Friday, October 15, 2004

Marketplace 'Elbows' Can Help Solve Energy Problem

Jay Leno recently displayed the new $50 bill to his "Tonight Show" audience. The fine print next to President Grant’s portrait said, "good for one barrel of oil". Jay got his laughs.

A few days later on October 7th, Robert Samuelson wrote in his Washington Post column that Americans suffer a fantasy about oil. Namely, that we believe we have a birthright to cheap fuel. He goes on in the style of Thomas Malthus and cites a "ground-breaking study" that concludes: "the world already uses about 12 billion more barrels a year than it finds."

I can’t believe he used the term "ground-breaking" to introduce his sky-is-falling, Malthusian conclusion about oil reserves.

Robert Samuelson is a journalist by education and by trade. He gets away with economic commentary in his articles because (I think) there is a genuine confusion among his readership with Paul Samuelson. Paul Samuelson, the Nobel economist, most probably wrote the economics textbook that you studied.

I will agree with one thing that Robert Samuelson wrote: "We need to face these realities; neither George Bush nor John Kerry does. Their energy plans are rival fantasies." In this regard, Paul Samuelson probably agrees because he once said, "Politicians like to tell people what they want to hear – and what they want to hear is what won't happen."

Robert Samuelson believes that our country needs a steep gasoline tax to solve our energy problems. He recommends a tax of $1 to $2 per gallon so that gasoline prices will stay high and radically change driving habits while encouraging a shift to hybrid-powered automobiles.

I do not know Paul Samuelson’s position on such a consumption tax. However, Paul Samuelson believes that David Ricardo’s famed treatise on comparative advantage is the one great truth in economics. Because of comparative advantage, we have a trade deficit in oil. In our favor is the fact that the US dollar is the currency of choice in the world. Because of this fact, Dr. Samuelson argues that we are better off to export the pieces of paper that Jay Leno makes fun of and import real goods-barrels of oil in this case.

But let’s put economic theory aside for a moment. If you paid a $2 tax per gallon of gas to the government, then what would the government spend it on? Does the government drill new oil wells? Does the government explore the subterranean world for pockets of oil? No. More likely, Congress would spend the tax on new highways or expensive subways to nowhere. Boston’s billion-dollar downtown expressway and L.A.’s subway are prime examples of what government spending buys.

On the other hand, if oil supplies tighten and consumers drive the price of gas from the current $2 to $4 per gallon, then ExxonMobil will hire every geologist on the planet. If there’s a pool of oil inside Mount Everest, they’ll find it and the higher price will make it worth extracting.

And amid this $4 gas bonanza, there will emerge a genius who invents a practical photovoltaic cell. Another genius will invent a practical hydrogen fuel cell. And a third genius will discover in the science lab how to genetically modify bacteria to convert organic matter directly into hydrocarbon fuel. If you doubt this, think of the Cuisinart attachment on the DeLorean in "Back to the Future, II."

In the end, David Ricardo’s treatise on comparative economic advantage will decide who makes what, where it’s made, and what it sells for. This was a hard sell back in 1972 when Richard Nixon opened trade with China. But look at how the world has changed. There are now just a handful of small nations that are run by die-hard communists or obtuse socialists. France qualifies as both.

The chances are probably good that we’ll pay $100 for a barrel of oil within the next decade. The changes we face will be painful in the short term. Paul Samuelson said it best: "The problem is no longer that with every pair of hands that comes into the world there comes a hungry stomach. Rather it is that, attached to those hands are sharp elbows."

We cannot now calculate the price at which oil peaks in the next few years. But it will peak and then it will recede. We will do what we always do. We will become more efficient, we will discover more oil, and we will invent alternatives. Provided, of course, we let the "sharp elbows" in the marketplace do their job.