Are YOU propping up a tyrant?

EconTalk Extra
by Amy Willis
Leif Wenar on Blood Oil... James Bessen on Learning by Do...

EconTalk host Russ Roberts showed us a very personal challenge this week...As a self-professed hard-core free-trader, this week's guest Leif Wenar had Russ re-examining some of his views. I know this week's episode had quite the same effect on me...So what about you?

If we care about the oppression of people living in oppressive regimes rich with oil, what should we do? Or more precisely, what can we do that would help the people we're hoping to help? Can we escape the "blood oil" ties to tyrannical regimes through government action? Is there a way to avoid blood oil using a bottom-up strategy? Share your thoughts with us in the Comments, and thanks for listening.

bloody hands.jpg

1. How is the Oil Curse different from the Resource Curse we've long heard about, or what makes oil a special case, according to Wenar?

2. To what extent is the legislation Wenar advocates to combat blood oil just another form of "fair trade"? (Revisit this 2013 episode with Amrita Narlika to explore the differences between free trade and fair trade.)

3. Russ credits Wenar with employing a "clever rhetorical device" in dubbing the oil trade as anti-market. How does Wenar justify this claim, and to what extent is Roberts persuaded by it? To what extent are you persuaded by it?

4. How effective do you think Wenar's proposed legislative solution to the problem of "blood oil" could be? Put another way, how can not trading with oppressive regimes help the citizens of these regimes?

5. Roberts suggested a possible bottom-up approach to the Blood Oil problem? Could an oil company get a significant competitive edge by pledging to avoid oil from repressive regimes? Can you think of an analogous case where firms changed behavior to curry favor with consumers that succeeded?

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COMMENTS (11 to date)
Waylon Flinn writes:

I live in Oklahoma. The Resource Curse is not just a problem of other nations. It affects us, too. Oklahoma has all the problems of the phenomenon: corrupt and unresponsive government, substandard education, a tendency towards religious extremism. For the first time in many years I'm hopeful that these things will change. The proposed regulatory solution makes me fear that those changes will be reversed, and we'll miss out on the opportunities of a better solution.

The recent drastic reduction in oil price has made our economy based on oil extraction untenable. Unlike most of my fellow Oklahomans, I view this as a good thing. Like the lush growth that follows a fire, the culture that would create a vibrant and sustainable economy cannot grow until we remove the loose choking weed of oil dependency. We need this. Real growth is painful. Delaying it will only make it harder.

Reliance on the easy money of oil production has created a bubble. A bubble in which developing human capital is unnecessary. A bubble where beliefs need not be examined or challenged, because a correct and nuanced understanding of the world is not required to remove petroleum from the ground. This affects everything from the importance we place on education, to the way we deploy capital towards new business. I've been fighting against this tendency for years, as an individual struggling against a community stubbornly resisting change in the face of it's own decline. That fight is lonely and painful. Recent developments give me hope that a timely change may be possible. A "fair trade" solution would destroy that hope.

The likely outcome of trade restrictions is an artificial inflation of market price for domestic petroleum. While this might help mitigate the effects of the Resource Curse abroad, it will exacerbate the very real problems here. There are other solutions that avoid this while also better aligning with environmental objectives and expected long term economic and energy trends. The foremost among these is solar.

Everyone knows that burning fossil fuels is bad for our health. Even climate change skeptics would be nauseated by the smog on a Beijing street. Cost per installed watt of solar is on a declining exponential curve. I would much prefer incentives that encourage investment in this to the bolstering of continued reliance on energy sources that are as destructive at home as they are abroad. I've heard of a mythical point in the past where we led the world by example. I'm hoping for a point in the future where it's a livable reality.

Amy Willis writes:

@Waylon, thanks for your thoughtful comments...I can certainly appreciate your situation...I would, though, ask you another version of the question Russ asked Wenar on #TWET. That is, let's assume that solar is the best alternative available to avoid the problems in the oil market...Is there a bottom-up means by which this could be effected, rather than a top-down/legislative one? Are solar companies just getting the incentives wrong? Why aren't the oil companies getting involved in solar if it's so complementary? Any thougbhts?

Gary Goubeau writes:

Too lazy too respond in more fully, but:

The author is the most naive guest ever to come to ECONTALK.

His first mis-apprehension, from which all subsequent confusion follows, is to fail to recognize that all states - the bosses that is - are the guys with the guns with whom the people have made a devils deal for protection, and in the welfare state, for sustenance. "Might makes Right", I seem to remember this in Camelot, the movie that is.

Contrary to his argument, that the state monopoly on violence controls the population is true in this country and every other country. It's just that in some countries the elite have managed gain or retain a greater control of state resources.

The guest identifies these countries as tyrannies.

In the oil rich Middle East the governing elite has control of oil resources because only the modern nations had a use for it and the technology to extract it. The masses had no understanding of its value and could not have developed the resource given their technological backwardness. It was left to the ruling class to sell it to the oil using states. This technical backwardness persists and increasingly the people are wards of the state and are supported by the oil revenue provided by the oil users.

Attempting to change this so called tyranny in Iraq is what brought the neocons and George the 2nd to such ignominy.

To think these oil rich regimes can be deposed with sanctions, which is what I think he is recommending, is the oldest bad idea in town.


Waylon Flinn writes:

@Amy Thanks for engaging. Regarding your questions:

I think a bottom-up solution to solar ubiquity is not only possible but inevitable. It will happen. It's just a matter of time. The question is, in the balance between incumbents and better alternatives, on which side of the scale do we want government to put their hefty thumb?

As to why existing energy companies don't transition toward solar, I think it's a matter of what former guest Cesar Hidalgo would call tacit knowledge. Existing large energy companies aren't really energy companies. They're oil and gas companies. Those organizations don't have the institutional knowledge that would allow them to transition to a very technical system of energy production. They don't know any exotic materials scientists. They don't have connections to highly skilled optical technicians. They aren't accustomed to innovating for their supper. This technology is an existential threat. In my experience those most affected by the Resource Curse are the organizations who profit from it.

jw writes:

Unfortunately, we are a LONG way from unsubsidized solar being cost effective (and reliable). There are enormous technical challenges. It is not just a lack of properly incentivized scientists, there are already a lot of them working for billions under government grants, it is a matter of physics.

Like the Saudis, the oil companies realize that they will be out of business someday if they don't diversify their product lines. But they have to make a profit and cannot match government largess.

Don't be surprised if when an alternative does come along that the oil companies produce it, regardless of where it is developed. It turns out that the skill in building huge energy production related industrial complexes and distribution systems while navigating bureaucratic red tape is a competitive advantage that is not easy to come by.

An aside, it is a federal felony punishable by a $250K fine and two years in jail if you kill a single bald eagle. As reported this week, if you kill up to 4,000 a year with wind farms, no problem.

Glenn Howard writes:

I wonder what thoughts Barry Weingast might have about Leif Wenar's analysis and proposed solution.

Floccina writes:

No Government is perfect perhaps we should think about the idea that we should not buy from governments.

Gene writes:

Waylon Flinn, it is ridiculous to caricature oil and gas companies as techno-imbeciles incapable of understanding non-oil/gas technologies and incapable of learning anything. It's an industry that's successfully adapted to immense pressures of all kinds--economic, political, environmental--for decades. Really, you badly damage your own argument with that kind of hyperbole.

Waylon Flinn writes:

@jw The work I participated in as an undergraduate physics student on novel epitaxial growth of gallium arsenide structures on silicon substrates is actually one of the reasons I'm so optimistic about solar. There is an immense amount of innovation happening in the field. The gap seems to be in the area of commercialization. Even then, progress is inexorably being made.

"It is expected that PV solar costs will reach conventional coal parity by 2017"

Do you agree with that statement?

@Gene It's nice to get an outside perspective. I've spent most of my life surrounded by the people who work in and run the oil and gas industry. I have not been impressed. Recent developments have only solidified this impression.

It's good to hear what it looks like from the outside.

jw writes:

Waylon Flinn,

(Sorry, I thought that I responded a few days ago but something must have gone wrong.)

The primary start up that was doing epitaxial growth of gallium arsenide structures on silicon substrates was sold by its venture capitalists to the Chinese because, while the technology was novel, it was 12X more expensive than current solar panel technology. If the VC's had thought that it was economically efficient and scalable to mass production, they would never have sold it.

And I do not agree with the overly optimistic analysis in your link. There are many other studies on the web that show that solar is far from economical, let alone the thousands of square miles that widespread solar farms would consume and the associated environmental impact.

In that same link, a perfect test case (a south facing roof in Phoenix - seriously?) was given and using their own calculations, the UN-subsidized payback period was 20 years for a 25 year life. Granted we are currently in a zero rate fantasyland, but with any reasonable time value of money, this would be an uneconomical investment. Remember that the unseen utility cost of the money must be accounted for in the model, and it is not in your link.

I am energy agnostic. Whenever a portable, energy dense, cheap, clean, politically unencumbered energy source comes along, I will be all for it. Until then (and I am not holding my breath), I disagree that the government should bankrupt some energy industries (coal) while creating billionaires (Musk, et al) by subsidizing energy industries that wouldn't see the light of day if based on actual free markets.

Brian writes:

Waylon Flinn,

Your argument on solar has no almost bearing on oil pricing. Oil is not used (a fraction of a %) for electric generation about 75% of the use is for transportation the rest is industrial goods. Our modern society exist mostly because of cheap transportation that oil allows.

The effective use of Oil is perhaps the greatest innovation in the last 2000 years. So we will continue to need oil until hydrogen tech get affordable with-out government subsidies. Even then I question it because basic physics there are only a handful of recurses that have more energy per pound than oil and I doubt even a modified hydron solution will ever come close. So even best case for long hauls oil or synthesized oils are going to be needed for a long time to come.

No the real innovation would be the ability to create oil without the need to use large amounts of farm land but instead use regional specific resources. For example there was research going on at creating oil out of coil but was stop by the eco Fascist thru regulations. So if a nation could create a oil out of the various local resources that have in plenty that can be cheaply extracted and created then you could see the oil mining industry need dry up.

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