Three Cheers for Oil Dependence

In response to President Bush’s assertion that “America is addicted to oil,” Harry linked to this article in the Wall Street Journal. The author catalogues 35 years of failed energy initiatives designed to free us from dependence on foreign oil.
Time and time again politicians have been taken in by the fallacy of composition. Their logic seems to be something like this: Individual independence is good. Individuals are part of the nation. Therefore, national independence from foreign oil is good for individuals. It is not.
Any time politicians try to flex national power in order to make the country independent from a foreign supplier, they rob individuals of their own independent right to buy from whomever they wish. Thus in matters of trade, national independence can only come at the price of sacrificing individual liberty.
Americans buy a lot of oil from abroad. They do so because oil happens to be abundant abroad. There is some indication that domestic sources of oil are relatively underutilized due to environmental restrictions and the “not in my backyard” approach to building (or not) refineries. But even without these restrictions on American supply, Americans would probably still want to buy some oil from foreigners. It is a simple matter of fact that the world’s largest oil deposits are not located in North America.
It seems to me that allowing Americans to buy from abroad is both morally and economically correct. If a farmer named Chuck in Sterling, Ill. wants to buy cheap gas from Amir in Egypt, and Amir wants to trade his oil for Chuck’s cash, then who are we to stop these two from a mutually beneficial exchange? I suppose that nationalists and unionists like Pat Buchanan or Charles Schumer would respond by saying that Chuck should buy from a Texan named Billy Bob and not from a foreigner like Amir.
There are only three ways to make Chuck buy from Billy Bob rather than from Amir: The government can outright forbid Chuck from trading with Amir, it can highly tax his trade with Amir, or it can tax Chuck and all other Americans and use the revenue to subsidize Billy’s production and lower his price relative to Amir’s. All three of these options redistribute wealth from Chuck to Billy. There being little reason to suspect that oil men are any closer to starvation than farmers, I don’t see much of a case for this redistribution. Apparently folks like Buchanan and Schumer do. Furthermore, all three of these options involve redistribution from Amir to Billy. There being even less reason to believe that First-World Americans are worse-off than Third-World Egyptians I again don’t see the moral argument.
What of the economics? Some may claim that we will make America and therefore all Americans—even Chuck—better off by encouraging domestic producers. This was Alexander Hamilton’s point in his 1791 Report on Domestic Manufacturers. This point was no more correct when Hamilton made it than when today’s politicians make it. For one thing, a simple model of supply and demand will demonstrate that consumers lose more than producers gain when government plays favorites. For another, we all may lose from barriers to trade if other nations retaliate (just ask the Great Depression generation how they felt about the Smoot-Hawley Tariff). In the long run, in fact, we are probably doing Billy Bob and his fellow oil-men a disservice by protecting them from competition. As the economist Gordon Tullock pointed out in 1975, industries which enjoy government’s protection do not, in the long, earn higher profits than non-protected industries. Instead, there are only short-term or transitional gains to be had from redistribution. This is because as soon as government gives an industry an unfair advantage such as a subsidy or a targeted tax break, others enter the industry, increasing supply, driving down price and eliminating whatever above-normal profits the government hand-out precipitated. As David Friedman has said, “the government can’t even give anything away.” We can’t remain walled off forever. Eventually, we will have to trade. And when we do poor Billy will find that he and his fellow oil men are not nearly as productive compared to Amir and his fellows. By that time, how many young workers will we have tempted into an unproductive oil patch and how old will they be when they start looking for new jobs?
Adam Smith long ago demonstrated that the wealth of nations is made in trade and specialization. I am extremely thankful that I depend on others to make my clothes, husband my food and construct my shelter. It would take years to master any one of those trades. Luckily, I only have to learn how to teach economics and can trade with others for these staples. I am grateful that I depend on others. I am even more so when the government permits me the independence to make my own choices.

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One Reply to “Three Cheers for Oil Dependence”

  1. The President’s argument is that dependence on foreign oil makes the nation vulnerable to a sudden shutoff of mideastern oil, which would have grave effects. Were we less dependent, those harmful effects would be less, and we would not need to jump through hoops to preserve the fragile situation in the mideast.

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