The policy of trying to achieve economic self-sufficiency, thus eliminating the need for foreign trade, is called “autarchy” and is associated with warlike regimes, such as Nazi Germany, since war may cut off a nation from foreign markets in products essential to a nation’s war machine. Germany made long strides toward energy self-sufficiency, essential to its blitzkrieg tactics, by manufacturing oil from coal; Germany had coal reserves in abundance, but no oil reserves. The only source of oil, besides its coal, that it could count on was the Romanian oil fields, and their output was too limited to supply the German military’s fuel needs.
Autarchy is a very costly policy for a nation to pursue, because, to the extent the policy succeeds, the nation loses the opportunity to substitute foreign products for inferior or more costly domestic output. A nation that has no exports will have nothing to trade for superior or cheaper foreign products.
Nevertheless it can be sensible to be concerned about the reliability of foreign sources of commodities that are important to a nation’s power or welfare. Most of the world’s oil resources are owned either by unstable countries, ranging from Nigeria and the Sudan to Iraq and Iran, or by unfriendly countries such as Russia, or by countries that are both unstable and unfriendly, such as Venezuela, or by potentially vulnerable countries, such as Kuwait and the other Persian Gulf sheikdoms, and Saudi Arabia.
Anxiety about the supply of oil, coupled with increased demand by rising countries such as China, have driven oil prices very high. That is actually a good thing because it both limits demand and stimulates exploration and development, including development of substitute energy sources. High oil prices have stimulated increased U.S. production of oil, although it has left us far from self-sufficient—we still import about half of all the oil that we consume. And this despite the fact that for reasons that Becker explains, such as substitution of very cheap natural gas (very cheap because of increased supply attributable to hydraulic fracturing [“fracking”]) for oil in power plants, the economic downturn, and the high price of gasoline as a direct consequence of high oil prices, domestic demand for oil has declined.
Should we worry about our continued if slightly diminished dependence on foreign oil? Probably not. Advances in technology, which include fracking, which is used to increase production of oil as well as gas, and deepwater drilling, should offset supply interruptions caused by foreign oil nations’ instability or hostility or vulnerability. Moreover, there are substitutes for oil and oil products as fuel and power sources, and the higher oil prices are, the faster those substitutes will come to market. Among attractive substitutes is simply less commuting—more working from home or living closer to work—and therefore less highway congestion, a negative externality. High gasoline prices, by reducing demand, have the same beneficial environmental effects as high gasoline taxes, which many economists recommend.
High gasoline prices may be a social boon, but they are a political problem. The contenders for the Republican presidential nomination are blaming those prices on Obama. They want the Administration to authorize more deepwater drilling and take other measures to increase domestic production. But unless those measures led to a significant increase in the world supply of oil, which is hardly likely, since the United States has only 2 percent of the world’s oil reserves, oil prices and therefore gasoline prices would be unaffected because, as Becker explains, those prices are set at the intersection of global demand and supply.
Moreover, there is a difference between authorizing new drilling and expanding supply. If the authorization leads to new production sufficient to reduce oil prices significantly, further increases in production are discouraged. Lower prices make it more difficult to cover the costs of increased production, especially since those costs may rise as oil companies are forced to explore for and develop oil in less favorable terrain, as older fields become exhausted.
If we do wish to lessen our dependence on foreign oil, the best instrument is probably a tariff. A tariff would increase the price of imported oil, and therefore encourage more domestic production. Moreover, it would weaken oil exporters, by reducing their output (the United States is a huge market for foreign oil—it consumes about 20 percent of the world’s oil, and half of that comes from abroad). It could actually lead to a reduction in oil prices. If a product has a positively shaped supply curve, meaning that the cost of production rises with output, then a reduction in output reduces the cost of production and therefore, given competition, the price.
"High gasoline prices may be a social boon"
Indeed, lower standard of living for more effort is .... a boon!
What you'd expect to hear form a wealthy intellectual busybody whoose transportation costs are a negligible fraction of his income.
Posted by: T. R. | 04/01/2012 at 08:23 PM
The question of whether reduced production leads to lower prices has little due to the costs of production, which are a small fraction of oil's price, but rather its lack of supply due to lack of availability, which clearly means reduced demand means reduced prices.
Also, a tariff would reduce dependance in the short term, but increase it in the long term as domestic reserves are rapidly depleted.
Posted by: jb | 04/01/2012 at 08:41 PM
You seem to be blindly accepting the left-wing contention that our shortage of oil is entirely due to excessive demand, and/or to the non-cooperation of oil producing countries. In fact, there are two much more important reasons for the shortage.
One, which is mostly new this century, is that China and India are modernizing and approaching our standard of living, which implies that they compete with us for oil (though one can argue that that doesn't directly affect the price, because the price is deliberately set by the Saudis, through OPEC, to their estimate of the most they can charge without it becoming profitable for us to develop alternative sources of fuel).
But the more important reason, which goes back before the "crisis" of 1972-3, is that our own environmentalists have shut off access to large and important existing oil supplies here in the US. For instance, California's coastal waters have been off-limits since the Carpinteria spill of 1971, in spite of the fact that drilling and pollution control technology has improved several generations since then (and that all visible effects of that spill disappeared more than 20 years ago).
The leftists want to lay the costs (in money and lives) of our Middle East wars at drivers' door. I lay them at the eco-doomsters' door. Those people are liars, and their politicians are corrupt.
Posted by: John David Galt | 04/01/2012 at 10:23 PM
Posner suggests that "high gasoline prices may be a social boon" because it reduces urban sprawl ("more working from home or living closer to work") and has "beneficial environmental effects" comparable to what might be achieved through heavier taxation of gasoline. I suspect that Posner places much weight on the benefits of carbon reduction for the environment because the other benefit is overstated.
Expensive gasoline does impose a penalty for those who commute long distances to work, but it does not have a significant effect on urban sprawl unless commuters and potential commuters expect gasoline prices to stay high well into the future. Someone who is willing to travel for hours by car everyday for work will do so because his job pays well or he is desperate for work. In either case, a temporary spike in gasoline prices will not change his commuting habits too much because the cost of relocation can be very high. Only when people expect the average price of gasoline to remain high over many years does the prospect of relocating one's home or choosing a different home become a more attractive option.
Since the price of gasoline is not expected to remain unseasonably high (prices over the summer are expected to be high), the decades long trend towards urban sprawl will not abate. Unless one believes that the world climate is teetering on the brink of a global warming catastrophe, it is difficult to see how a spike in gasoline prices and the benefits associated with slight reductions in traffic congestion from work-related commuting can be a social boon when weighed against the impact on the disposable income of the average commuter, the revenue of restaurants and stores (especially those that are tied to tourism), and the inflationary effect on the prices of goods and services.
Posted by: Mitchell K. | 04/01/2012 at 11:21 PM
"high gasoline prices may be a social boon"
Really?
How can European style living conditions where a typical 1000 sqf appartment in a multistory building in a crowded city costs as much as the American 3000 sqf single family dwelling on quarter acre -- and commuting costs by 1100cc subcompact equaling the commuting costs by typical American vehicle, due to gasoline taxes raising the cost of gas to the typical Euro-level of $9/gal -- possibly represent a social boon and an increase in standard of living?
Posted by: Miller | 04/01/2012 at 11:49 PM
Increasing the pricing of gasoline may create an crucial situation as this comes in the most important things to run the business.
Posted by: send flowers | 04/02/2012 at 01:42 AM
@Miller: I think you may be generalizing European and American standards of living a little too much. At least in the UK and Italy, the average working-class income tends to be lower than that of the US (18,000-25,000 USD per year), but the use of public transportation is a lot more widespread, which lowers the impact of oil price hikes on most low-income families.
I am single and live in a relatively expensive city (Edinburgh, UK) and my annual expenses amount to aprox. 12,000 pounds (19,231 USD), despite being the kind of guy that likes to eat at expensive restaurants twice a week. Having lived in the US before (Santa Barbara, CA) I don't think the standard of living here is that much different, especially when you factor in the cost of health care and education.
I think Posner's "social boon" refers to the positive externalities of high oil prices (e.g. less traffic congestion, environmental benefits, etc.), not (as you mention) the cost of housing which has nothing to do with oil prices and (in my experience) is really not that different.
Posted by: CoonAndFriends | 04/02/2012 at 09:53 AM
Since I don't live in a part of the country with congested roads, I'd like to dispel the notion that higher gasoline prices are a good way to diminish congestion. Sort of like raising popcorn prices in all theaters because some movies at some theaters are crowded. If you have a congestion problem in your city, try HOT lanes or localized congestion pricing.
Posted by: Mike Giberson | 04/02/2012 at 10:57 PM
A little pot is soon hot. @.@
Posted by: supra shoes for sale | 04/03/2012 at 12:54 AM
The reason the IRS does not let us deduct commuting expenses is that an individual's choice of where to live is not a business cost. It is a luxury. If you want to incur that cost and live far from a city (as I do), bear it yourself. Most people I know in Manhattan don't own a car. I am miles from groceries and medical care - a car is a necessity, and an expensive one.
Part of that cost is the cost of facing the market. If gas went to $20/gallon, many people would be forced to live in closer proximity to each other, a definite loss of standard of living in my book. Rural property values would plummet. Any such shift in price is disruptive, as we have seen recently. The increases in gasoline prices have caused a significant change in driving habits. Similarly, the drop in natural gas prices has affected the home heating market. In much of the U.S., insufficiently dense population precludes the installation of natural gas pipes to every home, and we rely on either propane or oil truck deliveries, or expensive electric heat, or geothermal as I have. With natural gas (and thus propane) so cheap, oil delivery companies are rapidly losing business.
One of my main objections to socialism is that it allows people to believe they are productive when they are not. By not paying an honest price for energy, by decades of government "management" of energy, we have been taught that it is an entitlement. Like everyone else, I don't care to dig deeper into my wallet than I must at the pump, but I am happy to see a return of the market, inflicted on us by BRIC's emergent demand pressure et al. If that forces us to realign our national modus operandi, at least we are becoming more realistic, and I count that as a plus.
Posted by: Terry Bennett | 04/03/2012 at 09:40 AM
Terry, Ready for nine to ten dollars a Liter transportation fuel costs? How about eight hundred dollar a month electric bills? How about six hundred dollar a month Gas bills? How about four hundred dollar a month Water bills? How about one thousand dollar a month Food bills? How about...
There comes a point in time that we need to look to our own interests. The most fundamental being to avoid freezing and starving in the dark. Regardless of "BRIC's" impact on the outdated pricing mechanism...
Posted by: NEH | 04/03/2012 at 03:23 PM
test?
Posted by: Jack | 04/03/2012 at 10:21 PM
"If we do wish to lessen our dependence on foreign oil, the best instrument is probably a tariff. A tariff would increase the price of imported oil, and therefore encourage more domestic production. Moreover, it would weaken oil exporters, by reducing their output (the United States is a huge market for foreign oil—it consumes about 20 percent of the world’s oil, and half of that comes from abroad). It could actually lead to a reduction in oil prices. If a product has a positively shaped supply curve, meaning that the cost of production rises with output, then a reduction in output reduces the cost of production and therefore, given competition, the price."
Our free traders suggesting a tariff? Under WTO would that be an option? or draw retaliation?
Better, might be to (at least) raise the Fed Hwy tax (is it still just 23 cents?) to help us pay for the roads and bridges and relieve congestion where we, and business vehicles idle away our fuel and precious time.
Raising gas/diesel prices across the board should, over time, have the same demand dampening effect as that of an import tariff. I assume oil imported from half way around the world would take the hit of less consumption in the US, but if not? hey, a nice little energy price competition war would be quite a pretty sight just now.
Shoulda done it decades ago! But! if we get after it, today we've the great option of fueling our trucks and other heavy transportation with NG (25% of our usage) and apparently, while the Volt and Leaf are slow to penetrate the market, a company seems about to come out with a "300 mile" battery of much lower pricing!
Let's see, if the world's largest energy hog/waster goes on a 20% diet that's a 5% drop (from us) in overall demand. Enough to crack the choke hold of the price manipulators as it seems President Carter's CAFE Std, 55 mile limit and other policies did in the late 70's?
Well, if not? we've at least lowered our trade deficit by $135 billion/year and re-injected that amount into OUR economy year after year!
Posted by: Jack | 04/03/2012 at 10:22 PM
Dear NEH, maybe that's what it really costs, and because the fact has been deliberately hidden from us by well-intentioned governments, we have taken on a standard of living we can't afford on our own, and if we one day are confronted with the reality of that invoice, we'll be forced to change our ways. For instance, the government decided broad home ownership was good public policy, and encouraged it, and we've recently come to grips with the not-so-rosy truth of that vision.
Large numbers of people live better than their production would dictate, because the bill is paid elsewhere. Right now, a large part of what we're receiving in the present will be paid for by our progeny in the future. Some see a benefit in this outcome, namely that many people who would otherwise never sit in a hot tub or have running water with which to fill it have been able to enjoy such comforts because the government has paid for same by taking from others. I however suspect that the non-good blown by this reasonably healthy wind is grossly underestimated and will someday be recognized to have dwarfed the obvious positives, creating generations of less-than-men who think that by mere virtue of their having been born, I owe them more than I do.
Posted by: Terry Bennett | 04/03/2012 at 10:25 PM
Terry, I take it you don't believe in the Judeo-Christian ethic that requires all to become "their brothers keeper". Ahh well... "To H. with them all, let them eat cake"! ;)
Remember, the Revolution will not be televised or carried on the Internet as a thirty second video/sound bite...
Posted by: NEH | 04/04/2012 at 10:09 AM
I thought that was left as an open question in Genesis. In point of fact, I believe (1) no man is an island, and some level of social responsibility is emobodied in the mandate of the individual, and (2) the necessities extend a little bit beyond food, clothing, and shelter, certainly to include basic health care and basic education, and maybe another item or two. Beyond that, I'm not suppressing anyone. I doubt Bill Gates wants to suppress anyone. He'd probably like everyone to be rich enough to afford his products. Where they go (H. or otherwheres) is a matter of personal choice, and I leave each man and woman to it, and I would ask the same.
Posted by: Terry Bennett | 04/04/2012 at 02:35 PM
Terry, Fair enough. But there comes a time, an epiphany if you will, that one must come down off the picket fence and stand on one side or the other and be counted among either the Blessed or the Damned. Remember, the crimes and sins of Ommission weigh as heavily as those of Commission. ;)
Anyway, let's leave behind the realms of Ethics and Theology and return to that rather smelly, grubby and dirty world of Energy and Economics.
Posted by: NEH | 04/04/2012 at 03:31 PM
No moderates allowed at Armageddon? Did not know that...
So, with a nod to Jack Benny: I'm thinking, I'm thinking...
Back to topic, the gypsies say, "The dogs bark as the caravan passes." Btw, we're the dogs.
Posted by: Terry Bennett | 04/04/2012 at 09:53 PM
Terry: Not widespread home ownership that was the problem but a "banking" system that grossly inflated housing "values" all over the nation.
Note the "values" "lenders" were selling into for eight years on the first graph. In addition to the price run-up note that hump soared beyond the traditional ratio of income to home loan.
http://www.jparsons.net/housingbubble/
Then..... on the next graph, note how the bubble outstripped the rental income.
Kinda the perfect storm eh? So oil gouging triggers the pull back in bubble building, as things crumble there are no buyers, then as the layoffs commence, where once (when ratios were proper) a guy taking a job somewhere else in our mobile society could have rented with little negative cash flow, no such thing could take place as the economy crumbled.
Ha! Gates? On the one hand a fine fellow. On the other? I was just seeing ads for "cloud computing" elements "as low as" $8/month. That's a LOT better (for him) than selling XP for $100.
GOOD point about all "being able to afford". Yes, exactly with long stagnant wages we ARE in a demand constrained economy.
"fair", "nice" or whatever the machine being 70% dependent on CONSUMER SPENDING simply will not work.
Stagnant wages for most EQUALS a Stagnant economy for all.
http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/
What do you suppose our founders were thinking when they posited "resources being developed for the general welfare?" ...... a rapacious "banking" sector? with few staying up late to gin up mfg and export jobs and wealth?
Posted by: Jack | 04/04/2012 at 11:10 PM
Terry, The time for thinking is long past. It's become time to act. Before we're all rode down by the "Four Horseman"... ;)
Posted by: NEH | 04/05/2012 at 09:04 AM
So, with a nod to Jack Benny: I'm thinking, I'm thinking...
Posted by: wholesale new era hats | 04/05/2012 at 08:10 PM
Oh gosh, Jack, did you really express above a nostalgic longing for the Carter dystopia of the late 1970s? Say it ain't so, Jack.
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Posted by: aditi | 04/06/2012 at 01:57 AM
I think Posner's "social boon" refers to the positive externalities of high oil prices (e.g. less traffic congestion, environmental benefits, etc.), not (as you mention) the cost of housing which has nothing to do with oil prices and (in my experience) is really not that different.
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