Nobody ever talks about independence for other products. We don’t care about automobile independence, or bottled water independence, or underwear independence. We avoid asserting that those would be worthy goals, for a good reason: Free trade enhances our welfare by allowing us to import products from those who have a comparative advantage producing them.Why should energy be any different? Three arguments are most commonly offered.Fluctuating PricesThe first is that oil price fluctuations harm the economy, and that owning more oil would help inoculate against them. This is specious. If the U.S. does discover a mother lode of oil, that discovery will affect the global price of oil. After the price adjusts to the new supply, it will go on and fluctuate from there. Before the discovery, Americans would pay the world price of oil, and watch and suffer as it moves up and down. Ditto for after the discovery.It might be nice, of course, to own the oil or oil companies if the price increases sharply. That way, U.S. citizens see their wealth increase to offset some of the damage of the higher price. But if that hedge is viewed as attractive, we don’t need to drill to acquire it. We could just encourage Americans to invest in the equities of publically traded foreign oil companies such as BP Plc, PetroChina Co. or Royal Dutch Shell Plc.Fear of EmbargoThe second reason sometimes given for more U.S. production is that a foreign enemy might decide to organize an embargo against us and shut off our supply of oil. Such an embargo might, indeed, harm the economy, as it did back in 1973.Still, think about it. If we fear there might be an embargo in the future, the optimal response is to purchase more oil from abroad today, not less. We should try to get as much as we can before the spigot is turned off. We should also reduce domestic production, not increase it, secure in the knowledge that the oil is there, available when we need it, in places such as the Arctic National Wildlife Refuge. If we ramp up production today, then we may find ourselves facing an embargo down the road after we have drained all of our own domestic reserves.The third argument one sometimes hears is that we should stop buying oil from evil-doers such as Iran, as that only provides them with resources they can use to do us harm. But the problem is, oil is a commodity, and if we do not purchase it from a given supplier, someone else will. Such a boycott has no effect whatsoever.
Monday, April 5, 2010
Common Sense meets Intelligent Economic Analysis
Every once in a while, somebody, somewhere makes a breathtaking show of good common sense, and in this case, an understanding of the economics involved. Still no good deed goes unpunished... he will probably get fired for this.
The price of crude oil in the market place is dangerously close to snuffing out the U.S. "nascent recovery" we hear tell about in the media (the data on employment and energy use in the U.S. do not give me a warm and fuzzy feeling about a "recovery" here. Still, the world economy probably IS growing, and since half of the S&P 500 profits come from international sales... well, I should have listened to "Coal Guy" - he posted back when the S&P was at 850 to look for 1250 or so... Oh, well... my precious metals have tracked the equity market, but my bonds sure haven't). Also, while the high price of crude oil might be bad for the U.S., there is somebody on the other side of that trade - and they are part of the "world economy", too. (Remember to ALWAYS look in the mirror: IF oil prices were to slide, that might really goose things along in the economy AND the stock market. That is the mirror image of the above.)
It is my sense that this last 36 months or so was the first of many waves in the price and supply of Oil to the U.S. as well as prices levels of everything else from stocks and bonds to corn and copper. I think we will see surges in the price of Oil and then full scale declines. Trading Oil futures will not be for the faint of heart - and irrespective of the price action by 2020 or so, imports of Oil into the U.S. will be a trickle of what they are now, which in turn is 75% of its peek of just 4 years ago - with all of the issues and outcomes attendant upon that.
Posted by The Short Story Man at 5:22 AM