David R. Henderson  

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More Thoughts on Masonomics... Ed Leamer...

Econlog is a blog devoted to economics education. So here's a quote from a recent book.

Being producers, the advisory group was more concerned with increasing production--for instance, by opening up the Arctic to more development--which would presumably increase its profit, than with conservation. It was a policy which put America's security at risk because it means more money goes to the Middle Eastern oil countries that fund terrorism, and because higher oil prices weaken the U.S. economy while benefiting the oil companies.

So the author is saying that higher production of oil leads to higher oil prices. Is that claim true or false?

I won't tell you the author. That's irrelevant to judging the claim. I'll save that for a later post, although in this world of Google, that's not hard to find.


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COMMENTS (14 to date)
ThomasL writes:

I'm more puzzled by the fact that the Arctic is, apparently, in the Middle East.

The only way any of that quotation makes sense is if "a policy" (in the second sentence) is referring to conservation, not to increased production. Is it possible that is what the writer meant?

Miracle Max writes:

This excerpt neglects the context, which it doesn't take a Ph.D. to figure out. The alternative to which the author contrasts the drill-baby-drill policy (including an intent to extract oil from the Arctic) is conservation. The DBD policy entails reliance on a finite resource that in the long run, Arctic supply or not, should get more expensive. That's the idea. You could contest it without the cheap shot at an economist whose shoes you may some day be fit to tie.

Carl The EconGuy writes:

I think we all recognize Paul Krugman economics when we see it, a man who apparently does not even know how to tie his own shoes, if Miracle Max is to be believed.

PK economics will of course raise prices in the US, which with inelastic demand will fatten the Arabian princes and have them laughing through all their wonderful Arabian nights, including some extra dancing girls thrown in from their hard earned PK profits.

What it won't do is to make green energy any cheaper in absolute terms, only in relative terms. So Miracle Max's PK economics still leaves us poorer.

You want to speed up the greening of the earth? Then accelerate the pace at which we consume non-renewable resources, because their prices are then bound to go up, and believe me when I tell you that they will be used, one way or another. So, let the drilling begin wherever there is unexploited oil, and let's use up all that filthy oil and then turn to nuclear energy. Apres nous, le deluge vert! Let's party like there's no tomorrow -- save Detroit, buy a Hummer.

Alex J. writes:

More oil from the arctic would reduce the marginal benefit provided from Middle Eastern oil without increasing its quantity, thus impoverishing ME producers somewhat. Normally, increasing the supply of oil would reduce the price per barrel, not increase it. Though with increased volume, this could still lead to higher net profits.

If one was concerned with reducing the use of oil, you'd get that with a higher price. I believe the Pigou club advocates higher taxes on gasoline. The price would go up regardless as supplies dwindled -- until some innovation offered a dramatic improvement over oil.

Gavin Andresen writes:

I'll try to channel my inner Green:

"Well, producing more oil increases their profits in the long run, because cheap oil kills any better technologies (like solar and wind power) that might compete with oil, so they have us over a barrel and can charge as much as they want later."

Which is false, but unfalsifiable, because "later" is never "now."

ThomasL writes:

MM,

I have to disagree. That quotation is poorly worded at best.

Stating that drilling in the Arctic by the US causes more money to be sent from the US to the Middle East simply skips over too many layers of an argument to be accepted as obvious truth.

There is an indirect, hypothetical connection that increased US production would cause increased demand from all (including foreign) sources, a point which you maintain in your post, but it isn't really a complete statement that this demand (driven by new production) will outstrip that new production (increasing prices relative to the lower production) without evidence to support it. Neither is it a fact which can be stated with blunt certainty. Increased US production, as such, is simply increased US production. Its affect on world, and specifically Middle Eastern production, cannot be definitely predicted.

The argument that we'll run out eventually, and that as we do oil will get expensive, doesn't incontestably lead to the conclusion that by increasing current production we'll end up paying the Middle East lots of money we wouldn't have otherwise done.

The more I think, the more I have to say, it simply makes no sense whatsoever. You cannot realistically argue both sides at once. You cannot argue we'll send more money to the Middle East because oil will have insufficient production some day (scarcity, for whatever good reasons, is still low production) and also argue that increased production produces the same effect. I suppose you can argue that increasing production means we run out faster, but if we don't process what we have access to now, it is the same as not having it at all.

All told, you can make an argument against oil entirely, but I don't see how you can make an argument that increased production (particularly citing increased domestic production) benefits the Middle East at our expense, and that decreased production benefits the Middle East at our expense, and that both happen for the same reason.

Mark T writes:

The quote says that "increasing production in the Arctic ... means ... that more money goes to the Middle Eastern oil countries that fund terrorism ..." I guess I am not just not smart enough to figure out how.

Miracle Max writes:

I didn't make a pro- or anti-green argument. I simply noted that Stiglitz was saying that failure to embrace conservation -- forsaking the project to reduce reliance on fossil fuel -- would mean higher prices etc., Arctic supplies notwithstanding. This could be right or wrong, but the quote blatantly misrepresents his argument to make a cheap Econ 101 point.

If some of you idiots can't figure out how to use Google to read the original text and get the context accurately, all evident by reading just one page, you should forsake the Internet and go back to something you can handle, like talk radio.

Jonathan writes:

I agree with Miracle Max. The context of the rest of the paragraph alters the interpretation of the two seemingly oddly juxtaposed sentences that are quoted. The author is describing the long-run effects of not implementing a conservation policy, not the short-run effects of drilling ANWR.

Political Observer writes:

Ok so let's understand this. If we conserve resources and don't use our available resources the Middle East gets less of our money. Yet if we don't conserve and we tap our resources the Middle East gets more of our money and funds terrorism.

The only way that Krugman's arguement works is under two scenarios. The first is that we not only conserve our resources but we effectively substitute oil consumption with some other viable source that we can produce within our borders. That way no U.S. sourced dollars flow to the Middle East and the value of the Middle East resources drops significantly.

The other scenario is that we simply conserve to the point that oil demand drops to the point that it is no longer econonmical to pump out of the ground. Of course that level of conservation may bankrupt our economy but at least we won't be sending dollars to the Middle East to fund terrorism.

It appears that most of your readers recognize how shallow the arguement is even if you stretch it to include the missing parts that would in some way seemingly connect the dots.

AB writes:

Hmmm, I'm inclined to say false because an increase in supply (movement of the supply curve) with any negatively sloping demand curve would decrease price.

However, if there was only an increase in the demand curve and an increase in the quantity supplied, then there would be an increase in price. The problem here is that if a new oil well is discovered, then there would be an actual increase in supply, not just quantity supplied.

The last possibility is that oil is a Giffen good, which would make the statement true.

Greg writes:

Political Observer, get it straight. It's not Krugman.

The argument is exceedingly poorly worded. Basically, Stiglitz is saying that the US is a price taker in the oil market as far as Arctic drilling goes and can't affect price or volume. The choice between Arctic drilling and conservation, however, is a false one, something Stiglitz basically chooses to ignore. He also doesn't take into account the feedback loops involved. If conservation lowers the price of oil, it makes oil more attractive, hurting the development of alternative energy sources. The high price of oil recently has probably done a lot to further sustainable energy, ironically.

What I think is the most amazing is that the terrorist oil states trope has stuck around so long. How many US citizens have Middle Eastern terrorists killed, outside of war zones? A few thousand? So if oil prices are higher, what, do they kill another 500? Lower oil prices save a few hundred potential terrorist victims? These numbers are probably dwarfed by the change in traffic fatalities due to miles driven, so perhaps we're all arguing about the wrong thing. I'd rather focus on the economic impacts than on specious security-related arguments.

Steve Roth writes:

Ignoring the contrapuntal word "conservation" in Stiglitz's statement is typically disingenuous.

Conservation can cut U.S. demand (or demand increase) for (foreign) oil by 3% almost instantly, and by far more over decades--has done so.

It also increases the Smithian holy grail: productivity.

The impact magnitude of increased US production--necessarily over decades, not months or years--is almost as uncertain as projections for carbon-reduction efforts.

And it does not contribute at all to productivity--at least multifactor. Quite the contrary.

I'm with Adam Smith on this one.

diz writes:

Just another quick point here:

It's a mistake to view "oil producers" as a monolith.

Many oil producers do not benefit at all from producing oil in Alaska today. Only a handful operate there, and only a handful would expect to directly profit from seeing access to ANWR open up.

Still, even the oil companies who would not produce oil in Alaska (and would thus tend to indirectly benefit from the Alaska oil being kept off the market) generally support open access to drilling there.

In part, this seems to arise from a view that if these sorts of regulations are not fought in Alaska they will eventually be denied access where they do want to operate. ("First they came for Alaska and I did not speak up because I did not operate in Alaska".) In part, I think they believe it is open access in Alaska is actually the right thing to do for the country.

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