Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“The New Deal began, like the Salvation Army, by promising to save humanity. It ended, again like the Salvation Army, by running flop-houses and disturbing the peace.”     H. L. Mencken

December 18, 2007

Should Oil Producers Embargo America Again? The Democrats And Republicans Seem To Think So

by tarran

In 1973, OPEC announced an embargo of oil sales to countries whose governments had supported Israel in the Yom Kippur war. In the U.S. this precipitated a major economic crisis as the U.S. government attempted to ration gasoline and control production and sale through a regime of price controls. The U.S. Central bank also embarked on an inflationary spree in an attempt to “stimulate ” the economy. Just as in the Great Depression, the result was a combination of inflation and economic stagnation, known as “stagflation.”

Today, nearly every presidential candidate is calling for something called “energy independence”, which amounts to an attempt to reenact the embargo, although this time it would be the U.S. government turning back oil shipments instead of the Saudi Government. This suicidal course is supposed to insulate the economy from high energy prices and to promote attempts to mitigate global warming. However, rather than insulating the economy from higher energy prices, these measures will have the perverse effect of making the high energy prices we face today more devastating and permanent.

Energy is merely a factor of production; one of many inputs that are converted into a more valuable product or service. Because energy is one of the most important inputs into most manufacturing processes, consumers of energy tend to be very price-conscious; attempting to get the most ergs for their dollar. However, unlike a person shopping at a grocery store, they can’t easily switch from oil to natural gas as easily as a consumer switches switches from buying eggs and bacon for their breakfasts to buying oatmeal. Once a factory or some other piece of heavy equipment or facility is designed to use on particular energy source, switching to another source is either very expensive or impossible. Thus, the largest consumers of energy look at not only the current price of energy products, but also at the long term trends. They try to lock in suppliers to long term contracts. They study the long term availability of the various sources and try to predict what the supply situation is like.

This desire for predictability forces energy producers to focus on keeping prices low and stable, if they want to attract customers. Because there are so many consumers of energy who will pick a supplier and stick with that supplier for a long period of time, and because these customers strive to understand their supplier’s business in great detail, the sources of energy that they choose to consume tend to be the most stable and cheapest sources then available, generally energy from oil or other petroleum products.

The plans being promoted by the politicians attempt to force American businesses to consume not the cheapest forms of energy, but rather more expensive and less economical forms of energy. They take one of four forms:

The Manhattan Project

Most programs call for the U.S. government to take money from tax-payers and to spend it on scientific research and engineering development to develop new sources of energy, or to make the consumption of new energy sources more “efficient”.

The problem is that these R&D programs will be funded by a political process and not necessarily based on criteria of which programs are most likely to bear fruit on a reasonable time-scale. The R&D that is expected to provide a payoff is already being done by investors or companies that expect to make a mint if they are the first to market with more efficient, less costly mechanisms that satisfy the demand for energy. The works that are not already being done, for the most part, are boondogles with an insufficient probability of a positive return. Essentially, the money confiscated and redirected to this research will necessarily displace investments that would otherwise be made in more profitable or less risky ventures. Thus, these programs are guaranteed to be as big a waste of money as other forays of the government into R&D such as nuclear power plant design and space exploration.

For my theory on why this is so, see my article Government Funding of Science: Inherently Susceptible to Junk and Superstition.

Subsidies for ‘local’ energy sources

Most plans involve subsidies for energy sources that do not use imported oil, things like wind-mills, ethanol and other ‘sustainable’ forms of energy. Essentially, these alternative sources of energy exist, but are so much less economical than imported oil, that nobody seriously uses them. The government’s plan is to subsidize these alternates so that the price demanded from people who are purchasing them is competitive with that of the hated imported oil. There is, of course, one problem with that: TANSTAAFL.

The subsidies must be paid by taxpayers, the same people who, for the most part, are consuming the subsidized energy. The result? The tax-man boosts the cost of energy to higher levels than we currently pay for “imported oil”. If the high cost of gasoline is painful, the cost of ethanol enhanced gasoline will be much more painful. In the end, this is the equivalent of treating the pain caused by a patient’s sore muscles by beating him up.

Subsidies for increased fuel efficiency

The rationale for this scheme is that if we could reduce the amount of fuel consumed, the price of the fuel would go down. However, it assumes that consumers want more efficient vehicles or factory equipment, but are powerless to influence manufacturers and producers to make more efficient machinery. This is, of course, poppycock. People balance fuel efficiency with many other criteria in making their choice. In times of bountiful, cheap energy, they may decide that a vehicle of large mass and carrying capacity is what they want. Increased efficiency generally comes at the expense of cost, or reduced performance in some other area.

Again, the principle of TAANSTAFL applies. By mandating that all products have a certain degree of efficiency, these plans essentially are forcing consumers to forgo other wants, or pay higher prices to purchase equipment that meets their needs.

Paying for Externalities

Currently it is in fashion to blame combustion of fossil fuels for causing a warming of the Earth. Of course, the change in climate causes people to bear costs in the form of reduced crop yields or loss of land to the sea etc. Many of these plans attempt to ‘mitigate’ this damage either through additional taxes levied on fuel consumption or from cap-and trade schemes. Both ideas suffer from flaws:

The rationale for remedying externalities through taxation is thus: Let us say that every gallon of gasoline burned in the U.S. causes $0.25 worth of damage to everybody on Earth. A tax of $0.25 is levied on each gallon of gasoline that is purchased or produced and the money is then spent to compensate the people suffering the damage.

Of course, the reality is quite different. The funds rarely are spent to reimburse injured parties, assuming that the injured parties can even be identified. Rather the funds are apportioned through a political process. A glaring example of this is, for example, the use of tobacco settlement money to pay for athletic programs in government schools as opposed to reimbursing Medicare for the costs of caring for ill smokers.

Cap and trade schemes have their own sets of problems. Under such a scheme, the state sells or issues permits to individuals or businesses permitting them produce X amount of pollution. The owners of these permits are then free to sell permits to those who wish to buy the right to pollute. There are two basic problems unique to these schemes:

First, there is the question of how many permits to issue? Of course, there will be a conflict between those who favor more permits and those who favor a reduction in the numbers of permits that are issued. The process for setting the number of permits will be a political one, and as such only loosely coupled with the actual number of permits that is appropriate, assuming that the number of appropriate permits is even calculable.

Secondly, there is the question of who gets the permits? If the permits are given away, then the state will have to ration the permits it issues. The distribution of permits will again be a political process with connected individuals and organizations being granted a windfall of permits that they can then sell at a great profit. Alternately, if the permits are sold, typically by auction, then once again the problems associated with the state levying taxes to repair externalities will manifest themselves.

Do We Need a National Energy Policy?

To me, the answer is a resounding NO! We no more need a national energy policy than we need a national food policy or a national entertainment policy or a national clothing policy.

The fact is that those who consume energy are already driven by reasons of frugality and profitability to seek the least expensive and most cost-efficient forms of energy out there. In order to prevent people from using oil, the state must force people to pay more for oil than they ever would under a volatile free market scheme. This means that in order to ensure energy the U.S. government must, in effect, force an embargo upon its subjects. Under international law, it is considered an act of war for one nation’s navy to blockade another nation’s sea trade. The fact that U.S. politicians are attempting to carry out such an act of war on their own people – worse that a significant portion of the U.S. population thinks this is a good idea – is quite disheartening.

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