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The Oil Dependency Myth

January 3, 2002

There are times when economists come up with "free market" ideas that are so bad, they cry out for a reply. Martin Feldstein, who served as President Ronald Reagan's chief economic adviser, has come out with a "free market" energy plan that defies logic--and even the imagination. Like so many other proposed energy-related policy abominations, it deserves to be trashed even before the scheme is brought out of the box.

Just the first sentence of his December 27 Wall Street Journal article, "Vouchers Can Free Us From Foreign Oil," provides enough grist for a full volume of work, but, unfortunately, there is much, much more. I will deal with as much as I can in this brief space.

Feldstein begins by declaring, "The United States can and should reduce its dependence on imported oil with the goal of achieving complete oil independence by 2020. Otherwise, we will continue to be hostage to the policies of the current and future rulers of Saudi Arabia, Iraq, Iran and their neighbors."  First, like so many other mainstream economists, he confuses the huge number of individual daily economic transactions with that of a mythical single entity, the United States. It is not the United States with whom "foreign" oil producers do business, but, rather, individuals from this country.

To say that the people of the United States are "dependent" upon foreign oil is also a misnomer. Individuals choose to purchase oil from overseas producers because such an action is preferable to other alternatives. I am "dependent" upon overseas oil in the same way that I am "dependent" upon Proctor & Gamble for my laundry detergent or the local butcher for my meat. (This is not to absolve the U.S. government for engaging in bad foreign policy in the hopes of convincing overseas producers to sell oil to Americans at cheap prices. My purpose is simply to point out the absurdity of saying that voluntary economic exchanges are acts of "dependence.")

This is not to deny that because we purchase huge volumes of oil from Middle East producers, political problems in those nations will produce large fluctuations in oil available for our consumption (and wild price swings for gasoline). However, even if Americans only consumed oil that was pumped from wells within the borders of this nation, we still would not be immune from periodic price swings, since there is a worldwide market for the product. Oil is not sold just in the USA, and U.S. prices would always be subject to what happens in the rest of the world.

Why Feldstein gives 2020 as the target date is also an absurdity. If the situation is as critical as he says, why should the USA wait for eighteen more years?  Why not order "energy independence" tomorrow?  The arbitrary date 2020 is simply a rhetorical tool, and nothing more. In terms of its importance as energy policy, it is useless.

If Feldstein and other "energy independence" advocates wish to ask us to believe that domestically produced oil will not be held hostage to politics, they are either naïve or stupid. The single most powerful lobby in Washington, D.C., is the green lobby, and environmentalists are much more hostile to the energy needs of our economy than are even the most anti-American Middle Easterners. Obtaining crude oil means someone has to drill, and most oil-producing or potential oil-producing lands in this country are the property of the national government, which means that by definition, drilling and exploration in those areas will be determined by the political process.

Should one think that Washington would be amenable to more drilling on "public" lands, keep in mind that even after the September 11 attacks, the green lobbyists and politicians refused to budge even an inch on permitting oil drilling to occur in Alaska's Arctic National Wildlife Reserve and on other public lands. A policy that forbade the importation of oil would not necessarily result in more U.S. drilling, but rather in laws requiring even more draconian restrictions in domestic oil usage.

Before going on, I need to deal with an obvious question: Why just oil?  Why not outlaw all imports, since the purchase of imported goods, in Feldstein's opinion, constitutes "dependence"?  It makes no sense to single out oil, and if the U.S. government were to embark on such a policy, lobbyists from nearly every domestic industry would also call for banning of imported goods that compete with their own products.

I now turn to Feldstein's distribution proposal. He acknowledges that even with increased oil drilling in the United States (a very big "if," I might add), there would be less oil available for public consumption. His great "free market" plan--which is something out of the "clever" pages of the economists' lexicon--is to issue ration coupons that freely can be bought and sold on the open market.

During World War II, the government rationed nearly all goods in a similar manner, except that ration coupons could not be legally traded (although people did it, anyway). Individuals who purchased commodities, including food and gasoline, could not make a legal purchase without a ration stamp. For example, a family might be allotted ten gallons of gasoline per week. Once they purchased that amount, they could have no more--unless they could illegally obtain extra fuel coupons.

As one can imagine, such trading, although prohibited by law, was common during World War II, along with the creation of counterfeit stamps, all of which could be purchased by someone willing to risk breaking the law. Furthermore, economists generally agree that such a command-and-control, "one-size-fits-all" scheme is less "efficient" than one that allows for free trading.

However, in Feldstein's mainstream economics imagination, allowing individuals to purchase gasoline rationing coupons on a secondary market is a "free market solution" to U.S. energy problems. Such a viewpoint is breathtaking in its ignorance.

First, there is no free market when government artificially restricts the supply of something, be it oil or sugar. In fact, because the U.S. government restricts the importation of sugar into this country in order to protect politically connected domestic sugar producers, we see a two-tiered pricing system: a world price and a U.S. price. While the U.S. price is determined in an open market setting, there is nothing free about it. The political classes have decreed that U.S. residents are going to pay higher prices for sugar than people do elsewhere.

(Even the "sugar program," as bad as it is, is still better than what Feldstein proposes. At least the government still permits U.S. sugar to be rationed by price, not via ration coupons. Consumers are free to purchase as much sugar as they please, albeit at a higher price than would exist without the import restrictions.)

Because mainstream economics is deficient in dealing with private property rights, most economists cannot understand the simple truth that a ration coupon issued by the government is not private property. Free trading of gasoline ration stamps is not the same thing as allowing a free market in gasoline. If the government were to forbid importation of oil from abroad, all pretenses of a free market would be gone. At that point, people would be prohibited from making exchanges that would have occurred otherwise if markets were free and if individuals could purchase, sell, and own property.

Like the characters in Frederic Bastiat's story of the broken window, Feldstein has made the classic error of assuming that if one thing changes, everything else would remain the same.  It is difficult to even imagine the utter chaos that would occur if the government actually were to restrict oil imports to zero, and the idea that the problems could be eliminated by free trading of ration coupons is silly indeed.

The energy problems that plague this country are government created. From restrictions on drilling to U.S. foreign policy blunders--created in the name of cheap oil--the government has been a veritable "bull in a china shop" when it comes to energy policy. That Feldstein believes another layer of political action would solve our problems makes one wonder how this nation managed to survive his term as the president's chief economic adviser. One would hope that Reagan did not listen to him, just as we should not listen to him now.

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William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University.  Send him MAIL.  See his Mises.org Articles Archive


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