-- Robert Bryce, Slate magazine
Irving Kristol wrote in The Neoconservative Persuasion that neoconservatives "tend to be more interested in history than economics or sociology." If neoconservatives want to launch a war over oil using hybrid automobiles and plant-based bio-fuels, then I fear that the cost of their economic ignorance could make the invasion of
What upsets neocons and others is that with oil prices high,
Review of Oil Econ 101
In Oil Econ 101, I tried to explain why there is no way to extricate ourselves from the market for Saudi oil. Briefly stated, the point is that oil is oil. Think of every country's production as flowing into one big pool, where it all gets mixed together before consumers draw on the oil for consumption. Given the commodity nature of oil, we cannot arrange to reduce demand for Saudi oil alone. If we are going to reduce demand, it has to be for oil in general. The effect of even a 10 percent reduction in world oil demand on the number of barrels of Saudi oil consumed would likely be minimal, because Saudi oil is the cheapest oil and hence the least likely to be rendered uneconomic to produce.
The point that I made in Oil Econ 101 is that it is possible, and sensible, to separate economic issues from political issues. That is, it is possible to confront
In the larger sense, the
Why do so many people want to wage economic warfare against the Saudis? Certainly not because of any evidence that economic warfare is effective. We have had sanctions against
Economic warfare is a "feel-good" approach that provides a false sense of accomplishment. It is a form of protest politics rather than a serious effort to influence policy. See Don't Smoot the Weasels or Free Trade with the AARP.
Costs of Conservation
Energy conservation sounds like a painless way to lower the Saudis' income. Who could be against conservation?
The point to keep in mind is that any oil conservation program will do two things. First, it will reduce our ratio of oil consumption to Gross Domestic Product (GDP, the total value of goods and services produced each year). Second, oil conservation will reduce GDP. The reason it will reduce GDP is that we will have to substitute other factors of production, including labor, capital, and more costly forms of energy, in order to conserve on oil.
I have received emails suggesting that the
The reality is that energy conservation is a feeble tool for foreign policy. Significant conservation could be very costly to our own country. It might have only a small effect on Saudi oil revenue. It is not at all clear that a drop in Saudi oil revenue would bring about favorable changes in their policies toward terrorism.
The most cost-effective policy for trying to reduce the oil revenues received by
Compared to a tax, other policies, such as fuel economy standards for automobiles, would be less effective. Raising the fuel economy of new cars would do nothing to discourage people from driving older cars with low gas mileage. Moreover, if the price of gasoline remains the same, better fuel economy in cars might encourage people to drive more, with little or no net reduction in gasoline consumption.
Even a fuel consumption tax would not reduce world demand for oil by as much as it would reduce our own consumption of fuel products. That is because as the price of oil declines, demand will increase in other countries.
Another adverse effect of a fuel consumption tax would be on the incentive to explore and produce oil elsewhere. Peter Huber and Mark Mills argue that there are large oil reserves in the
In my view, the worst policy option of all is to subsidize the use of alternative forms of energy. If other forms of energy are not economical on their own, then taxpayer subsidies are only harmful. The use of subsidized alternative energy does more damage to our own economy than to
We have a real foreign policy issue regarding
However, I believe that trying to contort our economy in order to reduce oil consumption is a poor way of addressing the real foreign policy issue. It would be difficult and very costly for the
Although engaging in the protest politics of trying to reduce the price of oil would be ineffectual, it would not be inexpensive. We could easily cost our economy hundreds of billions of dollars in annual GDP for many years.
In contrast, if we were to invade