Economics of Oil, Part 2

I received some comments on “The Economics of Oil.” T. Gillin wrote:

There is another dimension to the peak oil debate, at least insofar as foreign policy is concerned. Whether or not “peak oil” or more “price elastic” views of the oil supply situation is “right” or “wrong,” there is also the issue as to divining what the U.S. national security managers think the real situation actually is.

There doesn’t seem to be much publicly available material around to help us figure this out. Most commentators seem to be just guessing what they think is in Pentagon heads. Even former “insiders” like Karen Kwiatowski don’t seem to offer any insights here.

There is just no guarantee that national security managers will be operating within a realistic energy economics paradigm. History is rife with wars being pursued based on flawed economic advice. Look at the dubious attractions of the much-fought-over China market. Most of the foreign combatants always did more trade with each other than they ever managed to wangle from the Middle Kingdom.

I suspect that in a field where opinions are radically divided between the experts as to what the realistic energy economics paradigm actually is, responsible national security planners would probably choose the worst case scenario. So maybe peak oil theory, whether it is true or not, is behind Pentagon strategy after all.

It is possible that the neo-cons (despite the alleged faith in free markets) are drinking from the same well as the greens (who more or less reject any kind of market-based economic thinking as a matter of principle). It is a reasonable hypothesis to assume that the neo-con “faith” in free markets is superficial, especially when you consider their “Cold War liberal” roots. This faction has definite social democratic and interventionist heritage. So maybe the neocon “faith” in markets is similar to the proverbial Sunday morning Christian, loudly proclaiming his faith in Church but forgotten Monday to Friday.

Donald Losman has pointed out that well before the current Iraq war the U.S. was spending more on “defending” Persian Gulf oil than they were worth to the US at least when you count the cost of what the U.S. actually imports from the region. The same Donald Losman has pointed out that previous National Security Strategies, before the current pre-emptive war doctrine, i.e. those issued during the Clinton era, explicitly added “economic goals” like energy security to the Pentagon’s mission statement.

It is possible that what Losman is reporting here is an unpublicized revival of mercantilism by the U.S. Government, alternately we may be seeing the “military industrial complex” trying to find a new post-cold war justification. This may even turn classical theories of imperialism on their head. Instead of economic demands driving military imperialism, the imperialists are looking for economic sponsor to justify their expenditure levels.

I am old enough to recall that back in the 1970s OPEC oil crisis (which Losman has pointed out barely impacted the U.S. GDP — see pdf file here) even as ardent a defender of free trade as Milton Friedman was prepared to recommend a temporary tariff on OPEC-sourced oil imports as a means of discouraging dependence. Regardless of the validity of peak oil versus price elastic theories, a targeted tariff can be justified on strategic grounds. This would seem to me to be a fairly elegant response to the current situation, yet few seem willing to revive it.

Sam Koritz: I agree that bogus beliefs about oil economics – among other things! – influence foreign policy (see the 2nd half of “The New Energy ‘Crisis’ and Iraq“). My view is that all sorts of nonsensical ideas, some sincerely believed and some not, are used to justify government aggression. The natural tendency of those with power is to weaken restraints on that power. Leaders are often willing to sacrifice personal wealth or popularity to this end but, as Robert Higgs points out in “The Iraq War – A Catastrophic Success,” many of the initiators of this war have personally benefited from it. The active, ongoing limitation of executive power-grabbing is central to the successful functioning of political systems. (See “Common Denominator” by Nicholas Thompson about the judiary’s role – then see Simon Jenkins’ “I never thought I’d say this, but thank you to the Lords, the Libs and the law” for an example.) I don’t see how an oil tariff would help.

Here’s a short version of a letter from Joseph O’Ruandaidh:

I read with interest Sam Koritz’s opinion on The Economics of Oil.” I found the argument attractive because, just this once, I would like not to have the fear the worst. In his opinion, the high price of oil is nothing more than an Enron-like conspiracy to drive up prices. Although conspiracies can and most certainly do exist I like to find my explanations in either of two places: history or science. … It is true to say that there is plenty of oil left. But mostly it’s not very good oil. And it is harder to get. You have to go deeper, further, longer — down into the deep sea, way up into the Arctic kicking the pesky polar bears and malingering moose out of the way. The size of the finds is also decreasing. This is the truth on the ground (or even below the ground) and we are in deep doodoo. There is no viable alternative. Non-scientists like Sam think it is all a matter of technology and money and instant solutions are the result. Well, Sam, I am a scientist and I think you are naive. Just like in that movie Outbreak, starring Dustin Hoffman, the scientists will produce the vaccine to cure all our ills — literally overnight. Just so long as we can catch the goddamn monkey. Real solutions to real problems take time. We should be looking at doing research onto finding real alternatives — now! We need a Manhattan Project to find an alternative to oil — now! And calling intelligent people bearing bad news cranks or alarmists or chicken-littles is just plain dumb. If you read your history you’ll see that they are more often right than the mainstream.

Sam Koritz: I didn’t write that the recent (relatively) high price of oil is due to a conspiracy; I wrote that, in my opinion, it’s due to “political chaos, cartel decisions (possibly), and dollar inflation (despite the Iraq invasion, the euro price of oil has risen little; the prices of gold and real estate have risen with the price of oil but neither gold nor real estate is being consumed).” I’ve dealt with these issues already — here (again) is a link showing the discussion thus far. Briefly, since the dawn of the industrial age primary fuel sources have changed relatively painlessly, and the quantity of energy required to generate a given quantity of wealth has consistently declined. This is due the price mechanism, which automatically profits those who economize rare resources and substitute rarer useful resources for less-rare resources. From Malthus to the Club of Rome, the scarcity alarmists have been consistently wrong.

Alan G., a monthly contributor, objected to the inclusion of Slashdot in my list of “dissident” websites. He wrotes:

“Umm, Slashdot isn’t a ‘dissident’ website, it’s a poorly run ‘news for nerds’ site which spends most of its efforts posting items about computer games, software industry/ community stories, Anime, or miscellaneous science stuff. I’ve been reading Slashdot since 1998 and have watched it deteriorate into a cesspool of geek lameness. Any dissidence on the site is either the daily Microsoft bashing or is simply clickbait to increase traffic.”

Sam Koritz: I’m not a Slashdot reader (does that mean I’m not a nerd?) so I don’t know: How about “non-mainstream”?

Author: Sam Koritz

I like cheese.