Sunday, May 25, 2008

Oil and Electoral Politics

Chad Gray (25 May) writes:

“The Case for Not Drilling ANWR”

“Drilling domestic oil reserves (read: ANWR) has been, and will continue to be, a hot political topic, with the pro/con sides wrapping themselves in the US flag and Greenpeace flag, respectively. I'd like to wrap myself in the Adam Smith flag and make a case for not tapping into the reserves, just yet...

Being an economic realist (and a political cynic), I've observed that the ONLY thing which has really catalyzed the kinds of economic investments we've seen in the past couple of years (offshore drilling technologies, alternative energy research, etc...) that will end up providing the 50 year solution to our dependence on foreign oil has been the recent short term (past 2 years) surge in oil prices.

Tapping this oil now would be the equivalent of a 40 year old tapping into his 401k account to pay down your mounting credit card debt. Magic! Problem solved, except the part where you continue with your same spending habits that ran the credit card debt up in the first place (spending more than you make), and you've depleted an asset that would've been much more valuable a couple of decades later - when you really need it.

While it's painful in the short term, living with scarcity is the best way to assure future availability. Just ask Adam Smith

It's not clear to which Adam Smith we should look to for advice on this issue. The Adam Smith presiding over modern economic theory from the environs of Chicago or the Adam Smith who was born in Kirkcaldy in 1723. Markets operate in the public view and the consequences of oil demand outstripping current supply leads to rising supply prices. That’s economics.

The same prices are under the influence of the OPEC cartel, which controls how much oil is supplied to the world market. That’s political economy.

Oil prices are a political decision of the major suppliers; not a physical shortage. The OPEC countries use the same argument as recommended by Chad Gray to justify keeping the oil taps closed compared to them being fully open. By doing so they maintain a high current price (now rising rapidly) and receive more income now from consumers.

Chad Gray suggests that the US (and any other source of Non-OPEC oil) should restrict exploration and delay the creation of the infrastructure of new oil fields (production fields, pipelines, shipping, refineries and distribution), to reinforce OPEC’s ability to exploit its cartel prices.

Now the first rule of electoral politics is to get re-elected. How would politicians ‘sell’ the policy recommended by Chad Gray? It could be a hard sell.

Even if they started on the policy now, to which he suggests they don’t, this doesn’t turn on a domestic supply tap instantly. There would be a lag before oil flowed at any level to affect OPEC, even marginally, perhaps beyond the next election, with the sitting government’s flank exposed to a populist opposition.

In short, there is a political dimension to the debate, which Adam Smith certainly took into account. That is why economics was called ‘political economy’ in his day. If Wealth Of Nations was solely about economics as we know it, he would have published it as a single, much shorter, volume. But then it would not have had the impact it deserved.


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