To end our dependency on foreign petroleum we must subsidize it!

dget — Thu, 01 Nov 2007 20:14:00 GMT

Former commander of U.S. forces in the Middle East and retired Army Gen. John Abizaid recently revealed his opinion that the US military won’t be able to come home from Iraq for another 25-50 years, citing oil as a primary reason for continued occupation (link).

To quote the general: “I'm not saying this is a war for oil, but I am saying that oil fuels an awful lot of geopolitical moves that political powers may have there, and it is absolutely essential that we in the United States of America figure out how, in the long run, to lessen our dependency on foreign energy.”

To me, this reasoning would suggest that our current military action in the Middle East is precisely based on oil, and at its very core is a mercantilist approach to global policy. But regardless, isn’t the war itself an indirect subsidy favoring the continued use of foreign petroleum? Won’t one of the outcomes of the war be continued access to foreign petroleum supplies at reduced expense? If this is the case one can clearly see that some variety of subsidization has occured.

The very easy jump in logic, then, is that the war itself is preventing the proscribed reduction in our dependency on foreign energy by 1.) artificially reducing the price of foreign petroleum, consequently decreasing the potential of new energy solutions to be competitive, thus decreasing the economic incentive to innovate and 2.) by taking potential investment dollars away from the entrepreneurial pool that will ultimately reveal said innovations.

Consider the possibility that the trillion or so dollars that have already been spent on the war have worked to decrease the price of oil by X percent, leaving us with a current price of Y dollars/barrel with Z equaling the price/barrel without the subsidization effect of the war. To get the current price of oil, then, we would use the following equation:

Z(1-X)=Y

Thus, any alternative solution available where, ceteris paribus, the cost comes out to be greater than Y but less than Z would be economically unviable solely because of the subsidization effect of the war. In this scenario the war clearly works against a reduction in foreign petroleum dependency.

Ultimately it all comes down to the old economist’s assertion that the world will never run out of oil. Why? Because as supply dwindles and demand remains constant or increases, the price will become more and more prohibitive and the market will inevitablly find a less expensive, more viable solution.

It’s too bad that once again the US government has failed to understand even the most basic of economic assumptions.

dget : Petroleum Iraq War Subsidization dependency foreign

To end our dependency on foreign petroleum we must subsidize it!