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Wednesday, April 1, 2009

T. Boone Pickens is Right About Oil Imports? It Just Ain’t So!

Folksy oilman T. Boone Pickens has taken to the television and radio airwaves with a $58 mil­lion campaign to publicize his plan for energy independence. Though he’s suffered setbacks, his pro­posal involves building windmills in Texas to generate electricity. Natural gas that had been used previously for electric generation would then be used to fuel motor vehicles, allowing us to “break the stranglehold of foreign oil.”

Pickens’s commercials no doubt cause Freeman readers apprehension. The word “plan” alone rightly pro­vokes worries of coercive schemes. And in concocting such a plan, Pickens reveals himself to be what Adam Smith called a “man of system [who] seems to imagine that he can arrange the different members of a great soci­ety with as much ease as the hand arranges the different pieces upon a chess-board.” The notion of being independent of energy or any other commodity from foreign countries goes against the teachings of Smith, Bastiat, and others who recognize the gains from specialization and division of labor. Nor will readers knowledgeable about rent-seeking, or political entrepreneurship, be surprised that media reports describe Pickens as “heavily invested in natural gas and wind power.” And when he states in his commercials that “this plan will work but it needs your help,” read­ers familiar with Public Choice economics rightly sus­pect that the sort of help Pickens has in mind is tax dollars.

Although all these cautions are appropriate, ignore for the moment any self-interested motives and take Pickens at face value when he proclaims,“I’m 80 years old and have $4 billion. I don’t need any more money.” Instead, focus on the stated objective of his plan—stop­ping the “the largest transfer of wealth in the history of mankind.” As with so many things, it just ain’t so!

Here’s why.  The $700 billion that Americans spend annually to purchase oil from other countries (according to Pickens) is a price not a transfer. A true transfer— unemployment benefits or a taxpayer subsidy to a failing company—is a payment made to someone who pro­vides no good or service in exchange. By nature transfers are zero-sum. One person “gives” through coercive taxation; the other person receives. (Of course, if one throws a few bureaucrats into the mix, the transfer recipients might receive less than the amount taken from the taxpay­ers.) Ironically, it is Pickens, not oil-exporting countries, who has received transfers in the form of taxpayer sub­sidies for so-called renewable electricity generation. And that bit about needing your help—Pickens wants the largess to continue.

By contrast, when one makes a purchase, the money one pays is the price of the good, one side of a mutually beneficial voluntary exchange. Each party to the transaction trades away something in return for some­thing else he or she values more highly. If I spend $2 for a cup of coffee, I’ve made a purchase not a transfer. I get the coffee, which I value more than anything else I could have bought for the $2, and the coffee shop gets the $2, which it values more than the coffee. Readers familiar with John Stossel’s television special about greed will recall him illustrating this point by purchasing a container of milk. Both he and the store clerk said,“Thank you.”

For the $700 billion we send to oil exporters, we get something in return—oil. Our receipt of millions of barrels of oil in exchange for that money is hardly a transfer. We receive a versatile commodity that can be used for everything from making plastics to fueling family vacations. The exporters receive the $700 billion that they can then use to purchase other goods and services.

It is true that when oil was $140 per barrel, we were paying more than we had paid just a few years ago. We certainly are glad that oil is less expensive now. But the case I’m making would hold even if the price went back up. Higher prices would mean that the purchasers of oil or oil derivatives would experience a smaller differnce between their subjective value and the price they pay. If I valued a gallon of gas at $5 (that is, if I were willing to pay up to $5 for it), my net gain from purchasing it would be greater when I paid $2 than when the price was $4. It’s also true that people would find some purchases they might have considered beneficial when oil was, say, $35 per barrel no longer beneficial at $140. Consequently, almost as if guided by an invisible hand, people would reduce their oil consumption by driving less, buying more fuel-efficient vehicles, taking alternative forms of transportation, and so on. Yet none of these truths makes the purchase of foreign oil a transfer.

It is true that much of our imported oil comes from countries with odious regimes. Indeed, it’s difficult to think of countries more antithetical to classical-liberal ideals than Venzuela or Saudi Arabia. It’s also true that exchange with nasty regimes benefits them as it does us. This does not, however, imply that we should boycott them. Since oil is traded on the world market, a boycott— at least if unilateral—would not harm the intended targets. Although it might be nice if our oiltrading partners were nice folks in countries with greater respect for individual rights (the Swiss perhaps), the fact that they are unpleasant still doesn’t make purchasing imported oil a transfer.

If the price of oil again skyrockets, it will present a significant challenge to consumers and producers. There is no need to make their task more difficult with muddled thinking that confuses mutually beneficial exchanges with wealth transfers. T. Boone Pickens has been a businessman all his adult life. He should know better. If he’s putting his quest for taxpayer subsidies ahead of the truth, he is doing the American people a grave disservice.

  • Frank Stephenson is a professor of economics at Berry College in Rome, Georgia.  He holds a B.A. from Washington and Lee University and a Ph.D. from North Carolina State University.  His research interests lie primarily in public choice and sports economics, and he has published in scholarly journals such as Public Finance Review, Public Choice, the International Journal of Sport Finance, and the Journal Sports Economics.  He has also contributed to Regulation and The Freeman and has taught at IHS and FEE summer seminars.