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Friday, February 4, 2011

Wrong Lesson from Egypt

Energy self-sufficiency is a rotten idea.

One wrong conclusion being drawn from the popular uprising against the dictatorship in Egypt is that the American government could ignore such things if we were “energy independent.” (It’s unclear if this means independent of Middle Eastern oil or completely independent.) A moment’s reflection should be enough to jettison that thought, but even if oil were all that’s at stake, energy independence would be a terrible idea. It’s perplexing that self-described free-market advocates would favor such a policy.

As a student of Austrian economics, I know I cannot foresee what the domestic energy market would look like or what the relative prices would be if all U.S. regulations, taxes, and privileges were abolished. But I submit that those who think the United States would be energy self-sufficient have the same knowledge limitations. It seems highly unlikely that Americans would import no oil from the Middle East or elsewhere. (More on this below.)

But even if things should work out that way, it is not something to be aimed for. Making self-sufficiency a goal would only promote protectionism — to the benefit of privileged interests — and encourage interventionists. Let’s not give them a helping hand.

What if freeing the domestic market did not produce energy independence? Should the government give it a nudge? Do banning imports, subsidizing alternative forms of energy, and mandating conservation sound like good ideas? Have we forgotten all that we know about bureaucratic ignorance, perverse incentives, and naked corruption? When one considers how pervasive energy is economically, one realizes that a serious comprehensive energy policy would require squaring or cubing the current corporate state. No thank you.

Embargo Fears

Concerns about Middle East oil – which persist although only 24 percent U.S. crude-oil imports come from that region – center largely on fears that an unfriendly ruler might cut off shipments. But these concerns are baseless. Any oil-producing country will want to sell to someone. What else is there to do with it? The opportunity cost of leaving it in the ground would be enormous (unless prices were expected to rise). And even if a ruler tried to embargo the United States, the additional oil he sold to other countries (at necessarily lower prices) would find its way here. Economic interest and the market process – despite all the impediments — guarantee it.

I’ve previously discussed the misconceptions about the 1970s OPEC oil embargo. I pointed out that the hardship of that period was strictly the result of the U.S. government’s price controls and other interventions in the oil and gasoline industries, which discouraged producers from bringing supply to market. Even so, “[d]espite the embargo,” economist Donald Losman wrote, “U.S. oil stockpiles fell only slightly, and, by March 1974, they were growing again.”

In other words, the embargo failed. As the Saudi oil minister put it later, “[T]he embargo was more symbolic than anything else…. [T]he world is really just one market.” Bingo.

Another fear is that Middle Eastern turmoil could disrupt oil shipments, and this is surely possible. The answer to that is diversification, which an freed entrepreneurial market would encourage and permit. We need not refuse oil from the region because someday it might not be available.

Dependence Is Good

That should dispel the fears of energy dependence. Indeed, as David Henderson points out, the case for the market is all about dependence. We gain from exchange through lower costs thanks to the division of labor and comparative advantage, which deliver benefits of specialization. Self-sufficiency would be expensive and thus reduce our standard of living, harming the least well-off among us. How in the world can we account for apparently pro-market people looking to the government to “reduce our dependence on foreign oil”?

I don’t wish to underestimate the distortions government intervention has wrought in the energy market or how it encourages consumption of Middle Eastern oil. Imagine that the oil companies could not count on the U.S. departments of defense and state or the CIA to protect their access to and transport of that oil — at hidden taxpayer expense. Imagine that they had to foot that cost themselves and charge prices for their products that reflected those costs, in competition with alternatives that did not have to recoup those expenses. Consumers would then make choices with eyes wide open. Maybe oil from halfway around the world wouldn’t look so attractive. As I said at the outset, I don’t know what a freed energy market would look like. But nothing in this uncertainty supports a policy of energy self-sufficiency. Free the market of all impediments and privileges — and let it take its course.

Whether there are many years remaining of low-cost oil underground or not, the case for freeing the market is the same. As that Saudi oil minister also said, the Stone Age ended but not because mankind ran out of stones. Likewise, the Oil Age will end, but not because mankind has run out of oil.  I would only add: if the market is really free.

I suspect that events in Egypt are only the beginning of a spreading resistance to dictatorship throughout the region. As inhabitants of a land born in rebellion against  tyranny, we should view this with hope. Freedom will enable us to weather any turmoil as best as can be expected. There is no reason to wish for the unnatural state of self-sufficiency.

A final point: One way to help eliminate the need for uprisings such as we’re seeing in Egypt would be for the U.S. government to stop supporting dictators.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.