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Oil and Democracy

Ted Barlow tells you what you need to know about the economics of the 19th century whale oil industry. Speaking of which, someone desperately needs to teach Tom Friedman about the economics of the 21st century fossile oil industry before the ideas pimped in his latest column and many other recent writings become a mainstream staple of anti-Bush criticism. There are very good reasons not to like the Republican Party's energy policies, but virtually nothing about yesterday's argument makes sense.

For one thing, as Brad Plumer writes, this idea, like so many Friedman ideas, seems to suffer from an acute case of the "Friedman magic policy wand" syndrome. There's no real reason to think there's any way to accomplish what he thinks we should be accomplishing, and even if it could be accomplished, the time frame for getting it all done would be much longer than it would take to produce the sort of results he's looking for. More to the point, in many ways, if a crash conservation program succeeded in drastically reducing demand and lowering the price of crude, the result would be an increase in demand and a resumption of rising prices. This is roughly what happened during the 1980s and it's more-or-less written into the fabric of capitalism.

The assumption that impoverishment naturally leads autocratic governments to reform themselves in hopes of boosting economic growth, meanwhile, is strikingly lacking in empirical support. North Korea would be racing headlong toward freedom if this were right. And oil-poor Arab states like Egypt and Syria would be bastions of democracy rather than Egypt and Syria. Last but by no means least, in addition to the policy lag between the time when we implement our conservation program and we actually see $18 barrels of oil, the lag between when the Saudi and Kuwaiti governments start reforming their education system and when the newly-educated cadres take over the country would be enormous. The United States is currently governered primarily by people educated in the 1960s and looks set to continue to be so governered by quite some time now. Such is like. We Millenials will have our day, but it's going to be a long time off. The No Child Left Behind kids won't be running things until the 2040s.

And then there's the point that the dogmatic belief that an absence of secular education is a primary source of terrorist motivation seems to be way off base. Some jihadis went to madrassas (primarily in Southeast Asia) or were products of whatever it is they do in the Saudi school system, but many had technical educations of just the sort that a self-consciously modernizing regime would provide, often in the west. Now I think it would be equally silly to conclude from this that technical education leads to terrorism (though the MIT kids do have an affinity for pranks that involve blowing things up) but the lines of causation here are pretty confusing.

Back to oil. There's a very respectable case to be made that we ought to be trying to promote oil conservation in the United States and it doesn't involve any odd geopolitical theories. Oil causes a lot of pollution. It has, in other words, significant negative externalities. Right now, it's not taxed at a level commensurate with those externalities. If we did tax it proportionally to the real social cost of burning oil the price (to consumers) would rise, and with it interests in more fuel efficient vehicles (already, makers of hybrid cars are plausibly arguing that if you drive frequently it's worth it to shell out more up front in order to save on fuel) which will improve air quality. Better air quality would be an excellent thing. If it should happen to have some beneficial spillover effects on national security, so much the better, but I wouldn't count on it, and I certainly wouldn't go around promising it to people.

January 31, 2005 | Permalink

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Matt Yglesias has an excellent post up dissecting the foolishness of Tom Friedman's column proposing conservation as a means of... [Read More]

Tracked on Feb 1, 2005 11:18:18 AM

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....While Matthew Yglesias rejects the notion that a reduction in oil dependence should be couched in terms of geopolitical terms, he at least recognizes the environmental imperative. [Read More]

Tracked on Feb 1, 2005 5:10:42 PM

Comments

Capitalism doesn't have a lot to do with it, I think. We could tax oil heavily enough to depress demand, and keep increasing the tax to compensate for the subsequent decline in price. The trouble is that unless every oil-consuming country on the planet does it, demand will grow in the countries that don't. And getting everybody together on this is simply not a political possibility. It really doesn't matter what kind of economic system we or anyone else runs.

Posted by: SqueakyRat | Jan 31, 2005 11:43:06 AM

As for Tom Friedman, surely you must know by now that on any topic that turns on economics his stupidity is simply impenetrable.

Posted by: SqueakyRat | Jan 31, 2005 11:47:10 AM

Although I think Friedman is way off base, because even if we did manage to significantly reduce our dependence on imported oil, I don't think maintaining $18 per barrel oil is realistic. On the other hand, I think there is little doubt that there is little doubt that $50 per barrel oil is directly funding the terrorists and propping up the corrupt regimes that support the systems that create and support the fundamentalist terrorsits we are fighting. Of course if we were serious about "spreading democracy" in the middle east and were harder on the Gulf States and Saudi Arabia that use their oil money, banks, and schools (in the Emirates that don't have oil) to fund, launder money and indoctrinate the terrorists then we wouldn't necessarily have to starve the beast. But I think there is little doubt, especially in the case of Saudi Arabia and Iran, that since the price of oil has sky-rocketed, that the steps they were making towards moderating their hard-line stances have stopped and even regressed because now they can afford to buy off the fence-sitters once again.

Posted by: Freder Frederson | Jan 31, 2005 11:52:13 AM

"The assumption that impoverishment naturally leads autocratic governments to reform themselves in hopes of boosting economic growth, meanwhile, is strikingly lacking in empirical support."

True. But then why did you (on Tapped) send us all off to read Robert Wright's op-ed, in which this assumption is proclaimed to be a "theorem," and an "elegantly awesome" one at that?

Posted by: SqueakyRat | Jan 31, 2005 12:09:20 PM

Mr. Yglesias,

I congratulate you on your sound economic analysis. This is rare on the left, and should be recognized whenever it appears.

Bravo !

As for the environmentalist argument, well, here you've lost me. If you want to take up an environmentalist cause, there is far more bang for the buck to be had in pressing for a fast-track system to build nuclear power plants and more liberal policies wrt natural gas exploration and development.

Posted by: luisalegria | Jan 31, 2005 12:45:40 PM

$50/barrel seems unsustainable to me over the long term, because of estimates that coal liquefaction using existing technology can produce a petroleum equivalent at $35/barrel. E.g. http://edis.ifas.ufl.edu/pdffiles/EH/EH26400.pdf

This is sort of an obsession with me, not because I think it's a good idea (it's an environmental nightmare in terms of greenhouse gas and land use) but because I still don't feel I have the straight explanation on how oil can stay as high as $50/barrel. $50 was unthinkable several years ago, which is why $35 looked impractical.

There are two possibilities I can think of.

First, any new technology requires longterm capital investment. No one will make such an investment if they expect oil to return to levels under $35/barrel in the foreseeable future.

Second, maybe the government estimate is just way too optimistic. This ought to be checkable. South Africa has a coal liquefaction industry established to circumvent apartheid era embargoes. What's their cost per barrel?

Anyone have a definitive answer?

Posted by: Paul Callahan | Jan 31, 2005 12:53:44 PM

As a chemist who is somewhat aware of the issues surrounding oil economics and production, I think that it is laughable to think that even with a tremendous oil conservation effort, which I strongly support, that we will be able to get close to $18/barrel. The days of cheap oil are close to over.

Posted by: Christopher Brandow | Jan 31, 2005 1:00:04 PM

Paul - I suspect it has a lot to do with cost of entry for coal liquefaction and volatility of oil prices. I suspect that at $35 a barrel, if you sink a billion dollars into a coal liquefaction plant you pay off the billion dollars in ten years and then make money after that. If the price of oil ends up going down instead, you lose your shirt. So people wait until the price of oil is high and going to stay there before making such huge capital investments.

Posted by: Jake McGuire | Jan 31, 2005 1:04:39 PM

More to the point, in many ways, if a crash conservation program succeeded in drastically reducing demand and lowering the price of crude, the result would be an increase in demand and a resumption of rising prices.

My Econ degree was years ago, but this doesn't sound right to me. Lowering demand means shifting the demand curve to the left. The resulting lower market-clearing price would not entice more people to go back to consuming oil, necessarily. The very reason that the demand is lower is that people are then using alternatives that they value more highly than oil. Yes, $20/barrel oil would entice innovation in oil-based products or encourage people to switch from their new green fuel back to oil, but it's likely that if that were the case, the price never would have made it all the way down to $20 in the first place.

Posted by: Kuz | Jan 31, 2005 1:10:08 PM

Good post. It is amazing how many people who are paid to yammer or peck at keyboards, about the world at large, breezily suggest that dependence on Persian Gulf oil be ended, or greatly reduced, apparently without ever actually having expended any electrical energy in their craniums as to how that could happen. Then again, Friedman once wrote that a key component to the economic health of the U.S. was the Head Start program, so there is nothing he could say in the area of economics that would be so stupid as to be a novelty.

If some sort of oil or carbon tax is considered worthwhile, how about using it as a replacement for FICA taxes? Thus, we could really develop an unpassable piece of proposed legislation, by bundling entitlement reform with energy policy!

Posted by: Will Allen | Jan 31, 2005 1:10:52 PM

I'm also amazed at Friedman's cluelessness about the ability of the US to cut the global price of oil in half, just by engaging in a little conservation and wind-farming and builing some hybrid cars. How far does he think the US can cut its oil consumption in the next 20 years, even with a Carter-style crash energy conservation program? And since this will all be taking place against a backdrop of sharply increasing Indian and Chinese oil consumption, just how much leverage does the US to affect oil prices? And even if the US cuts its consumption of oil, any effect that it our reduced demand would have on the global price of oil would be counteracted by other countries taking advantage of the newly-cheap oil - "Hey, more for us!" - and driving the price back up.

Never mind the nutty logic of Friedman's transformative policy - that liberal democracy will fluorish in the Arab world if we just collapse the price of oil and crash their economies. The notion that we could drive oil prices down to such a degree by ourselves is ludicrous, doubly so if you think it can be done by replacing incandescent bulbs with fluorescents.

It's of a piece with a lot of mainstream policy analysis, though - the notion that the US has untrammelled (and growing) power to single-handedly influence the world in whatever way we like, which is in direct contradiction of the truth, which is that relative US power (economic, cultural, political, and military) is on the wane.

Posted by: FMguru | Jan 31, 2005 1:16:30 PM

FMguru: "The notion that we could drive oil prices down to such a degree by ourselves is ludicrous"

Not altogether ludicrous. If the US and Japan put a large
investment into developing cheap-to-produce energy-conservation
technologies, such as (cheaper) hybrid cars, more efficient
microprocessor-controlled electric motors, better refrigeration
and air-conditioning technology, LED lighting, then marketing
this technology worldwide can have a big impact. India and China
didn't invent their own cheap personal computers, but they will
end up with a lot of PCs mostly thanks to development efforts in
the US.

I mention Japan in particular because they are entirely dependent
on foreign oil, and they're already leading the charge on hybrid
vehicle technology.

Posted by: Richard Cownie | Jan 31, 2005 1:36:12 PM

I'll agree that the "promise" is overboard. But even if the theory weren't 100% sound, it's worth doing simply for the other reasons and simply for that the fact that if you can convince neocons of one thing that happens to align in our interests for reasons that they see important, than its worth doing it. It may not be 100% intellectually honest, but neither is politics.

Posted by: Adrock | Jan 31, 2005 1:39:20 PM

> It is amazing how many people who are paid to yammer or peck at keyboards, about the world at large, breezily suggest that dependence on Persian Gulf oil be ended, or greatly reduced, apparently without ever actually having expended any electrical energy in their craniums as to how that could happen.

Uh, didn't Friedman suggest expansion of the nuclear grid?

Of course, if you are a 24 buff, you'd know we have 110 power plants open to terrorist attack! AH! Run for your lives! Aaaaaaaaaaaaaaaaahhhhhhhhh.........oh yeah, its just a TV show.

Posted by: Adrock | Jan 31, 2005 1:54:58 PM


"If the US and Japan put a large
investment into developing cheap-to-produce energy-conservation technologies, such as (cheaper) hybrid cars, more efficient
microprocessor-controlled electric motors, better refrigeration and air-conditioning technology, LED lighting, then marketing
this technology worldwide can have a big impact."


Making oil consuming products cheaper to operate means more of them, and more oil consumed. The average fuel economy for cars and trucks is much better than 30 years ago. Even with SUV's tooling around. However, making them cheaper to operate is a big part of the reason we have many more in use.

When is the last time you saw a single car garage on a new construction home? Triple and and even quad garages are getting more common.

Posted by: Abdul Abulbul Amir | Jan 31, 2005 2:03:39 PM

Ted Barlow didn't explain whaling economics, he just posted someone who did. It may not be the best comment thread ever, but it's funny (NB I didn't post in it).

Posted by: John Isbell | Jan 31, 2005 2:13:39 PM

Abdul: "Making oil consuming products cheaper to operate means more of them, and more oil consumed"

This is rubbish. I expect you also believe that the Bush tax cuts
will increase revenue ? And maybe also in the Tooth Fairy ?

I recently insulated my house and bought a new 96% efficiency
gas furnace. By your logic I should have turned my thermostat
up to 95 degrees and/or bought a second house once I got the
new furnace installed.

Posted by: Richard Cownie | Jan 31, 2005 2:25:19 PM

Abdul, The Bulbul Ameer



The sons of the Prophet are hardy and bold
And quite unaccustomed to fear-
But of all, the most reckless of life or of limb
Was Abdul, the Bulbul Ameer.
When they wanted a man to encourage the van
Or to shout "Hul-la-loo!" in the rear
Or to storm a redoubt, they straightaway sent out
For Abdul, the Bulbul Ameer.
There are heroes in plenty and well-known to fame
In the ranks that are led by the Czar
But the bravest of all was the man with the name
Of Ivan Skavinski Skavar.
He could imitate Irving, play euchre or pool,
And perform on the Spanish guitar.
In fact, quite the cream of the Muscovite team,
Was Ivan Skavinski Skavar
One morning the Russian had shouldered his gun,
And put on his most cynical sneer,
When, going down town, he happened to run
Into Abdul the Bulbul Ameer
Said the Bulbul, "Young man, is existence so dull
That you're anxious to end your career?
For, infidel, know that you've trod on the toe
Of Abdul, the Bulbul Ameer."
Said the Russian, "My friend, your remarks in the end
Will prove only futile, I fear
For I mean to imply you are going to die
Mr. Abdul, the Bulbul Ameer."
The Bulbul so bold, swore a swear, it is said,
Which brought people in crowds from afar
Then, fiercely intent upon slaughter, he went
For Ivan Skavinski Skavar.
But just as his knife was ending his life
In fact, he had shouted "Huzza!"
He felt himself struck by that subtle Calmuck
Bold Ivan Skavinski Skavar.
When the Sultan rode up the disturbance to quell
Or to give to the victor the cheer,
He arrived just in time to take hasty farewell
Of Abdul, the Bulbul Ameer.
There's la grave where the wave of the Danube doth roll
And on it, engraven so clear
Is, "Stranger, remember to pray for the soul
Of Abdul the Bulbul Ameer."
But a Muscovite maiden her vigil doth keep
In her home 'neath the cold northern star
And the name she so tenderly murmurs in sleep
Is "Ivan Skavinski Skavar."


Posted by: John Isbell | Jan 31, 2005 2:31:28 PM

A bulbul is either a bird or a tree. I think a songbird.

Posted by: John Isbell | Jan 31, 2005 2:34:04 PM

As an "MIT kid", I have to say that we do *not* engage in "pranks that involve blowing things up." To quote the MIT Hack Gallery:

"The word hack at MIT usually refers to a clever, benign, and ethical prank or practical joke, which is both challenging for the perpetrators and amusing to the MIT community (and sometimes even the rest of the world!). Note that this has nothing to do with computer (or phone) hacking (which we call "cracking")."

There is also a hacker code of ethics, which states that a hack must:

be safe
not damage anything
not damage anyone, either physically, mentally or emotionally
be funny, at least to most of the people who experience it

So, we do not engage in "pranks" that blow stuff up.

We blow stuff up because blowing stuff up is cool (see the annual Sodium Drop). Completely different.

Posted by: Matthewfivenine | Jan 31, 2005 2:58:55 PM

Never mind the nutty logic of Friedman's transformative policy - that liberal democracy will fluorish in the Arab world if we just collapse the price of oil and crash their economies

This was supposedly part of the Reagan administration's cold-war policy-- buy getting OPEC to open up production and drive down prices, the Soviet Union (at the time the largest oil producer in the world), became starved for funds. Now, one can argue about the "democracy" that ultimtately developed in Russia and former Soviet States, but the collapse of oil prices did play a huge role in the Soviet Union's collapse.

On the domestic front, the pattern seems to be that higher average fuel efficiency has seemed to just result in the economic feasibility of longer and longer commutes, so I doubt that incremental advances in fuel efficiency along will allow the USA to cut overall fuel consumption, outside of massive increases in efficiency (such as maybe 50 miles/gallon). At that point, the time spent commuting would become a more considerable factor than the cost.

Posted by: Constantine | Jan 31, 2005 3:06:52 PM

while the general gist of this criticism of friedman is right, Kuz is right to point out that he is being a bit less sloppy in his econologic than matt is giving him credit for: whether he knows it or not, friedman is arguing for shifting the demand curve for oil down thru conservation, which leads, all else equal, to a lower equilibrium price.

joshb

Posted by: joshb | Jan 31, 2005 3:32:39 PM

What about the issue of exporting US dollars to pay for oil? As the dollar dives, oil will go up in relative price. What's the real cost of importing oil vs conservation/US based resources?

Posted by: uptown | Jan 31, 2005 4:01:19 PM

Richard Cownie : "I recently insulated my house and bought a new 96% efficiency gas furnace. By your logic I should have turned my thermostat up to 95 degrees and/or bought a second house once I got the new furnace installed."

No, you're confusing total consumption and total cost. If, magically, the price of gas is cut in half I could make my normal commute for half the price, or I could drive twice as far for the same cost. If I buy a car that gets twice as many miles per gallon I have the same options: spend half as much or drive twice as much for the same cost. The difference is that in the former I use the same or more oil and in the later I the same or less oil.

The proper analogy to your house would be that you now have the choice to either save money or turn the furnace on earlier in the year and off later.

Posted by: andrew morton | Jan 31, 2005 4:51:32 PM

luisalegria : consumption of natural gas may be environmentally friendly but the extraction is often very damaging to the environment. wyoming is now having problems with air pollution and destruction of the water table. if you're interested: http://www.powderriverbasin.org/cbm/

Posted by: andrew morton | Jan 31, 2005 5:07:15 PM

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