PM, Blogger the buggy professor said...

You go to the grocery store to buy $100 of groceries, because you and your family need food to survive. Is that a transfer of wealth? Mark P

Is this example really analogous to the role of OPEC in oil production and sales, Mark?

....

1) To make it more parallel, let's take your example and say that you live in a city with 20 grocery stores, no more. 19 of the 20 are owned by 4 national or regional super-markets, and the 20th a large independent. There are no other grocery stores nearer your city, let's say, that 200 miles.

2) One day, the regional managers of the super-market chains meet, quietly, on the sly, with the owner of the independent store. They agree to up prices considerably by withholding grocery stocks in the back of their stores or in their warehouses or maybe by not delivering from the regional warehouses in the big city 200 miles away.

3) A cartel in groceries is thus established. Suddenly, as with oil prices, food prices now rise, say, 30% in just a short interval.

But, as you say, groceries are a necessity. In paying this collusion-price, is there a transfer of (income/wealth) that is not justified as the price would be in a competitive grocery market?

4) If such cartels are illegal in the US --- and apparently in most advanced democratic countries --- what makes the exchange of American income/wealth for oil prices if a cartel, with 36% of world production (and a far greater percentage of oil exports globally), any different other than the absence of enforceable anti-trust laws on the global scene?

Especially since the key OPEC country, Saudi Arabia, could easily up production daily far beyond what any oil we could produce, in a few years, in North Alaska?

If you want --- libertarians won't want to, but others might --- add in a ethnical consideration: these high-living, degenerate, corrupt gangster regimes have done absolutely nothing to produce their oil revenues . . . only, instead, to be lucky to live on some terrain where vegetation, dead dinosaurs, and sunshine have, over time, bestowed lots of petroleum resources under their soil.

......

Two major points, then, to conclude my analysis in these posts:

1) The global oil market is not a competitive market. It cannot be treated that way. It is, at its core, dominated by a cartel.

2) Any cost/benefit analysis --- the exchange of US dollars by US consumers (costs) for the benefits of getting oil at the gas pump and in other products --- that will not consider the extravagant costs in American blood and wealth in protecting utterly corrupt, gangster regimes in the Persian Gulf is simply, in my view, very sloppy economics.

.....

Michael Gordon, AKA, the buggy professor

 
At 8/06/2008 3:58 PM, Blogger Walt G. said...

the buggy professor said,

"2) Any cost/benefit analysis --- the exchange of US dollars by US consumers (costs) for the benefits of getting oil at the gas pump and in other products --- that will not consider the extravagant costs in American blood and wealth in protecting utterly corrupt, gangster regimes in the Persian Gulf is simply, in my view, very sloppy economics."

I'm not disagreeing with your methodology. But if we do what you propose, do we figure in Americans stealing the land from the Indians and enslaving the blacks? It would seem sloppy not to do so. There was a lot of blood there, too. Tit-for-tat, I'm not sure where an analysis like that would end.

 
At 8/06/2008 4:16 PM, Anonymous qt said...

Bugmeister,

Isn't American blood and treasure to secure the stability of a strategic region a direct consequence of being the most powerful nation on earth? Is it not the consequences of living in a unipolar world where the U.S. must act as the world's policeman?

If the U.S. had not led the world in the first gulf war when Saddam invaded Kuwait, would there have been an international coalition of the willing?

Is there in fact any viable international alternative to American blood and treasure? What happens when the U.S. does not intervene clearly shows what the international community is prepared to do. The results are on view in Darfur, Rwanda, and Zimbabwe.

The U.S. does not have sufficient resources to fix every problem on the globe. Without a criteria based upon strategic interest, what would you suggest?

We buy oil from Saudi Arabia because they have the lowest cost to produce oil in the world, a comparative advantage that they have had for decades.

 
At 8/06/2008 5:01 PM, Anonymous Odofakyodo said...

From a common sense PoV, if the buyer of an exchange can use the goods to peoduce more wealth to make up the cost then one can argy that there was vistually n wealth transfered eventually.

Assuming this is true (which I believe it is), how then, Sophist, could you some small group of people accurately determine whether or not the millions and millions of transactions and cost/benefit decisions about energy that Americans make every day could be used to produce more wealth than what else could be purchased by the money they have given up? You can't, plain and simple. Then how can you possibly claim with any degree of certainty that "wealth" is being transferred out of the country? The fact of the matter is that, as Walt G. and others pointed out, you buy gas and food so you can do other things that you consider productive, like go to work, stay healthy, etc.

And Ryan, I don't think the thread missed the subjectivity of "wealth". MP presented a few different economic transactions and asked which were an exchange of wealth, and then concluded that sophist got to decide which was an exchange of wealth and which not. The point is, everyone values everything differently, so some people think some transactions are an exchange of wealth and others are not. It's ridiculous to think one or 535 people are going to figure out who buying what for how much is the "best" way to distribute the resources among millions of Americans, not to mention globally. And that includes oil.

 
At 8/06/2008 5:21 PM, Anonymous QT said...

odofakyodo,

"MP presented a few different economic transactions and asked which were an exchange of wealth, and then concluded that sophist got to decide which was an exchange of wealth and which not. The point is, everyone values everything differently, so some people think some transactions are an exchange of wealth and others are not. It's ridiculous to think one or 535 people are going to figure out who buying what for how much is the "best" way to distribute the resources among millions of Americans, not to mention globally."

Fair point.

 
At 8/06/2008 5:28 PM, Blogger the buggy professor said...

Is there in fact any viable international alternative to American blood and treasure? What happens when the U.S. does not intervene clearly shows what the international community is prepared to do. The results are on view in Darfur, Rwanda, and Zimbabwe. --qt

As usual, I find all these exchanges a laudable prod to reflection . . . starting, of course, with Mark's original post and follow-up comments in this post. Thank you for the opportunity to participate in this exchange, everybody.

.....

As to your query, qt, I would answer --- yes, there are alternatives for the future, and the future is what counts now: not what might have been in the past.

......

The most promising?

A goal of energy independence that we could achieve, say, over 10 to 20 years . . . the longer the span envisaged here, the more flexible and pragmatic the time for adjustments to be made. And any cost-benefit analyses offered by specialists --- economists, energy-experts, engineers, what have you -- would have to consider on the cost side all the security and foreign policy externalities that have absorbed so much American wealth, blood, and policy-making time in the White House over the last 18 years . . . ever since Saddam's invasion of Kuwait (though possibly someone might want to go all the way back to the Shi-ite revolution in Iran since 1979.

Among the most promising possibilities here:

1. Simple conservation, such as the proposal by Obama that drivers be reminded to use proper pressure for their tires --- a saving of 3% is the expert consensus in the use of gasoline --- and regular tune-ups . . . a saving of 4%.

We import daily about 10 million barrels a day, 60% from OPEC producing countries (which figure, taken from the US government, probably still includes Indonesian exports to us, Indonesia out of OPEC for four months now). A savings of 7%, which requires hardly anything but attentive action by Americans, would save 700,000 barrels a day . . . far more than any oil production we could get out of North Alaska or even off-shore deposits within a decade or more.

2) A subsidy --- which we already offered for hybrids --- for Americans who switch their gas-guzzling vehicles for higher gas-saving ones. The exact level of the desirable subsidy? Who knows? Certainly not me. But the same would be true for any tax on pollution (or the exact amount of permit-sales). It could be adjusted in timely fashion every year.

3) Since we already subsidize certain kinds of alternative energies --- the most promising long-run solution to our oil dependence and (should global warming prove a problem) the simultaneous 1st-best policy for that too --- we could do what the Reagan and Bush Sr administrations did for memory chips: any subsidies offered with tax money would have to be matched by the innovative firms.

Such subsidies, of course, would have to have some time-frame in mind. Again, I have no idea what that might be, nor does anybody else.

But then nobody knows how much more American wealth, blood, and military spending will have to be directed to dealing with Iran, Afghanistan, Islamist terrorism in the region, and so on over the future either. Only it will likely be considerable, as it has been for the last 17 years, and especially since 9/11.

4) Similar subsidies can be offered, with the promising firms ponying up, say, 50%$ of the costs, for energy developments and conservation outside the transportation sectors.

That might include Boone Pickens' windmills.

5)In the long-run, I agree, the most important options will come out of the private sector.

Note though. Just government skews our market incentives by taxing, raising a big military, and fighting wars abroad, so some positive action in the energy realm that will save lots of money (and lives)slated to defend and fight in the Middle East is necessary too. And remember, those military and foreign policy costs include supporting repugnant regimes, with oil additionally emboldening autocratic Russia and the crazy-house paranoia of Chavey in Venezuela

......

None of this means abandoning the Middle East, just reducing its strategic importance and letting the local states, including Israel --- our democratic ally, and the most pro-American country in the world (which has never asked for one American boy or girl to defend it) --- settle their problems.

And as the US begins to lessen its military presence in that volatile area, full of dictatorial regimes sitting on top of powder-keg Arab (and Farsi-dominated) Muslim countries, then maybe --- just maybe --- the free-riding by the European Union, Japan, South Korea, India, and China will require them to become more active too.

.......

More generally, qt, we are not the world's policeman.

Never have been; never will be. We may be unipolar in military terms, but only in a narrow technical security sense: the US is powerful enough to defeat (or deter) any potential hostile coalition of adversaries on our own in warfare. In this narrow sense, and only in it, a quasi-global hegemon has more freedom-of-will to decide whether to fight somewhere or not . . . a luxury that didn't exist to the same degree in the bipolar world of the cold war, or the multipolar world that led to our inevitable involvement in World War II.

.

Otherwise, the US --- whether before 1991 in the cold war or after --- has not had any diplomatic ability to get even fairly friendly Latin American countries like Mexico and Chile to support our position over Saddamite Iraq in the Security Council in 2003.

.......

Michael Gordon, AKA, the buggy professor

P.S. Walt: There is, believe it or not, a left-wing libertarian position that does argue in favor of shifting wealth from current landowners (with scarce resources that fetch good profits) to the landowners in the past who were "cheated." To an extent, even Robert Nozick favored that.

My own view?

The compensation would have to be given strictly to the surviving generation or its immediate sons and daughters . . . and there are likely to be none living these days. The current externalities we are talking about involve us --- you and Mark and the posters and 300,000 Americans --- who live and breathe right now.

 
At 8/06/2008 5:56 PM, Anonymous QT said...

Buggy Prof,

Thank you for an interesting post.

With regard to Pickens' windmills, at present, neither solar nor wind can provide stable base load power. While you have mentioned hybrids, conservation, and alternative energies, it is interesting that you have not mentioned nuclear.

The energy independence has been an objective in U.S. policy since Richard Nixon. If one has no idea how one is to reach a goal, will not the past be prologue?

 
At 8/06/2008 6:12 PM, Blogger Walt G. said...

buggy professor,

This is a lively discussion; I am not sure how the social, economic, and political systems mesh here. Maybe we’ve left economics and entered the philosophical arena. So, I think I will move on after this last, parting remark.

I don’t want to quantify human life in a cost benefit analysis. But if you believe that American soldiers are dying for freedom, then that freedom must mean those lives were worth it. So, they cancel each other out and there is no gain or loss. Accordingly, if the lives are worth more than the freedom, the lives were wasted. You can’t put a price tag on the deaths and ignore the benefit of freedom at the same time. Each person is just going to have to judge this one for themselves.

As a parting shot: I’m willing to trade a $200 gold watch for $200 worth of bananas. What’s wrong with that? If I am really hungry, it may be one banana, if I am not, it may be a truck load. I don’t see a wealth transfer there (Although, I can see a problem with a banana monopoly/cartel)

 
At 8/07/2008 4:32 AM, Blogger Sophist said...

I think the mistake MP and many of you make if the following:

In any trade, like in oil trade, there is no NET exchange of wealth under a common definition of value. However, there IS exchange of wealth on each side. Naturally, each side cares about the wealth it transfers.

Now, this is a trivial mistake elementary shcool kids often make in physics. When pushing a block of iron resting on a flkat surface on opposing sides by exerting equal forces, there is no NET force applied on the block. However, one CANNOT say there are no forces. One cannot say there is NO energy spent by each opposing agent to exert the force. The system is at equilibrium only when looked as a closed system.

Thus, we care how much wealth we transfer to get the oil. We and oil producing countries are NOT one family, one closed system so to consider a zero NET exchange of wealth. We care at which price we buy oil and we desire to buy it as cheap as possible to minimize the transfer of wealth from our side. However, this affacts the value of wealth at the other side. The other side tries naturally to maximize their value of wealth. Our dependence makes their position superior.

The solution: we set the price of oil, not OPEC. We say we are going to buy at $60. If they do not want we do not buy. We suffer for one year or so. We light candles and get 5 gallons a week of gas. We can do it, we just do not try.

The time has come for an anti-cartel of oil cosuming countries to oppose the cartel of oil producing countries.

 
At 8/07/2008 8:03 AM, Anonymous QT said...

Sophist,

In Canada, this idea was known as the failed National Energy Policy of Pierre Trudeau. Mr. Trudeau mandated that Alberta & Saskatchewan had to supply oil at a price far lower than the world price of crude because oil was a "national resource". The result was economic devastation in the oil producing provinces.

The last thing this problem needs is wage and price controls. The price of oil is already coming down as world demand drops, from a high of $140 to $118. Without a proper price signal, demand does not drop and there is even less incentive to expand supply in the U.S.

Unless domestic producers were forced to sell to the U.S. market ala National Energy Policy, the result would be shutting down the U.S. economy. Why would any producer sell their product at a price that was less than 1/2 the world price unless forced?

If producers were not forced to sell below the world price, one would merely achieve shutting down the economy of the U.S. While that might be achievable in a totalitarian country like China, it is simply not acceptable in a democracy. The hardships that you suggest would fall disproportionately on the poor. What do you think would happen to the value of the dollar or to the price of heating oil? What would the real price of gas be on the black market? Who, if anyone, would support such a disasterous policy?

P.S.
We don't use oil to power electrical generating stations so where do the candles come in?

 
At 8/07/2008 10:04 AM, Blogger Darryl said...

"The last thing this problem needs is wage and price controls. The price of oil is already coming down as world demand drops, from a high of $140 to $118. Without a proper price signal, demand does not drop and there is even less incentive to expand supply in the U.S."

Well said, qt. It seems to me the U.S. tried the price control thing on oil and gas in the 70's (0ur last "oil crisis"). I believe the result was shortages and extremely long lines at the pump - as the model for price ceilings predicts. Do we really want to go that route again?

 
At 8/07/2008 10:34 AM, Blogger Sophist said...

qt, you think too"locally". You remind me of a song:

...it's raining in Georgia and I think it's raining all over the world...

Who cares what Canada did or does? It's a country in the verge of being divided into two or more pieces, as far as I know.

 
At 8/07/2008 11:09 AM, Blogger the buggy professor said...

"The solution: we set the price of oil, not OPEC. We say we are going to buy at $60. If they do not want we do not buy. We suffer for one year or so. We light candles and get 5 gallons a week of gas. We can do it, we just do not try." -- sophist

There is, in fact, a standard part of mainstream trade theory known as the "optimal tariff" that can, in fact, under certain conditions, do what you suggest, Sophist . . . though not in the manner you suggest.

.....

The conditions:

First, to impose an optimal tariff, the buying country or countries operating together have to have near monoposony--- a near-monopoly of buying power. Possibly, short of that, just a large percentage of purchases of the imported goods in question -- in this case oil.

Second, the selling country or countries cannot retaliate seriously by doing the same for other exports they sell to the monoposonist or embargoing all sales.

At one point, in the late 1970s and 1980s, the US --- together with West Europe and Japan --- would fit these conditions in the international oil market. That was before big importers like China, India, and other rapidly developing countries with large populations became major importers.

......

How the optimal tariff works.

The tariff imposed by the US --- consider it the monopsonist --- raises the price of oil to American consumers. The higher price reduces purchases here. That forces the oil-exporting countries to cut back on their production levels at that price. In this way, the costs rise for both US consumers of oil and oil-producing states (the costs for the latter in reduced sales and profits).

Who wins from this tariff?

The winner is the US government, which collects the revenue from the tariff.

It could then reduce taxes for everybody, offsetting the higher costs of oil to consumers and business firms in the US, or compensating just lower-income Americans or what have you.

.......

Such a tariff was suggested by numerous economists back in the late 1970s and early 1980s. The advice became superfluous when the oil price crashed in the late 1980s and continued to decline in the 1990s, reaching a low point in real price-terms in 1997-1998 historically.

.....

The optimal tariff was worked out by a UC Berkeley professor, Tibor Scitovsky, at the start of the 1940s. A discussion of it can be found in any textbook on international trade and monetary economics.

To repeat, it seems unlikely to work today owing to the huge buying power of China and India in oil markets. That means, among other things,the EU, Japan, and the US would have to work together with them, and right now there is no likelihood of such collusive monopsony emerging.

.........

So we're stuck with other options, such as subsidizing buying shifts in this country from gas-guzzlers to high-mpg vehicles. And encouraging and subsidizing public transportation. And encouraging simple conservation like proper tire pressure and tune-ups. And car-pooling.

Alternative standard fuels like natural gas --- which we have in abundance and which is far less polluting in C02 (if that is important) --- need to be tapped to.

And, most important of all, some subsidies to promising alternative energies are needed --- the biggest and ultimate solution to the current oil-crisis.

.....

And remember: all cost/benefit analysis of these alternatives that does not carefully consider the extravagantly expensive spillovers in American military and foreign policies caused by our (unnecessarily inflated) burdens in the Middle East would be, in my view, junk-economics . . . the same sort of problem that exists with the failure to consider all the social, criminal, educational, and health spillovers in economic studies of immigration.

....

Michael Gordon
AKA, the buggy professor

 
At 8/07/2008 12:59 PM, Anonymous Odofakyodo said...

In any trade, like in oil trade, there is no NET exchange of wealth under a common definition of value. However, there IS exchange of wealth on each side. Naturally, each side cares about the wealth it transfers.

Perhaps I'm being dense, but you're explanation just doesn't make sense to me. Of course each side cares about what it trades away to the other side, but it values what it gets in return even more! So, both sides end up winners because each is better off in the exchange. Are they better off than they would like to be? Probably not, because there are just not enough resources to satisfy everyone's needs and wants. But still, each side is better off, and thus the whole is better off. The economy is not a zero-sum game. If I didn't think I was better off by buying gas, I wouldn't buy it! Plain and simple. Is there a net transfer of wealth when I go fill up at the gas station? Yes, but only in the sense that both sides gets more wealthy!

Now, this is a trivial mistake elementary shcool kids often make in physics. When pushing a block of iron resting on a flkat surface on opposing sides by exerting equal forces, there is no NET force applied on the block. However, one CANNOT say there are no forces. One cannot say there is NO energy spent by each opposing agent to exert the force. The system is at equilibrium only when looked as a closed system.

This physics analogy does not help out because it is unclear. What corresponds to what? Does "value" correspond to "forces" or to "energy"? Does "wealth" correspond to "forces" or to "energy"? Energy is a resource. Two kids pushing a block may be spending energy to do no work (in the physical sense) because the block is not moving. However, they could still be getting value from pushing the block. That value could be exercise, exploration of the surroundings (perhaps learning about the laws of physics), joy in playing the game or contest, or any number of things. So the kids could be better off in the exchange. YOU may think energy is being wasted, but they might not.

 
At 8/07/2008 4:11 PM, Blogger juandos said...

Hmmm, what's being discussed (more like hashed out) here are forgotten lessons of the not so distant past...

 
At 8/07/2008 4:11 PM, Anonymous QT said...

Sophist,

"Who cares what Canada did or does? It's a country in the verge of being divided into two or more pieces, as far as I know."

Is that the best you can do? LOL

If you want to prove your latest cockamammie idea, it's real easy. Just provide us with an example from any country of any size in recorded history where your proposed scheme has worked.

Yeah, like that's going to happen!
ROFLMAO!

 
At 8/07/2008 4:20 PM, Anonymous QT said...

Juandos,

Good article. Thanks for having a great brain and a wicked sense of humor.

Can't believe that we have the kiddies recycling these non-starters from the 1970s.

 
At 8/07/2008 4:47 PM, Blogger the buggy professor said...

Below, at the end of this commentary, is a link to a thoughtful article on alternative energies --- to reduce or eliminate our dependence on imported oil --- by Andy Grove, the former CEO of Intel Corporation.

The underlying shift in energy policies that he favors is . . . well, nothing startling; but set out in good, easy-to-read form, with diagrams: to wit, toward electrified transportation. The gas-driven vehicle, including existing hybrids, would be rendered superfluous.

....

The big advantage?
Sending electricity across lines long distance is the "stickiest" and hence less costly form of transporting energy. It is cheaper to build the power lines than, say, ship natural gas or petroleum by long pipelines. And it stays, if produced in America, in America: there won't be competition by foreign buyers.


An equal advantage is that electricity can be generated from a variety of interchangeable sources: domestic petroleum, our vast coal resources, wind, solar, hydroelectrict, and nuclear. (Here Grove fails to note that foreigners could, of course, up the price for our coal resources. But they are huge, and probably production could be increased fairly easily, all depending on the environmental and transportation costs to ports.)

......

The time-frame of the shift toward electrification, generated by various sources?

Grove suggests that it would, with subsidies, take about a decade to make the transition.

.....

Please note. This is not a detailed, scholarly researched paper put out by an energy expert.

In particular, it does not engage in cost-benefit analysis. It ignores at the same time certain environmental costs, such as greater reliance on coal: coal-fueled electricity-generated plants can be made fairly environment friendly with existing pollutant controls on sulfur compounds. that our coke-fired electrification already uses in cost-beneficial ways.

The trouble is, C02 --- which coal generates as a side product aplenty --- requires radically new kinds of pollutant controls, such as sequestering. They may be expensive initially; hard to say.

(Interestingly, Sulfur dioxide pollution actually reduces global temperature, the particles making it hard for sun rays to reach the earth. Over time, though, that influence reverses. And China, which is building a new coke-fired electrification plant every week and will continue to do so for years into the future, is already responsible for negative pollutants showing up in California!)

See http://www.nytimes.com/2006/06/11/business/worldbusiness/11chinacoal.html



......

Back to Grove's article.

To repeat,it's not a researched professional article. It isn't intended to be that . . . rather, a good think-piece to get us started in a new direction.

And it has a virtue that virtually all articles on alternative energies produced by economists or engineers ignore when they get down to cost-benefit analyses:

Namely?

There are, Grove argues, definite security and foreign policy spillovers of a negative sort from our growing dependence on imported oil from OPEC.

.....

And he has no illusions, as do those free-market economists who think growing trade with China --- as China continues to develop --- will produce ever greater "harmonious" mutual dependency.

Maybe. Maybe not.

The main problems in the way --- besides growing Chinese nationalism as a legitimizing ideology whipped up by the Chinese CP to maintain its power monopoly that can heighten tensions with its neighbors and others --- are or will be growing resource-generated conflicts as China's huge economy searches out more and more exclusive foreign sites for its resource needs . . . and of course, not just in energy.

Remember here: International relations specialists like me automatically think in terms of power --- military, economic, diplomatic influence --- in relative terms, not just absolute.

Absolute gains in GDP, for instance, are what free-trade theory posits: initially an advantage of being able to consumer beyond the production-possibility function of a country, then growing specialization along lines of comparative advantage, and then --- long run --- more competition in our domestic market from foreigners speeding up innovation here by a variety of means, not least in openness to best-practices and ideas generated by foreign firms like Japanese auto-producers. (This latter advantage, a dynamic long-run, has been ignored in all trade theory since Ricardo until the last few years in developmental studies.)

...... .

The Grove source: Our Electric Future,

http://www.american.com/archive/2008/july-august-magazine-contents/our-electric-future

 
At 8/07/2008 5:37 PM, Blogger juandos said...

Sadly the buggy professor is falling back on socialist thinking to promote social engineering: "So we're stuck with other options, such as subsidizing buying shifts in this country from gas-guzzlers to high-mpg vehicles. And encouraging and subsidizing public transportation. And encouraging simple conservation like proper tire pressure and tune-ups. And car-pooling"...

qt says: "Can't believe that we have the kiddies recycling these non-starters from the 1970s"...

Exactly!

You know qt, I never thought I'd live long enough to hear people make what I can only interpet as Carter nostalgia...

 
At 8/07/2008 7:32 PM, Blogger the buggy professor said...

Sadly the buggy professor is falling back on socialist thinking to promote social engineering: "So we're stuck with other options, such as subsidizing buying shifts in this country from gas-guzzlers to high-mpg vehicles. And encouraging and subsidizing public transportation. And encouraging simple conservation like proper tire pressure and tune-ups. And car-pooling"...

No need to scare yourselves needlessly, guys, with bellowing boo-words . . . especially since the Bush W administration signed an energy bill in 2005 that gave $6 billion in subsidies to the oil industry, $12 billion to the nuclear industry, and $12 billion to the coal industry. In the spring of this year, the Bush administration wanted to up the subsidies to our oil industry to $18 billion.

And earlier in the decade, several billion dollars were dished out to the hydrogen energy industry.

.....

You see, we don't live in a fantasy-world of libertarian free-markets in any of our energy use.

Quite apart from our subsidies in the Bush-W socialist era, to use your terminology, OPEC is a cartel that sets production quotas and has the biggest chunk by far of oil exports world-wide. Of our 10 million barrels imported daily, 6 billion come from abroad, and 60% of those are from OPEC, a cartel. For whose key Arab countries we have spent trillions of dollars in US military spending --- and several thousand US lives --- protecting them, all ruled by gangster, thoroughly corrupt regimes. In the Saudi case, ruled by a royal family of 5000 that has heavily subsidized Wahhabi Islamist extremism world-wide, including to the volunteers for Osama bin Laden's murderous terrorists.

.....

Then too we have spent huge sums building dams for both flood-control and hydroelectric power . . . all built not by the private market, but by government tax-generated funds. In todays, Hoover Dam's cost would be around $30-40 billion (originally $4 billion or so in the 1930s). Grand Coulee, which cost about $2 billion in those days, would be around $15-20 billion. None of these costs include the expenditures for upkeep.

Oh, not to forget the Federal freeway system built with huge tax money back in the 1950s and expanded ever since . . . you know, the roads on which Exxon and BP and Shell deliver gasoline to your local gasoline station. And the port facilities where foreign oil enters: who built those, BP?


.......

Oh, then there are the alternative fuel subsidies that the Bush-W socialist regime initiated back in 2003. The total so far? Oddly, google doesn't show the sum since 2002, but it is several billion dollars --- mainly slated for hydrogen.

......

So where are we?

Not back in the Carter era or back in Comrade Stalin's Russia, but rather in the real world as it exists, in which energy systems on which the people around the world depend are not delivered by non-subsidized energy firms anywhere . . . quite apart from the spillovers in our case that have cost close to two trillion dollars in military and foreign policy commitments and warfare in the Persian Gulf area.

.....

But then, I suppose, it's easy for some people to imagine the complexities of the world can be re-created and dealt with by instinctive deductions from basic ideological premises . . . with heavy evidence such as citing this or that Austrian economist or maybe Ayn Rand.

My own ideological inclinations?

I'm a non-partisan independent voter, with leanings toward the use of free markets where possible, but no libertarian and no instinctive dislike or fear or hatred of either Republican or Democratic candidates for office.
Call me, if you want, a fuzzy-minded pragmatist, though oddly I do take seriously social science analysis, statistical work, case-study work, and hard empirical evidence.

.....

Anyway, as before, I wish to thank Mark and all the participants in this thread. Mark's post and comments as well as all those from other posters have been a big stimulus to clarifying some of my own ideas . . . including, for the time being (with little time now, seeing that I'm under a publishing deadline) some more serious research in the energy area.

......

Michael Gordon, AKA, the buggy professor http://www.thebuggyprofessor.org

 
At 8/07/2008 9:35 PM, Anonymous QT said...

There is another alternative to sophist's proposal of setting an arbitrary price for a barrel of oil. Namely, setting a floor price for oil.

The U.S. could set a floor price at say $70.00 per barrel, a price at which alternative fuels would be competitive. If the world price of oil dropped below this price, oil imports would be subject to an import tariff. The proceeds of the tariff could be redistributed to consumers as a general reduction in tax rates and the program could be administered by existing customs & excise staff.

The purpose of the tax would be to set a floor price so that investors in alternative energies could be assured of a minimum price at which their products could sell. The program would have a sunset clause so that it would be phased out in 10 years. The tax would protect a fledging industry from OPEC attempting to drop the price of oil making alternative fuels uneconomic as they are thought to have done in the 1980s.

The advantage is that it avoids the subsidies and the entire process of the government picking winners & losers (usually losers) in favor of private investment. It does not require a new branch of government to administer and only kicks in if the price of oil drops below a certain level.

Would very much appreciate if you could blow as many holes in this idea as possible. Would such a tariff violate current WTO rules, for example?

Your thoughts, gentlemen, would be most appreciated.

 
At 8/08/2008 10:49 AM, Blogger the buggy professor said...

QT:

1) No, such a tariff would not violate the WTO, no OPEC members under its authority.

2) On a practical level, yes --- we could and eventually probably will set a floor price for imported oil, but it's doubtful a tariff of the sort you mention would work.

Why? For one thing, we'd have to distinguish between oil from Canada and Mexico --- our neighbors and friends (who also sell us electricity across our borders) --- and OPEC exporters; and that would not be easy to monitor.

For another thing, since any tariff on any imports doesn't simply raise prices for US consumers (and firms) but forces the losses back onto the exporting countries as well --- in this case, by cutting production and sales --- they could possibly retaliate: refuse to sell us oil with the tariff (though there could be covert defector-countries in OPEC), threaten to stop buying our Treasury securities, threaten to sell off in a bursting blast their US Treasury bills and bonds to start a panic run on the dollar rate --- not likely, mind you; just possible --- or, alternatively, retaliate politically by, say, refusing us port facilities and usage for the US navy in the Persian Gulf or Mediterranean.

.....

By the way, the US "socialist" administrations of Ronald Reagan and George Bush Sr. helped subsidize our memory-chip firms back in the 1980s, when they were losing lots of markets to Japanese competition (protected and subsidized by the Japanese government).

The innovative twist here?

The US government would use taxpayer money only if the firms ponied up equivalent funds from private markets. The subsidies helped . . . at any rate, bought a fair amount of time for US firms to move up the technological ladder away from DRAM chips to advanced memory chips and cpu processors.

We still have a big lead in those advanced high-tech chips.

Otherwise, yes: subsidies just lavished on firms --- the way the Bush Jr. "socialist" administrations have done for nuclear power, oil, and coal --- may only be wasteful. They were in the Carter era. How wasteful in this decade would depend on careful, non-partisan research-studies, and it may be too early to tell. (It would also be hard in the case of oil firms to distinguish between increased private R&D and new explorations and new techniques of extraction and the use of the large subsidies offered by Comrade Bush and Comrade Cheney.

----

Michael Gordon, AKA, the buggy professor: http//www.thebuggyprofessor.org

 
At 8/08/2008 10:55 AM, Blogger the buggy professor said...

Oh, by the way, forgot to add. Since we're talking about socialism under Carter, don't forget that in Comrade Bush's time in office --- just this last year to be exact --- the Federal Reserve and the US Treasury have been busy dishing out huge tax-sums to shore up financial institutions that are allegedly fully private.

Not to mention guaranteeing loans to them from private sources, something that started, I believe, in Comrade Reagan's era with such guarantee to Chrysler . . . with, at any rate in the 1980s and the next day, success. At one point in the mid-90s, Chrysler was the most profitable car company in the US, with profits as a percentage of sales.

Not to overlook, ladies and gentlemen who believe we can explain the world by gut-level deductions from our ideologies, the vast sums spent on agricultural subsidies and tariff protection . . . now mounting to trillions and trillions of dollars over the last few decades.

Come to that, I believe --- correct me if I'm wrong --- the citadel of libertarian economics, GMU, is subsidized by considerable tax money by the state of Virginia. Just as some of the prominent economists there, including one from California (Ph.D. Berkeley), went to other state universities whose funds and salaries were overwhelmingly derived from tax money.



.....

Michael Gordon, AKA, the buggy professor

 
At 8/08/2008 4:12 PM, Anonymous QT said...

Buggy Professor,

Thank you. I appreciate your thoughts so late in this string.

Would agree that government funding can be beneficial although government management of vast swaths of industry does not seem to have produced the best results in many countries. There are certain technological fields requiring funding on a very large scale such as space exploration that could not be achieved without government funding. Technologies with security implications such as nuclear energy also would seem to be logical to place under the control of government.

For the record, I am not one of the libertarians but a fiscal conservative reflecting 20 years in finance. Government has a very important role. With limited resources, governments must set priorities and determine what is and is not to be the business of government to ensure the maximum utility value to society of its public resources.

As you say, the present model of government in the U.S. is not even remotely libertarian. Libertarianism helps to remind us of the value of cost-benefit analysis, and objectivity in evaluating between competing priorities. One can achieve the same goal, for example, motivating consumers to buy energy efficient cars, using a myriad of different public policy methods.

The idea of the tariff was proposed to me and it seemed quite an innovative idea for assuring private investment in alternative energies. The dramatic drop in oil prices after the last energy crisis turned promising alternative energy technologies into investment dogs. Few investors aspire to lose their capital. Investments must compete for capital resources.

The idea seemed similar to a government wheat board setting a floor price for wheat so that the farmer can calculate his outlays and potential returns.

Thank you again for your thoughts. Will pass your comments along. :)

 
At 8/08/2008 4:32 PM, Anonymous QT said...

Buggy Professor,

My apologies. I did not get this right the first time.

The floor price would kick in to prevent the price of oil from dropping to a level where alternative fuels would be uneconomic (ie. if the world price dropped to $35.00 per barrel). The U.S. would buy oil at the world price (ie. $35.00) and sell it to U.S. consumers for $70.00. The difference would be refunded to tax payers so that it would be revenue neutral.

Recent statements by the Saudi Oil Minister indicate that Saudia Arabia is well aware of exactly what oil price is required for alternative energies to be competitive (see earlier link). If alternative energy seriously challenged oil, it is highly likely that OPEC would try to drop the price of oil thereby making the technology uneconomic.

That's what OPEC did in the 1980's.

Thank you for bearing with me.

 
At 8/08/2008 6:49 PM, Anonymous Odofakyodo said...

The floor price would kick in to prevent the price of oil from dropping to a level where alternative fuels would be uneconomic (ie. if the world price dropped to $35.00 per barrel). The U.S. would buy oil at the world price (ie. $35.00) and sell it to U.S. consumers for $70.00. The difference would be refunded to tax payers so that it would be revenue neutral.

I see a couple of problems with this. Let me know what you think.

First, price floors cause surpluses. If the market is at equilibrium, the "value" of the oil is reflected by the $35 price, not the $70. By artificially increasing the price of the oil, demand for oil will decrease. Moreover, supply of oil will increase because the US will want to sell more oil at $70 than it would at $35. The result would be the US sitting on a lot of oil that it is unable to sell to American consumers at $70.

Second, you get more government bureaucracy, so you have to add that cost in.

Both of these factors add up to a big waste to me, and for what gain? To accelerate the development of alternative energies? The price floor would hurt the economy, because fewer gas would be consumed, which means less production, and that would be at a higher cost. This would stifle growth across the board. Isn't it possible that we would develop alternative energies sooner without the price floor, given a better economy?

 
At 8/08/2008 8:09 PM, Anonymous QT said...

odofakyodo,

Alternative energy costs money to develop. The Oil Minister of Saudi Arabia pegged the price at which alternatives are competitive at $60.00 per barrel. I tossed off the figure of $70.00 per barrel but that may be too high. Without a price of at least $60.00 per barrel, alternative energies will not be developed because they would simply not be economically viable unless there is substantial government subsidies. We have all seen what that distortions are created by subsidies with ethanol.

The assertion that alternative energies would develop with $35.00 per barrel oil has been proved false. You simply have to look at the first oil crisis in the 70s to note that no alternative energy sources were developed.

The idea of a floor price set at a level which is unlikely to be substantially breached would simply dissuade oil producing nations in their attempts to limit alternate fuel sources in order perpetuate cartel control of a critical resource.

With regard to domestic oil production, it costs $2.50 per barrel to produce oil in Saudia Arabia and about $50.00 per barrel to produce oil in the U.S. Therefor a surplus of locally produced oil is highly unlikely under any circumstances. We have had oil problems in N.America and I have not seen any substantial increase in production as a result of the present high prices. This suggests that oil at $35.00 per barrel would not be supplied by domestic production. Chances are pretty slim that we will ever see $35.00 per barrel oil.

Europe has managed to be fairly competitive with much higher gas prices and the U.S. has also become far more efficient in its use of oil over the last 20 years. Even at the recent high of $140.00 per barrel, $4.00 per gallon gas has only dropped consumption by 4%. Not really sufficient to create a material surplus. $70.00 per barrel oil would be nowhere near as difficult for consumers as recent prices. Consumers would adjust as they have in Europe.

There is little reason for a massive bureaucracy because we presently have a very efficient private tax collection system administered by oil companies like Exxon who collect the taxes at the pump and sent the U.S. government the money. One of the lowest cost, highest compliance tax collection programs in the U.S.

Thanks for kicking these ideas around. It helps to parse out the issues. Any thoughts on the above?

 
At 8/09/2008 11:29 PM, Blogger juandos said...

"No need to scare yourselves needlessly, guys, with bellowing boo-words . . . especially since the Bush W administration signed an energy bill in 2005 that gave $6 billion in subsidies to the oil industry, $12 billion to the nuclear industry, and $12 billion to the coal industry"...

Hmmm, what does the liberal George Bush have to do with your socialist mantra buggy professor?

BTW these so called subsidies you rightly mention, just how different are they from what other publically held businesses get from the government either via IRS write offs or via the farm bill?

How different are these subsidies to the oil business than are those given to homeowners?

Its all someone else's money...

Again in your urge to pander to your fellow socialist, 'sophist' you say: "It could then reduce taxes for everybody, offsetting the higher costs of oil to consumers and business firms in the US, or compensating just lower-income Americans or what have you"...

"Could"?!?!

BTW what is the federal government doing with the lion's share of the gasoline tax that it has been collecting?

Reducing taxes for everyone?

Compensating just lower-income Americans?

 
At 8/11/2008 4:46 PM, Blogger OBloodyHell said...

> It matters not if it's bananas, oil, or financial services. Imports vs Exports. Trade Deficit. If you run a trade deficit, you're transferring wealth out of the country. When oil was cheaper and we had some semblance of manufacturing in the US, the trade deficit was lower and wealth transfer was minimized.

Matt, this whole BS notion of a "trade deficit" has been rehashed over and over in commentary.
1) The obvious: You buy groceries from the supermarket. They NEVER buy anything from you. Should you stop using the supermarket and grow your own food in your yard? Have you done so? Why not?
2) As you would find if you actually had read and grasped anything on this blog -- a somewhat recent entry showed how *most* healthy, expanding economies show a "trade deficit". It's the unhealthy, *stagnant* ones which show a surplus.

QED. "Trade deficit" is BS. And I think you've been told this before, and never made any valid refutation of that. So unless you actually have something new to contribute beyond repeating it like a mindless, brain-damaged parrot, STFU about it. You are, as the man said, "Stuck on Stupid".

 
At 8/11/2008 4:50 PM, Blogger OBloodyHell said...

> I'm not sure how wealth is defined. Is it the same as net worth? I understand that term.

Wealth is the value of the complete set of assets you control. Clearly, the precise values depend on how good you are at finding the best prices for them... less taxes.

What sophists' definition is, who knows?

 
At 8/11/2008 5:15 PM, Blogger OBloodyHell said...

This comment has been removed by the author.

 
At 8/11/2008 5:19 PM, Blogger OBloodyHell said...

> The US has spent nearly two trillion dollars, not to mention the blood of American soldiers, in two Persian Gulf Wars . . . plus all the strains on our military that follow.

Well, professor, I think you have presented a somewhat simplistic view of both the military and what has occurred in view of that expenditure.

1) Militaries atrophy when they don't have a chance to fight. Not to suggest that wars are good, but, like anything, there are positives and negatives.

2) It's always good to test the abilities of your military against real situations. That allows you to avoid winding up in a situation like the French, "secure" behind their unassailable wall of fortifications.
The Falklands War showed the significance of missle technology with regards to a modern Naval conflict. Adjustments followed. The first Gulf War showed the value of and importance of our new, extremely maneuverable, but non-real-world-tested Abrahms tanks (Iraqi tankmen complained that they had to stop, aim, and fire at our tanks, while ours had the ability to aim and fire while barreling along at up to 60 mph -- i.e., the Iraqi tankmen became sitting ducks). And the Iraq war has shown both the value and effectiveness of Shock And Awe as well as the increasing modern importance of knowing how to handle guerilla tactics in the post-war pacification phase.

3) By showing our military's capability, it gives us a degree of strength at any bargaining table. No one is going to walk out and threaten war with us. Or if they ARE so inclined, they're going to think two or three times on it, beforehand. And that's a very, very good thing. It increases the chances of diplomacy being used to resolve issues rather than a resort to force.

4) Humanitarianwise, 25 million people now have a semblance of hope, and the idea that, just maybe, their kids' lives can be better than that of their parents. And other, nearby nations, have that to look at too, and go "Why can't things be like that here?"

5) Given the nature of Islamic Fundamentalism, which I believe tends to prey on rage and helplessness, removing some of the social causes of that rage and helplessness is A Real Good Thing for the future of human society. It blunts a dangerous and perniciously evil meme. It also shows a people who have rarely experienced Another Way, that there really is one -- that it's not all decadence and promiscuity.

So, by those arguments, I claim that the cost paid so far isn't that bad.

Among other things, I believe that the price to be paid would have had to have been paid regardless of the presence of oil or not.

The central memes of Islamic Fundamentalism have long term repercussions which have nothing to do with oil. They are directly at odds with several central memes inherent in Western Culture. A clash is/was always inevitable.

The oil in the area is just another complication.

 
At 8/11/2008 5:37 PM, Blogger OBloodyHell said...

> 1) The global oil market is not a competitive market. It cannot be treated that way. It is, at its core, dominated by a cartel.

This is disingenuous. I think, from your own comments, that you know at least as much about the history of the OPEC cartel as I do -- that it's suffered the fate of most cartels in history, that their power is enormously reduced by the tendency for members to "cheat" the efforts of the cartel.

Otherwise, the price of oil would be much more stable, since, by your arguments, they pretty much would get to set it.

There certainly would not have been oil so cheap that gasoline ca. summer 2000, would have dropped under US$1.00 per gallon for the first time in almost two decades, and which I've seen described as the lowest price EVER, in constant dollars, for gasoline.

OPEC is a very loose cartel with a widely varying set of members and national interests. As such, it does not have anywhere near the power you appear to ascribe to it for setting prices at will. While OPEC might be able to lower prices from their current values, the rise is caused more by the fact that people are grasping the increase in demand represented by a finally developing China and India (which have previously been slow to develop despite both having more than adequate access to technology and knowledge) and which represent, between the two of them, an essential tripling of modern major consumers of oil and its products.

So I have to wonder why you postulate this when it's clearly at odds with known capabilities of OPEC over time.

 
At 8/12/2008 1:18 AM, Anonymous Odofakyodo said...

qt,

I am highly skeptical that any statement like that made by the Oil Minister is accurate. There are so many forms of energy out there waiting to be harnessed, and technology is improving dramatically all the time. How could one person possibly know that no alternative fuel can be competitive at a certain price, at all times, and all places in the world? I would not make policy on something so complex based on the statements of one man.

Also, I do not believe that, as you say, "The assertion that alternative energies would develop with $35.00 per barrel oil has been proved false." There are so many factors that play into the development of alternative energies. For example, one significant one I would say is computer technology, which back in the 70s, was orders of magnitude (several, probably?) less powerful and less widespread. Note that I am not claiming that "low oil prices will definitely result in development of alternative energies", but I don't think that high oil prices will necessarily help either. I do think that the economy would be far better off with lower oil prices because costs for nearly everything get lower, and resources can be spent on other things, including better technology that could lead to alternative energies.

I have to admit I don't know much about gas prices in Europe as compared to the US, only that they are higher. But I believe that there are far more factors in play that make Europe's economy successful than just gas prices. How many taxes do they have on gas? What kind of distribution system do they have? How far do they typically have to travel when compared to us? Don't some European countries use nuclear power? I guess what I'm saying is that even though there prices is high, they might just not need nearly as much gas (I'm sure there's data out there on US vs European consumption), so high prices wouldn't affect the economy as much.

Upon seeing your 4% figure, I did a little research from the EIA data here, and you'll be happy to know that I find your figure to be accurate based on projected increases in consumption in the last three years. However, I'm not convinced that 4% isn't a trivial amount. I don't know if this is a fair comparison, but isn't there a huge difference between an unemployment rate of, say 0% and 4%? Or perhaps more realistically 4% and 8%?

4% of US consumption in 2007 amounts to about 302 million barrels of oil, or roughly $22.6 billion worth of oil (I estimated $75 for a barrel of oil in 2007, based on this). It's interesting to note that this amount makes up a very small percentage of our GDP (0.16%), but if my analysis is correct, it's about 7.2% of our annual economic growth (which is 2.2% of GDP, seen here). That doesn't seem like something to sneeze at.

Anyhow, I'm just playing around with the numbers. I'm not sure what to conclude based on them, but here are a couple of thoughts you maybe can answer:

1) If you don't think that an price floor would reduce consumption enough to create a significant surplus (people are still willing to pay for the oil), would it really provide strong incentives for people to buy alternative fuels?

2) The real cost of the price floor is not the material surplus, it is what could have been produced otherwise with the extra money spent on oil. That means $245 billion ($35/per barrel x 7 billion barrels) could have been spent on other things. Now your proposal would be "revenue neutral", but that means you have to distribute the "extra" money the oil companies made back to the consumers. How do you go about doing that in any fair or efficient manner?

 

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