Arnold Kling  

More on Energy Idiots

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I try to explain energy policy so that even a TV talking head might understand.


Let's go s-l-o-w-l-y. Start by asking yourselves these questions:

* Should the goal of U.S. energy policy be to raise long-term domestic energy production, or to reduce long-term domestic energy production?
* Should the goal of U.S. energy policy be to increase profits earned by Iran and other foreign producers, or to reduce their profits?
* Should the goal of U.S. energy policy be to increase consumer demand for gasoline, to leave consumer demand alone, or to reduce consumer demand?


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COMMENTS (11 to date)
John T. Kennedy writes:

Wouldn't the best policy be to refrain from government interference in markets?

Mark Horn writes:

First: I am *NOT* an economist. I read this to learn. So I'm hoping for criticism and correction to help me understand.

That being said, my answer's to Arnold's questions are:

  • Depends on who has the comparative advantage.
  • Depends on who has the comparative advantage.
  • Leave it alone, i.e. let it increase or decrease on it's own.
  • I was surprised to read that the "sensible answers" were not that. What am I missing? So here are my questions related to each of Arnold's questions:
  • Isn't it better for everyone if energy production is maximized by the country that has the comparative advantage in producing it? So if we have a comparative advantage in oil production then yes we should raise long-term domestic energy production. But if we don't, shouldn't the goal be to raise the production of that nation that does have the comparative advantage?
  • Isn't it better for everyone if the profits go to Iran if they have a comparative advantage in oil production? Of course, if we have a comparative advantage at oil production, then it's better for us. But isn't the answer to this depend on who has the comparative advantage?
  • Why would we ever want mess with consumer demand for oil? Wouldn't the best solution be to let demand match supply through price?
  • What am I missing?

    JohnJ writes:

    If it were only a domestic issue, the best policy would be to leave free markets alone. There is more to consider, however. The best policy would be the one that puts America in the best position, so first you have to decide the position in which you want America to be.
    Then figure out how to use the power of the free market to best achieve that position.

    Mark Horn writes:

    JohnJ,

    I'm not sure that I agree with that answer. Let's assume that I'm looking to maximize my benefit. It may not be the case that my benefit is maximized if we increase the production in the US. What if it turns out that Iran has a distinct comparative advantage in oil production? Doesn't the Law of Comparative Advantage say that everyone is better off if they specialize in oil production?

    I don't understand what you mean by "putting America in the best position". I think we want to maximize wealth, and when we do that, wealth doesn't stay restricted to America.

    xmath writes:

    Arnold,

    Putting together your overall "tax cuts + reduce tax breaks to US co's = helps Iran" argument, at root of your claim seems to be an implicit assertion that if gasoline prices were to lower from (say) $3 to $2.82 in a relatively short timespan with no change in supply, this would induce a run on the market, supply would run out (or be stretched, same diff), and rationing/gas lines would become necessary. And that's why the price has to stay at (or above.. right?) its current $3 level regardless of how much of that goes to tax. Because the "reason" it's at $3 is to discourage people from buying just enough to keep supplies from running out.

    This needs to be true for your argument to work (I think). So is this in fact what you believe? Just checking....

    Nacim writes:

    Arnold,

    Naming your opponents "idiots" is completely unwarranted, especially considering the fact the argument dealing with how Iran benefits out of this is extremely weak for instance. Most of the arguments laid out in the article are not exactly related to elementary economics. They're mostly centered around how foreign policy should be run and how domestic suppliers are more important than foreign ones. Those positions are all well and good if you can adequately back them up but it should be obvious that you're deep in NormativeLand.

    JohnJ writes:

    Mark, what I was getting at is that there are other considerations besides the creation of wealth. Sometimes these real world limitations inhibit the ability of the free market ina certain area. This is why we have things like diplomacy, and armies. If everyone else in the world played by the free market, there'd be no problem. If we didn't have to worry about other countries attacking us, there'd be no problem. The free market works best in a free world.
    Here's an example: Say that country X makes product A using slave labor. Since they're not subject to our laws, should we use only the economic principle of the free market and buy their product, if it's cheaper than the same product we could produce? All I'm saying is that there are often other, real-world factors that inhibit full use of the free market. The creation of wealth is truly a good thing, as it has been shown to have the reverse effect that poverty does (sometimes you have to break things down for people). But the real world is complex, and sometimes the free market is not the best answer.

    Daniel writes:

    It surprises me, that people talk about free oil markets, even when they know, that supply is largely determined by OPEC, growth of demand is virtually constant and prices are reflections of the political actions of cranks like Ahmadinejad and Bush.

    Oil prices are no results of oil supply and demand.
    There is no well-functioning oil market.

    To the would-like-to-be-economists, that quibble about comparative advantage and market-clearing prices: Just shut up and let the US-Congress do what's right.

    Tom Schofield writes:

    "Let the US-Congress do what's right"?? With shamefully few exceptions, members of Congress have one and only one goal - stay in office. Every issue that comes before Congress is immediately trivialized, politicized, and turned irretrievably into "idiot-bait". If Daniel expects to see the Congress do what's right he'll have to out live Methuselah - at least.

    Roger M writes:

    Mark,
    I am an economicst and I say you're right on the mark! Don't let anyone persuade you otherwise. Free markets are always in the best interest of this country regardless of what any other country does. Our military prowess is built upon our wealth; destroy wealth and you destroy our military.

    Mark Horn writes:
    To the would-like-to-be-economists, that quibble about comparative advantage and market-clearing prices: Just shut up and let the US-Congress do what's right.
    I believe that would be me. And I also believe that the US Congress is empowered on the basis of the constitution, which does not require me to shut up. In fact, it specifically restricts congress from making me shut up.

    So in answer to your suggestion, I will respectfully decline.

    As to the rest of your post, do you have data substantiate your claims? It seems counter-intuitive to me that oil prices are not a product of supply and demand. If that's true, I'd like to examine the data that supports that. If it's true, I'd certainly like to know it.

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