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Monday, July 1, 2024

New Study Shows Anti-Oil Policies Could Be Causing More Oil Consumption

The "Green Paradox" shows us that policies aimed at regulating oil may actually increase the speed of oil consumption.

Image Credit: Alisdare Hickson via Flickr | CC BY SA 2.0

Every few weeks, the environmental zealots of the organization “Just Stop Oil” make headlines for trying to destroy something important to bring attention to their goal of stopping oil.

It turns out, though, like many shortsighted policy prescriptions, the means are not conducive to the ends. In other words, legislative efforts to stop oil might cause more oil to be used rather than less.

A recent working paper by Maya A. Norman and Wolfram Schlenker out of the National Bureau of Economic Research (NBER) finds evidence that the “Green Paradox” is real.

But what is the Green Paradox? Well, the idea of the Green Paradox was put forward by economist Hans-Werner Sinn in what Wikipedia calls a “controversial” book. The 2012 book is titled The Green Paradox after the theory.

The idea is relatively straightforward. Those who own oil and oil reserves are rational economic agents. That means that they will extract and sell their oil at a particular rate that maximizes long-term profits. Owners don’t want to pull every drop of oil out of the ground because it would be costly to do so quickly, but they also want to sell the resource at a quick enough pace to meet demand.

However, so-called “green policies” change this calculus. If oil owners believe that sometime in the future a policy will be passed that makes it illegal or even more expensive to sell their oil, they will begin to try to extract and offload the oil before the policy passes.

The result is counterintuitive to shallow thinking—green policies aimed at regulating oil may actually increase the speed at which oil is produced and consumed. This is the Green Paradox.

As I mentioned before, Wikipedia calls this book “controversial,” though it doesn’t cite any source for that particular editorialization. However, even if the book were controversial, this new paper should make it less so.

The authors examine the Green Paradox with a few tests, but one result sticks out.

They examine a 2009–10 Waxman-Markey Bill, a cap-and-trade law which would have been burdensome for the oil industry.

The authors consider prices of oil futures compared to market expectations about the Waxman-Markey Bill’s likelihood of passing. If the argument of the Green Paradox is correct, the price of oil futures should fall as the likelihood of the bill passing increases. Documenting results, they say:

Consistent with this prediction, we find a significant negative coefficient; prices of oil futures decline whenever the expected likelihood that the bill will pass increases. This effect is persistent across all futures contracts, even increasing for longer-term maturities, suggesting that the relationship reflects long-term adjustments in the expected oil price path rather than temporary shocks. Through our analysis we find (i) the passage of the Waxman-Markey bill would have increased global oil consumption 2–4% and (ii) Waxman-Markey deliberations increased oil consumption by 8–27 million metric tons equivalent to 1–3 days of global oil consumption.

So, not only would the bill have led to increased oil consumption if it had passed; the mere possibility of it passing led to millions of tons of extra oil consumption. The Green Paradox stands.

One of the most important functions of economics is that it often shows that the means of policy-makers are not actually capable of achieving the desired ends. Policy-makers don’t like this, of course, which is why good economic ideas, like the Green Paradox, tend to be disparaged with terms like “controversial.”

This shouldn’t surprise us.

In his 1949 magnum opus Human Action, the economist Ludwig von Mises brilliantly highlighted this phenomenon:

It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him.

Long live the mischief-makers.

  • Peter Jacobsen is a Writing Fellow at the Foundation for Economic Education.