(Disclaimer: the government should not invest in anything.)

Some people think that we should reduce our dependence on foreign oil.  To this end, they propose that we produce our own oil, or that we subsidize encourage the domestic production of some other energy source.My friend e-mailed me a few weeks ago, asking for my opinion in response to president Bush repealing his portion of the offshore-drilling ban. (ed., I have no idea whether the link still works)

Check out this article along with Bush’s short speech from today, if you get a couple minutes. I’d really like to know what your opinion is.

The problem is not a dependence on foreign oil. It’s a dependence on oil, in general. Even if the U.S. could produce a lot of oil internally and at a competitive cost, that oil would still find its way to a global market, and would not be immune from the effects of scarcity and increasing demand. The only way to prevent this, is to implement even more laws (at a non-zero cost) in order to keep the oil within the country’s borders; which is to say, create disincentives to invest. And the only way to overcome this, is essentially to force people to produce oil even though they don’t want to. Charming, huh?

I’m generally supportive of any measure which makes it easier for business to supply people with things that they want to buy. But there are numerous other restrictions that could also be repealed: ending the moratorium on the construction of new refineries would certainly help.

One oft-repeated fallacy in the article that I’d like to point out is the assumption that speculators somehow cause prices to increase:

Oil traders have been bidding up the price of oil based on a perception that there is not enough supply to meet demand.

If their perception is incorrect, they’ll lose their asses on contracts to purchase oil at prices higher than the prevailing future market would bear. Keep in mind that for every future contract, there is an equal and opposite future contract: for every long buyer anticipating higher prices in the future, there is a long seller who is anticipating lower prices in the future — but nobody ever says prices are too low because of speculation.

That said, drilling for oil is a long-term solution, and not likely to have much of an impact on prices at the pump in the near future. Further, unless they discover an unknown Saudi-Arabia sized oil-field below the surface, the quantity yielded isn’t going to be significant. I think Congress is not likely to repeal their portion of the ban this year (either by vote, or by allowing it to lapse) because it is a problem of greatly concentrated interests and widely dispersed benefits. Congressional districts near the coasts have (historically) overwhelmingly disapproved of off-shore drilling, even though it’s probably in the better interest of everyone else.

I think it’s mostly a non-starter; as long as the increase in quantity demanded outpaces the increase in quantity supplied, there is no reason to think that prices will go anywhere but up. Since 40% of the world’s population (China + India) is in the midst of an industrial revolution, there’s little reason to believe that demand will decrease, or even level off.

In a previous post, the peak oil myth, I argued that we’ll never run out of oil . Ultimately, the solution is going to be found in some sort of renewable resource, but I also object to any subsidies granted to these industries – they will be profitable enough when the time and technology are right, and there is no reason to believe that the particular industries picked by politicians are the right industries to subsidize, anyways.
He replied:

Interesting.

Even if the price of oil would not be reduced, I would still like to see more domestic production. It would create more American jobs, if nothing else. Same goes for updating and/or building more refineries.

I guess your opinion about granting subsidies to specific types of renewable energy research is understandable, given your general Libertarian/laissez-faire economics disposition. But isn’t there a way to speed the process up? Do you think that the government could productively use any subsidies/grants to encourage renewable energy research of any kind? What about grants for university research on renewable energy possibilities? That would probably be more productive than picking and choosing what type of technology to throw money at.

I’m sure renewable energy will take off at some point, I just hope it’s sooner, rather than later.

Opening up off-shore drilling could certainly promote employment – same for building/updating refineries. Employment could also be greatly promoted by removing or reducing licensure restrictions on most occupational professions. Do you really need a license to cut people’s hair, or to give manicures? In most states there is no license requirement for tattoo artists, by far a more dangerous procedure than getting a buzz-cut, and you don’t hear very many stories about tattoos gone horribly awry, why would haircutting be any different?

Is there a way to speed up the process of discovering renewable energy?

Implied in this line of questioning is that “sooner” is preferable to “later.” Well, you’ve got to ask yourself: “preferable, to whom?” and “preferable, according to what metric?” Of course it’s preferable if you don’t have to pay for it. Everyone wants less-expensive fuel, for which somebody else is tasked with paying the Lion’s share, in other words, if you’re picking up the tab, I’ll have the top sirloin. No, when we say that we’d rather have something sooner than later, we have to be able to quantify it in terms of time preference, what are you willing to give up now in order to have energy in the future. (Not, what are you willing to make me give up now in order that you might have energy in the future.)

If the sum of the costs required to develop some alternative source of energy are (in the present) judged to be unprofitable then common sense dictates that preference is given to the future; R&D, production, etc., will be deferred until either the cost of gasoline becomes too high to bear, or the availability and technology required to develop an unknown alternative become more profitable, or some combination of the two forces working together.

Until someone can say “I have developed a less-expensive alternative,” or, “I have an investment-quality idea ready to mass-produce,” it doesn’t really matter if everybody thinks that “gas is too expensive.” Too expensive compared to what? Compared to what prices used to be? There is no valid frame of reference for the opinion that current prices are too high.

Times change, and shit happens. It’s unfortunate, but man is pretty goddamn smart, and he’ll figure out a way to overcome this problem in due time. We don’t need oil, we need energy. It’s there for the taking, we just haven’t figured out how to harvest it, yet.

Could government productively use subsidies/grants?

Government can’t productively use anything. By definition, they overpay for everything.

There’s simply no reason to presume that legislators, who are neither businessmen renowned for their acumen, professional economists/market forecasters, or venture-capital entrepreneurs, would be able to direct those monies in a more profitable and productive manner than those more qualified at judging risk, return, and market conditions. Hell, Amtrak loses millions of dollars every year, but they keep renewing it. We spend billions of tax dollars each year subsidizing the production of grain which we then dump on the world market, impoverishing agrarian third-worlders which then require even more aid from our government.

Perhaps most importantly, by subsidizing a particular type of renewable energy (a subsidy is in effect, a guaranteed profit) government erects artificial barriers that keep competition from entering the market: if there is guaranteed income in corn-ethanol, it’s hard to attract investors and raise capital if your business-model is not corn-ethanol. In this way, the future state of the market is artificially bent towards a particular product, which may not be the best or cheapest. From a utilitarian viewpoint, even if it’s better than what we have, it’s worse than what we could have, and therefore represents a failure, a waste of billions of dollars that can never be recouped.

Distortions also ripple through other markets: when corn-ethanol is subsidized (I’m using ethanol for example’s sake), land is increasingly devoted to the production of corn for ethanol, and not for feed or livestock. Other grains become more expensive because they are produced in fewer quantities and demand has not changed, and livestock becomes more expensive because they cost more to feed.

What about research subsidies/grants?

I don’t know if there’s a stronger case for subsidizing research at University as opposed to for-profit corporations; all you’re doing is giving the money to one group of people instead of another. The question here is that if research subsidies were such a surefire win, why don’t smart businesspeople invest in joint partnerships with Universities?

Another point of contention is that every $ worth of subsidy/grant is a tax dollar taken from an American citizen who would’ve (most likely) otherwise spent that money on something other than oil. From the point of view of just about any individual, that money would be better spent on something of more immediate import: staving off foreclosure, paying off a creditor, paying for a child’s tuition, buying sirloin instead of ground chuck, etc. To this end, there’s no conceivable way that government redistribution of tax dollars could be more productive than if the individual had directed that money according to his own wishes.

To which he responds,

So let me get this straight…you’re basically saying that there should be no regulation/taxation/etc. of anything, and that everything will just work out for the best on its own. I wonder what a world like that would look like…

In a nutshell, yeah.

If you’re worried about energy costs, you should probably build yourself an earthship, look for a way to buy out at the bottom, instead of trying to find a way to waste even more of your productivity.