Arnold Kling  

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Robert Bryce wrote,


Many of the leading neoconservatives who pushed hard for the Iraq war are going green. James Woolsey, the former director of the Central Intelligence Agency and staunch backer of the Iraq war, now drives a 58-miles-per-gallon Toyota Prius and has two more hybrid vehicles on order. Frank Gaffney, the president of the Center for Security Policy and another neocon who championed the war, has been speaking regularly in Washington about fuel efficiency and plant-based bio-fuels.

This was picked up by Andrew Sullivan, who supports the "green neocon" movement. However, Sullivan was persuaded to link to the alternative view that I offer in Oil Econ 101. This in turn led one of Sullivan's readers to write

While Kling is correct that an intense conservation program would only marginally cut our reliance on the Saudis (they are the equivalent of the global Federal Reserve in crude production capacity, and nothing will change this unfortunate geological reality), what ultimately matters is the price they receive...

The volume of oil that OPEC and the Saudis produce only changes marginally year to year, but the price can very tremendously. Crude prices -- and all commodity prices -- are set at the margin.


The argument for conservation appears to be that it would lower oil prices, therefore it would lower oil revenues for OPEC countries, therefore it would destabilize their governments, therefore the United States would be better off.

I think it is fair to say that conservation of oil, particularly to the extent being discussed, would reduce our GDP. I wonder how much GDP we should give up in order to help destabilize the Saudi government. For example, 5 percent of our GDP would be more than $500 billion a year. We could invade Saudi Arabia for a lot less than that. I am not advocating invasion, just using it as a benchmark. The point is that economic warfare is not cheap. People ought to at least look at the numbers before they jump on board the conservation bandwagon.

But are there other, long-term benefits of conservation? Peter Huber and Mark Mills think not.


To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that's trillion -- over a century's worth of global supply, at the current 30-billion-barrel-a-year rate of consumption.

For Discussion. Does the Free Trade with the AARP argument also apply to Saudi Arabia?


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COMMENTS (15 to date)
Bill Stepp writes:

Why would the US be better off if Middle Eastern governments were destabilized? That would certainly increase the price of oil and perhaps have other unpleasant consequences.
See Robert Wright's op-ed in today's New York Times. (I disagree with all the points of his positive program, but his criticisms of the Bush Reich are on target, in addition to his point that Clinton did a lot to undermine Chinese tyranny by supporting trade with China.)

Boonton writes:
think it is fair to say that conservation of oil, particularly to the extent being discussed, would reduce our GDP. I wonder how much GDP we should give up in order to help destabilize the Saudi government.

What's strange is that the actual policy of the US gov't is to not destabalize the Saudi gov't. Considering how hostile and prone to radicalism the underlying population is, the Saudi gov't is quite pro-American and has been cut a considerable amount of slack by Bush.

Perhaps the more relevant argument is that if you achieved falling prices AND decreased demand you would lower the importance of oil to the economy. This indeed would be a benefit since the trillions of barrels of oil locked in tar sands are expensive to obtain while the Middle East remains awash in easy to pump oil but hostile and dangerous politics.

Randy writes:

Why worry about oil? Its eventually going to run out. As it starts to run out, it will gradually get more expensive and we will find replacements - or maybe not. I recommend we use as much as possible. If we don't use it, the Chinese will.

Lawrance George Lux writes:

Conservation will not cut Our Energy bill, it will raise it as OPEC and other Producers seek to maintain current levels of revenue. The problem is the distended Demand curve for Oil, and diminished Demand curves for American product. Foreign nations (particularly China) use non-market instruments to suppress the Demand curve for American products. Yuan should be about four to a dollar at present. This is why Oil is $48/barrel, instead of $34/barrel; the Oil shocks so much commented on raising it from $26/barrel. The enemy is not OPEC, Saudi Arabia, or Venezula; it is most definitely China, and other low-Cost Producers, who peg to the Dollar. lgl

Walker writes:

I think it is fair to say that conservation of oil, particularly to the extent being discussed, would reduce our GDP

This should not go unchallenged. It really depends what measures are taken to conserve. Taking one big example, the energy efficiency of the average American home could be improved tremendously using investments that pay for themselves very quickly -- (smart thermostat, ceiling fans). There are many more techniques that are cost effective but may take a while to pay for themselves and so the individual homeowner may be discouraged from making the upfront investment (insulation, better windows).

There are a lot of no brainer opportunities out there to improve energy efficiency that are not exploited either for lack of awareness or lack of appropriate incentives that would actually boost GDP.

spencer writes:

I have to agree with Walker that your comment that conserving energy would cut GDP is way off base. Conserving energy would make a change in the composition of GDP but it would be extremely unlikely to cut GDP. From 1975 to 1995 productivity growth slowed from 3% to 1.5% before rebounding to 3% after 1995. Although the question is still open, I think the dominant reason productivity slowed was a shift in capital spending. In the slow period much more capital was allocated to conserving energy rather then conserving labor -- moreover it worked as there was a shift in the GDP to energy ratio.

But that is the type of costs you should look at in evaluating the question of the costs of conservation, not a cut in GDP.

Moreover, in you calculaion how are you including the over 1,5000 military lives lost in Iraq as a part of the costs of being dependent on Saudi oil.

It is not just the lives, but the budget costs of keeping a military presence in the middle east.
Is the fact that we are losing in Iraq the real reason the neoconservatives now favor conservation.

Finally, yes the finding costs of Veneluelan & Canadian tar sands is zero, but the development costs are very high. Right now the fixed costs per barrel of the better tar sands operations runs at about $30 to $35. On top of that you have to add about a $10 /bbl variable costs. So even though the finding costs of tar sands is zero, the final costs of that oil is on the order of $40 -$50 per bbl. So how are zero finding costs relevant?

Tim Harford writes:

A stronger argument for the conservation of oil is the risk of man-made climate change.
There is a risk that carbon dioxide emissions, such as those from burning oil, will cause substantial damage. It is possible that we may find ourselves having to react quite quickly in the future: the probability seems modest but large enough that there is a substantial option value from having alternatives to fossil fuels available.
There are no credible alternatives right now, but a tournament offering substantial cash prizes for successful inventions would help unleash the private sector on this problem, with no up-front cost.
Meanwhile, an auction for the right to burn carbon dioxide should quickly uncover low-cost conservation options while allowing high-value uses of fossil fuels to continue.

Joe Deely writes:

Conservation of oil will reduce GDP. HUH?!?

I have to agree with the others that question this. Where is the basis of fact for this statement.

The US has only recently rereached the levels of oil usage that we had in 1979.
see - http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_7.pdf

Oil usage was the same in 1979 as is was in 1999. How much has GDP grown in this time period?

For another look at oil consumption vs GDP see -
http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_16.pdf

We can easily cut oil consumption and still grow GDP at 3-4% a year.

Barry Posner writes:

Concerning the debate as to whether conservation would cause a drop in GDP:

There is a difference between organic, endogenous efficiency improvements, which have been responsible for the declining share of energy as a component of GDP, and legislative, or enforced conservation.

People use some specific amount of energy because using less (or more) will make them poorer; that is, force them to a lower utility option on their menu of choices. Enforced conservation does this. However, when technological advancements make reducing the amount of energy consumed the lowest opportunity cost option, people switch to this, which makes it the wealth maximizing option.

The notion that there are all sorts of cost-free methods of reducing energy consumption implies that people are stupid, which I think is a rather arrogant stance to take.

Allow people to make free choices about the energy they consume, using the guidance that the price system provides. Any other option necessarily makes us a poorer society.

John writes:

In response to Barry Posner,

a distortionary tax on fuel would lead to a lower utility, but the same GDP.

Joe Deely writes:

Barry,

I think your answer makes sense in theory but not in practice.
You say: "The notion that there are all sorts of cost-free methods of reducing energy consumption implies that people are stupid, which I think is a rather arrogant stance to take."

Here's a comparative example:

A technology company with highly paid employees -
Many new employees do not not sign up for the companies 401K plan even though the company matches contributions. Switch this so that new employees are automatically enrolled and they have to "opt out" and enrollment jumps dramatically.
Are these stupid people? No. Are they lazy? maybe. Are they uninformed? maybe.

As far as there being cost-free means of reducing energy consumption... there are still hundreds/thousands of changes that can me made to reduce energy consumption. Many of these changes have very high rates of return. Corporations that have invested in energy conservation discover this and often dramatically increase their investments in these programs.

People and companies are not stupid but sometimes they need a "nudge" to make the economically correct choice.

Walker writes:

The notion that there are all sorts of cost-free methods of reducing energy consumption implies that people are stupid, which I think is a rather arrogant stance to take.

Even if people were omniscient they are discouraged from making long-term investments in energy-efficiency for residences with high turnover. Even so, I don't think the assumption that people are not omniscient with respect to their energy consumption is unreasonable. Descending to reality, assumption is really unnecessary here, there is no shortage of empirical evidence showing that American homes could be made more efficient through investments that pay for themselves fairly quickly. Allow me to post a link to taxpayer funded information for those who might be interested in some home improvements...

http://www.eere.energy.gov/consumerinfo/energy_savers/

Stephen Richards writes:

"To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that's trillion -- over a century's worth of global supply, at the current 30-billion-barrel-a-year rate of consumption."

The idea that global consumption is steady at a given level is an obvious myth - I would guess that the past level of exponential increase would only get us 30 - 50 years out of this much oil.

A second myth is that tar sands - which need to be dug up with mechanical means, processed using large amounts of energy (currently natural gas in Canada - which already has it's use planned heating American and Canadian homes) are in any way equivalent to a traditional oil field, where the oil comes out under its own pressure. It is not at all clear to me that the harder to mine parts of the tar fields will be energy gainers, they may just become expensive batteries, where we lose energy for the convienence of easy transport of the energy.

jaimito writes:

The US enjoys military control of the Middle East oil fields. In a classic colonial situation, described by Marx, oil should be sold cheap and the locals should buy expensive industrial goods (such as useless AWACS airplanes or irrigation equipment for growing wheat in the desert.) Today, as industry is shifting to the Far East, oil should be sold expensively to the Chinese and locals should buy expensive American products such as management consulting services.

Mark Bahner writes:

Stephen Richards writes, "The idea that global consumption is steady at a given level is an obvious myth - I would guess that the past level of exponential increase would only get us 30 - 50 years out of this much oil."

No, what is a myth is that there is currently an "exponential increase" in world oil consumption.

The year 2000 issue of "Vital Signs" (published by Worldwatch Institute ) contains data on world oil consumption dating back to 1950. Values are in millions of tons of oil consumed per year. Percentage increase values are relative to the previous decade. (One ton of oil = approximately 6.6 barrels of oil. So there is a bit of the problem...another website puts world consumption at 28.5 billion barrels per year, but 3,200 tons per year only works out to 21.1 billion barrels per year.)

Year = Millions of tons of oil consumed

1950 = 436

1960 = 1,020 (134% increase)

1970 = 2,189 (115% increase)

1980 = 2,873 ( 31% increase)

1990 = 2,964 ( 3% increase)

1999 (preliminary) = 3,200 ( 8% increase)

If oil consumption was increasing exponentially, the percentage increases would be approximately the same for each decade. But the percentages have in fact dropped off very dramatically since the 1950-1970 period.

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