Real Clear Politics posted this article today by John Stossel in which he argues that energy independence is some sort of populist, protectionist talking point that makes no economic sense. All he succeeds in, however, is showing his own economic idiocy. He correctly uses some very basic principles from high school economics to point out problems with the most simplified 3-second sound bites on the issue. It’s great that someone understands these overly simplified basic principles, but if that’s the only economics you understand, you should stay out of high-profile public debates on economic issues.
Don’t Obama and Pickens realize that we get something useful for that money? It’s not a “transfer”; it’s a win-win transaction, like all voluntary trade. Who cares if the sellers live in a foreign country?
This point is right on face. It’s not in general bad that we buy things from other countries, and the “our money is being sent overseas” argument would apply to all trade. He is, however, ignoring a multitude of points that are more subtle. First of all, oil is not traded in a free, competitive market. It’s controlled largely by a cartel that is not above manipulating the price. This isn’t to say we don’t benefit from the trade — we still voluntarily make the exchange — but it does mean that developing domestic supplies or alternatives lowers the price more than the normal competitive forces would indicate, and therefore has what are essentially positive externalities.
It’s also important to note where the money goes. Stossel points out that most of the oil that physically comes into the US comes from Canada and Mexico, rather than oppressive dictators, but in doing so he’s missing his own point. The oil market is global. Price changes affect everyone. Our demand for oil raises the price that Russia can charge, even if we aren’t buying oil from Russia.
He also, of course, ignores the negative externalities (pollution, massive geopolitical games and expensive wars, increased power to Russia and Venezuela, etc.) that aren’t priced into oil.
The biggest idiocy, though, is the premise of the entire article. He thinks that “energy independence” means not ever importing oil. Maybe someone somewhere has used it to mean this, but definitely not anyone intelligent. Energy independence means that we produce as much energy as we consume. Denmark has done this, and yet they still both import and export oil. Stossel is correct to lampoon a literal no-oil-imports goal, but that’s not the argument anyone else is making.
If we export as much oil as we import, or if we have cheap alternatives available in the case of price spikes, it forces oil prices down and means that oil prices can never be used as a political weapon against us or anyone else. It takes power away from our enemies. (It should be pointed out that since much of our decreased dependence is likely to come from new technology, it will be easily spread and will also reduce the demand for oil from other countries.) That’s because an increase in the price, in addition to being unlikely, helps us as much as it hurts us.
He also makes the unfounded claim that energy independence is an impossible goal. We could replace oil for electricity generation, he says, but cars need oil so we’ll always need oil. Except that a lot of the focus of energy independence efforts has been to change exactly that. Hydrogen or electric cars, for example, do not offer any way to generate energy. They simply offer the flexibility to use other methods — anything that can produce electricity — to power cars. I’m just blown away by the stupidity of his argument.
He finishes by warning against government spending programs for energy research, saying that the government is unable to pick the most promising technologies. I have a lot of sympathy for this goal, but there are a lot of methods, such as gas taxes, that are clearly effective methods by which the government can push energy independence without trying to directly engineer the solution.
There are lots of good options, and they need to be supported. The energy debate is sorely in need of some increased sophistication. Stossel is clearly trying to provide that, but wow did he fail.
August 24th, 2008 at 9:56 pm
Great post. One thing Stossel should keep in mind is that while Canada and Mexico may supply the majority of our oil, we remain OPEC’s biggest customer. transferring our wealth to them causes more security threats to us than anything Al Qaeda can throw at us.