Arnold Kling  

Oil is Oil

Milton Friedman on Big Busines... Inequality...

Shame on Reason for giving us this essay on "terror-free" oil.

I usually give Citgo a pass because most of the company's profits wind up on the hands of the Venezuelan government, headed by the socialist, Castro-loving, anti-globalization, and virulently anti-American Hugo Chavez.

Oil is oil. If you fill up at any gas station, you raise the demand for oil, and you raise the income of Venezuela. See Oil Econ 101.

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COMMENTS (7 to date)
KipEsquire writes:

Then how is Venezuela/Citgo, with the help of socialist collaborator Joseph P. Kennedy II, able to sell oil below a market rate to Massachusetts?

Just because a commodity is homogeneous, or "fungible," does not mean that there are perfect and costless physical or even derivative markets for that commodity, or that markets in that commodity cannot be segmented.

"Oil is oil" is a simplification that assumes away the reality-based point of the argument. If I buy my gas somewhere other than Citgo, then Citgo has to sell it to someone else. But to simply assume that it can do so costlessly, because "oil is oil," is to over-abstract the way actual markets actually work.

It is not "pointless" to boycott Citgo on moral grounds, just as it is not pointless to pick up a dollar lying on the ground because economics "tells you" that someone must have already picked it up by now.

I'm with Reason -- shame on anyone who patronizes Citgo.

Bob writes:

Saying the oil market is imperfect is like saying the galaxy is finite. It's true, so what? Working with the opposite (false) assumption is not "a simplification that assumes away the reality-based point of the argument." A reality-based point needs to be practical/plausible. Newton's laws are a simplification that is "wrong," but they are still valid in a "reality-based" sense. Modern oil markets are, in reality, very close to a classic perfect market.

Maybe we've hit on why gas prices are quoted in 10ths of a cent - you need that small a unit to conceive of how much a Citgo boycott costs Venezuela. The problem is that if you do something that is ineffective (but you think otherwise), you generally fail to do things that are far more effective (e.g., supporting general conservation driven by higher oil or gas taxes). By all means, boycott Citgo. Just don't think that you're inflicting much damage on Chavez. My guess is that the extra driving you do to find another station lines his pockets more.

Chris Rasch writes:

And sugar is sugar. Yet Walmart cares very much that you buy sugar from them and not Costco. Why is that?

Matt writes:

It's a retail boycott, not an oil boycott. If all they provide is fuel, the impact will be nothing because they can sell the fuel elsewhere for the same wholesale price. But if they get licensing fees or a cut of the total retail sales, there is something to be lost.

bartman writes:

I think Arnold is being needlessly snarky as well as missing the point. I understand that oil is fungible, and Venezuela, as a producer, get whatever rents they will get from extracting oil. But that is separate to the additional profits Venezuela makes through product retailing via CITGO.

Perhaps its better that the value-added between the import terminal and gas pump accrue to some other company than CITGO.

mobile writes:

Citgo oil is almost a perfect substitute for Exxon oil, like, I don't know, Wal-Mart sugar is almost a perfect substitute for Costco sugar. At the margin the boycotter is decreasing demand for Citgo product and (assuming they are not forgoing any purchase) increasing demand for another company's product, affecting the revenue of each company. By failing to purchase a dollar's worth of Citgo gas, you are certainly depriving Citgo of much less than a dollar in revenue, but the effect is as real as, say, the effect of a widespread perception that Wal-Mart sugar is of a lower quality than Costco sugar.

Alan J writes:

Terror free oil

In a market driven economy I fail to see where boycotting CITGO oil will affect change on the Venezuelan government. I will outline a few simple arguments as to back up my statement. I use CITGO and Exxon as my examples in reply to the Blog comments.

From micro-economics let us look at the demand for oil, it is a scarce resource and until adequate alternatives are found the demand for oil will remain unlimited. This is not a new concept it is in-fact the “economic problem”.

Assume the boycott of CITGO begins and consumers driven by patriotism and contempt for Hugo choose to purchase Exxon oil, a substitute supplier. Two things may begin to happen. Exxon will sell more oil and CITGO will sell less. Now look at the supply of oil to the market. While consumers boycott CITGO the amount of oil supplied to the market ie Exxon’s reserves will begin to decrease while Exxon oil prices will begin to rise in relation to the amount supplied to the market. This is also not a new concept it is the law of supply, advocating price and quantity supplied have a direct relationship.

Oil has been continually shown to be a relatively inelastic good in regards to the price that is the consumer is less sensitive to purchasing oil products even if the price increases. I remember reading somewhere about the “Oil Crisis” in the 80s where the supply of oil was retarded by the oil tycoons in the middle-east brining the US to its knees showing its dependence on oil products from foreign countries yet showing American were willing to pay a lot of money for “the precious juice”.

Back to our hypothetical and CITGO who in reaction to their surplus of oil will begin to lower the price in relation to Exxon prices. There will come a point where the “average Joe” will no longer care about “doing the right thing by others” and start “doing the right thing by him/her self”. This is not a criticism on the American nation it is a fact that Americans are an individualist culture where ones priorities are to him/her self, documented in Franzoi S. L. “Social Psychology 4th Edition” the chapter on “The Self”.

Driven by unlimited needs in the face of limited income, the consumer will begin to choose the cheaper alternative offered by CITGO and the cycle begins again where the American nation sends its income to the Venezuelan government.

Once again I find myself advocating Bio diesel, E85 and hybrid vehicles and until alternatives are found to dependence on oil from other nations the US will continue to support other nations regardless of their political situation because of the economic problem of unlimited wants in the face of limited resources.

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