“Energy Independence” Would Be Economically Crippling; “Global Warming” Is a Crippling Theory
[Napoleon] did not realize until it was too late that the only closed political economy is the world economy. Britain could not be starved into submission by blockade unless she were totally cut off from the world. As long as Britain could trade with any nation outside France, it was thus trading indirectly with France.
—Jude Wanniski, The Way the World Works
Many years ago, while flipping through the television channels late at night, I stopped on HBO’s Real Time hosted by Bill Maher. No real fan of the show, or Maher’s politics, I nevertheless put down the clicker and watched a bit. Maher is not entirely devoid of insight. That night he used a photo of the Cuban dictator Fidel Castro wearing an Adidas track suit to make the point that embargoes are worthless as economic punishment for miscreant countries and their leaders.
American politicians can pass a law against exporting goods to Cuba,* but Cuban consumers (a very small category of persons, comprising Castro and a few other high-ranking figures) can buy U.S. goods from countries that trade with American businesses. Adidas is not an American brand, but Castro might well have been wearing Nike, which he could have bought from any country other than the United States where Nike sells its apparel—which is to say, almost any other country. There is no accounting for the final destination of any exported product.
Unfortunately for Cuba, an end of the U.S. embargo would not change much. People trade products for products, and the rulers of that ailing island, by severely limiting property rights, give their people little incentive to produce. Slavery, apart from its inherent immorality, is a bad economic idea, because if people cannot keep the fruits of their work or investment, they won’t work or invest. In chapter one we saw that taxes are a price placed on work. In Cuba, work is almost 100 percent penalized. Cubans, therefore, lack products of their own to exchange for American goods. Lifting our trade embargo with Cuba, therefore, would have no effect without a liberalization of the island’s economy.
What about those internationally venerated Cuban cigars? Couldn’t they trade those with us? It’s a good point, but as a visit to any cigar bar in this country reveals, the Cubans already export their cigars to the United States. There are laws against this export, but the Cubans do not necessarily send them here directly. American cigar aficionados buy Cuban cigars from merchants in other countries that do not have a trade embargo on the island nation. Again, there’s no accounting for the final destination of any good. Americans can obtain Cuban cigars as readily as if they were manufactured in Winston-Salem, North Carolina.
Thousands of miles east of impoverished Cuba is another troubled region, the Middle East. There Israel sits, a tiny sliver of land within missile shot of many of its surrounding enemies. With their rich oil deposits, some of these enemies are not lacking in the material resources to “push the Jews into the sea.”
Israel has historically been fuel “dependent,” but it might be sitting atop billions of barrels of oil that innovations in drilling will make accessible for the first time.1 Many are encouraging Israel to find that oil in the hope that vast new reserves might drive down the price of oil to the detriment of its hostile neighbors. But the economics of comparative advantage dictate that Israel should leave the oil in the ground. Retrieving it would be economically crippling.
Oil is by no means expensive today. Instead, the dollar has been cheap. The price of oil has always been tied to the dollar. In 1971 when the dollar’s price was fixed at 1/35 of an ounce of gold, an ounce of gold (that is, thirty-five dollars) bought fifteen barrels of oil at $2.30 a barrel. Ten years later, when the dollar was worth 1/480 of an ounce of gold, that same gold ounce still bought fifteen barrels of oil, now at thirty-two dollars a barrel.2 Oil is priced in dollars, and when the dollar weakens, the prices of gold and oil rise. In 2014, with the dollar worth 1/1379 of an ounce of gold, an ounce of the yellow metal still buys fourteen barrels of oil.
Movements in the price of crude have little to do with supply and plenty to do with the value of the dollar. Flooding the market with Israeli oil, therefore, would not destabilize its hostile neighbors. The United States is the only country that can substantially affect the price of oil. It would have to pursue a stronger dollar, and in fact the dollar has strengthened considerably since 2013, giving us much lower fuel costs, as one would predict.
Others will argue that Israel should produce oil in order to achieve “energy security.” That is one of the main arguments traditionally made by proponents of “energy independence,” who seek to have a secure supply of fuel in times of conflict. But history shows that this policy is an affront to basic economics. During the mid-nineteenth century, fears of a food embargo arose in Great Britain. Free trade, the argument went, might decimate British agriculture. The Corn Laws were meant to ensure a food supply for the kingdom’s troops and people in times of war. The problem with that argument, however, was that since 1810 Britain had been at war with nearly every European power, and it still managed to import 1,491,000 quarters of wheat from the countries it had been fighting.3
The economics of the matter had not changed a century later. During World War I, the Royal Navy imposed a blockade on Germany, hoping to frustrate American trade with the Central Powers. U.S. exports to Germany plummeted, but exports to Sweden and other Scandinavian countries suddenly soared.4 Germany could not trade with American producers directly, so it traded with them indirectly through countries that maintained normal trading relations with the belligerent nation.
In the late 1930s, when troubles arose between the United States and Japan, America restricted the sale of oil and steel to Japan. Modern history books assert that the need for oil and steel forced Japan into war with the United States. In truth, Japan had no trouble importing either commodity. It imported steel and oil from non-U.S. sources, including fuel from Shell Oil that was sourced in the Dutch East Indies.5
The most famous embargo of all was in 1973, when Arab countries refused to sell oil to the United States and the Netherlands. As Jerry Taylor and Peter Van Doren, scholars at the Cato Institute, have pointed out, “oil that was exported [by Arab countries] to Europe was simply resold to the United States or ended up displacing non-OPEC oil that was diverted to the U.S. market. Saudi oil minister Sheik Yamani conceded afterwards that the 1973 embargo ‘did not imply that we could reduce imports to the United States. . . . [T]he world is really just one market. So the embargo was more symbolic than anything else.’”6
But isn’t the oil shock of 1973–1974, in which the price of gasoline rose by 120 percent from October to March, a matter of historical record? That’s a good question, and Robert Bartley answered it in The Seven Fat Years: “The real shock was that the dollar was depreciating against oil, against gold, against foreign currencies and against nearly everything else.”7 The price of commodities across the board—from wheat, to meat, to soybeans—went up as the dollar fell. In short, the oil shocks were dollar shocks, and they would have occurred exactly as they did even without an Arab oil embargo.
Now let’s apply these lessons about embargoes to Israel. If Israel went to war with every single oil-producing country in the Middle East, and if those enemies embargoed the sale of oil to Israel, Israel would still consume fuel as though the oil had bubbled up in Tel Aviv. Trade embargoes defy basic economics, and as long as somebody is willing to trade with Israel, it will get the oil it needs. But defying comparative advantage would harm the country’s long-term economic health.
The problem with the oil industry is that, contrary to what most people think, oil exploration is not very profitable. Mark Perry, an economist at the American Enterprise Institute, has calculated that the energy sector ranks 112th among all industries in profit margins.8 Now, Israel boasts the highest density of technology start-ups in the world. There are more Israeli companies listed on the NASDAQ exchange than from the whole of Europe. Venture capital investments in Israel are 2.5 times greater, per capita, than in the United States.9 That’s a pretty powerful economic signal that Israel’s comparative advantage lies in technology. Israel is the LeBron James of technology. Diverting its resources from tech to oil would be like James leaving basketball to play football. He could probably make a nice living as an NFL tight end, but he’d make nowhere near what he makes as the best basketball player in the world. That doesn’t mean private investors shouldn’t be free to invest in oil exploration in Israel, but it suggests that some sort of organized national effort to achieve “energy independence” would be misguided. As Cato Institute president John Allison regularly observes, the consumers have all the power. As long as there is demand for oil in Israel (or the United States or anywhere else), it will reach that country at the market price. Oil producers need the world’s consumption far more than Israelis need their oil.
If we apply this same analysis of comparative advantage to the United States, we reach the same conclusion—energy independence should not be our national priority. But since oil is priced in dollars, some worry about the dollars flowing out of our country to buy oil. The destination of those dollars, however, doesn’t make any difference. They will end up where they will achieve a return—that is to say, the United States and other countries that use the dollar as the medium of exchange and investment. What’s important is that they will often return as investments in profitable ideas.
The electronics and computer equipment sectors, in which American and Israeli companies shine, enjoy profits per dollar of sales of 14.5 cents (U.S.) and 13.7 cents (Israel). Microsoft earns twenty-seven cents on every dollar of sales. In the oil industry that figure is 8.3 cents.10 Internet businesses enjoy profit margins of 23 percent, which dwarf the 6.1 percent average of the oil industry.11 The most productive sector of the American and Israeli economies is technology. A politically driven national quest for the false god of “energy independence” would be the equivalent of LeBron James’s splitting his time between basketball and football—unnecessary and counterproductive. Financial, human, and physical capital would be pushed into a sector with relatively low profits at the expense of pursuing higher profits elsewhere. All of this effort would be expended to produce a commodity that will always be available in abundance at the market price.
Oil companies, moreover, are sitting ducks for the depredations of tax-happy politicians, further diminishing their appeal as investments. As I mentioned earlier, ExxonMobil paid thirty-one billion dollars in taxes on its profits in 2012, more than any other company in the United States.12 Of the ten most taxed U.S. companies, three—ExxonMobil, Chevron, and ConocoPhillips—are oil companies.13 Google’s, Nike’s, and Apple’s most important assets are the people who show up for work each day, and if taxation ever became too onerous, all three companies could move without missing a beat. Who would notice if the GooglePlex moved to Bermuda? But the most important asset of oil companies is oil in the ground, which cannot be moved. ExxonMobil can’t move Prudhoe Bay or the Bakken Shale. Precisely because oil is immovable, profits from its sale are easy for politicians to tax.
Someone might object here that, however nice it would be to follow our comparative advantage, we have got to have oil, and our access to it is seriously unreliable. Most of the world’s oil, warns Peter Maass in Crude World: The Violent Twilight of Oil, “is now in the hands of state-controlled companies like Saudi Aramco, Gazprom, Petroleos de Venezuela, National Iranian Oil Company, and China National Petroleum Corporation.”14 These are the world’s bad guys, and they could cut us off any time they choose.
That’s not going to happen, however. Governments need revenue because politicians, whatever their country, exist to spend. It is naïve to think that these global thugs will shut off a major source of revenue. No matter what happens, the oil will flow.
The United States should treat oil as what it is—a commodity that will reach us in abundance no matter where it is drilled. “Energy independence” is an appealing slogan, but neither the laws of economics nor the lessons of history suggest that it makes any sense.
* * *
If you take your cue from the popular media, it doesn’t make any difference to you whether our oil comes from Saudi Arabia or North Dakota, Venezuela or the Permian Basin. Our most urgent task is curtailing our consumption of oil and other fossil fuels, not finding more of them, because of the looming catastrophe of “global warming.”
I’m no scientist, but I can read market signals as well as anyone else. Those signals are the product of all available information, and they strongly suggest that all the worry about “global warming” is overdone.
The Wall Street Journal’s weekly “Mansion” section is a chronicle of the amazing evolution of high-end real estate. In November 2013 the stories included “Miami House Not Yet Built Hits the Market for $40 Million,” “Los Angeles Estate on 48 Acres Reduces Its Price to $34.995 Million,” “Manhattan Townhouse Brings In $26 Million to Prominent Chinese Buyer,” and “A House in the Hamptons Lists For $38 Million.” Where people are buying property and at what price are market signals pregnant with information.
The prophets of climatic catastrophe say ocean levels are going to rise more than four feet by 2100 because of unchecked global warming, swamping coastal cities like New York. Perhaps. But no matter how much the United States reduces its own carbon emissions, the rising economies of Asia will more than make up for our reductions. And I say, good for them. It is obnoxious for rich Americans to dictate economy-sapping environmental policy to Chinese and Indians striving to live as we do in the West. In any case, the “tragedy of the commons” will prevent a coordinated response to climate change.
And yet coastal properties in the United States continue to fetch enormous prices. Even more troublesome for climate alarmists is that the most expensive coastal communities—places like Malibu, Manhattan, and the Hamptons—are filled with people who say they believe in man-made global warming. Ted Danson owns property in Martha’s Vineyard, as does the environmental activist Laurie David. Al Gore has a palazzo a mile inland from Montecito, California. Global warming’s most famous advocates apparently don’t take their cause all that seriously. Rome is burning while the fire-safety activists fiddle. The market, meanwhile, says the “science” predicting catastrophe is nonsense.
If the markets are wrong about climate change, they will adjust as they always do. If there is one thing that capitalism is indisputably best at, it is providing in abundance. Capitalism and the markets are saying right now that there is no need to invest in wind, solar, and electric cars. If they are proved incorrect, market-driven price signals will lure profit-seeking investors into a green space that they currently will not enter—at least not with their own money.
Implicit in global warming “science” is the assumption that people do not, and will not, adjust to changes. But they do, and they will adjust to rising sea levels if they come to pass. Otherwise, beachfront property would be dropping in value every year in anticipation of the looming cataclysm. Market signals are mocking the presumption that politicians should act on the theory of global warming.
On the other hand, China—one of the worst environmental offenders—is funneling substantial investment into measures intended to ward off the menace of global warming. Market signals say they’re wasting their time and money. But if the markets are wrong and the climate alarmists are right, we’ll know where to buy the products and services to deal with the environmental changes. Just as we import bananas from Guatemala, shoes from Italy, and televisions from Japan, we’ll be able to import green solutions from China. Until then, let others around the world expend taxpayer money on a theory in defiance of the markets. The American economy needs freedom from environmental regulations and an end to tax handouts that subsidize wind turbines and electric cars at the expense of economic growth.
* As this book goes to press, there is an encouraging movement toward normalizing trade relations with Cuba.