The End of the "Free" Market?

This week has been insane, with the bailout of AIG, the collapse of Lehman Bros and the buyout of Merrill Lynch, and finally the massive $700 billion federal financial rescue plan. It's an unprecedented repudiation of the ideals of deregulation and limited oversight as championed by fiscal conservatives over the past 3 decades. Ronald Reagan, that slick snakecharmer, used to famously say that government wasn't the solution---it was the problem. Well, considering that these federal bailouts were literally the ONLY OPTION for preventing Great Depression-like financial ruin, I wonder what the Gipper would be thinking now. Seems that government was the only solution possible here. Free Market Fundamendalists like to think that the market will solve all problems through some sort of magical, mystical, Santa Claus-like "invisible hand." But what happens when that hand is caught in the cookie jar? Who slaps that hand when it's been bad?

I only wish that the collapse of conservative ideology could happen in a vaccuum and didn't have to drag the rest of us down.

Drill Drill Drill

All the recent talk of offshore oil drilling spurred me to write this essay.

COM 471
08/15/08

“Drill, Drill, Drill”---John McCain, 2008

The U.S. presidential campaign has always been a home for outlandish claims and vague policy promises. From the first President Bush's “No New Taxes” refrain to the current's “Restoring Integrity to the Oval Office,” presidential candidates have never shied away from lofty, persuasive appeals long on emotion but short on facts. As these two examples (and countless others throughout our sordid electoral history) show, these claims are generally nothing more than lip service designed to mobilize voters around a candidate's cause. This year's presidential campaign is no exception. In fact, with all of the current concern over energy, the economy, and the environment, it should come as no surprise that political discussion around the water cooler these days involves the one issue that binds together those three major policy rails: Offshore Oil Drilling.

Republican candidate Senator John McCain, attempting to direct the tenor of this ongoing debate, recently reversed his longstanding position supporting the Congressional ban on drilling in the Outer Continental Shelf (OCS). McCain now argues in favor of drilling, and has featured this issue in the forefront of many of his recent stump speeches and campaign advertisements. Drilling, McCain argues, would help the United States achieve 3 major objectives: (1) a reduction in the price paid by consumers at the gasoline pump; (2) greater energy independence for the United States as a whole; and (3) a reduction in the U.S. trade deficit as a result of lessened oil imports from abroad. (McCain, 2008)

Obviously, McCain's proposal comes at a time when consumers are facing increased pressure at the pump, with gasoline prices having recently reached into all-time record territory. Offshore drilling is such a critical issue that it is literally featured first on his campaign website, ahead of even the current housing crisis and wars in Iraq and Afghanistan. Considering a recent Rasmussen poll found that nearly 70% of Americans support offshore drilling, it is easy to see McCain's political motivation. But will offshore drilling really help achieve the objectives McCain has identified---or is this rhetoric simply red meat designed to appeal to the broadest political base possible? A close analysis of McCain's three major claims shows it to be just another false electoral promise, steeped in emotional appeal yet severely lacking on facts. Let us examine each claim on its own merit.

- - - - -

Claim 1: Offshore drilling will help to reduce gasoline prices

Oil prices, and subsequently, gas prices, have reached record highs in 2008, creating economic and financial hardships for millions of Americans. A number of separate solutions have been offered, amongst them a moratorium on the Federal gasoline tax (also proposed by McCain), pleas to oil-producing countries such as Saudi Arabia to increase production, and even the conversion of formerly food-producing crops such as corn into the oil replacement ethanol. However, none of these solutions has made much of a dent in the price of gasoline, and the high prices continue to affect the overall economy, which has been teetering on the brink of recession for much of the past two years. Because of its critical place in a society which has been built upon the abundance of cheap oil, gasoline price increases have affected all facets of the economy and created a tense environment for nearly every American. Considering the failure of all other approaches in reducing the price of gas, offshore drilling seems to be a perfect solution---or at least the only one left---and the fact that a majority of Americans support lifting the ban seems logical.

Unfortunately, however, many independent economic sources, both liberal and conservative, have roundly criticized the position that offshore drilling will have any immediate reduction in the price of gas at the pump. The Bush Administration's own Department of Energy, in their 2007 “Annual Energy Outlook,” was blunt in their assessment of the impact offshore drilling would have at the pump:

Access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017. Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant. (DoE, 2007)

This bland analysis from an administration comprised of many former oil executives should be taken seriously, yet claims such as McCain's are allowed to take root without any factual analysis of the reality of his position. The last sentence of this quote is most important, as it invalidates practically McCain's entire claim that increased supply through domestic production will help drive down prices; since oil is a global commodity, it is traded on the international market, and that is where costs are determined. The more liberal Boston Globe hits directly on this point, in no uncertain terms:

"Suppose the US produced all its oil domestically," said Robert Kaufmann, director of the Center for Energy and Environmental Studies at Boston University. "Do you think oil companies would sell oil to US consumers for one cent less than they could get from French consumers? No. Where oil comes from has no effect on price." (Boston Globe, 2008)

This basic economic principle---of shared global resources determining price---lays bare McCain's proposal and exposes it for what it is: simple red meat in the heat of an election campaign. The record highs recently achieved in oil prices come from increased demand, from rapidly-developing countries like China and India, and has literally nothing to do with supply, which has not fluctuated or decreased in the same time period. Recent events prove this equation: the reductions achieved in the price of oil over the past three weeks have come with no increase in supply whatsoever, but instead have come as a result of the largest drop in U.S. demand since 1982: “U.S. oil demand during the first half of 2008 fell by an average 800,000 barrels per day compared to the same period a year ago, the biggest volume decline in 26 years, the Energy Information Administration said on Tuesday.” (Reuters, 2008) Although McCain has admitted that economics is not exactly his strongest suit (“I’m going to be honest: I know a lot less about economics than I do about military and foreign policy issues---I still need to be educated.” [McCain, 2005]), reversing the roles of supply and demand is a most egregious error for the presidential candidate of a major political party.

- - - - -

Claim 2: Offshore Drilling will Result in U.S. Energy Independence

While this is most certainly related to the principle of shared global resources as discussed above, refuting the very idea of such a thing as energy independence in a global economy, the claim still deserves its own discussion. McCain's claim that drilling will result in energy independence is facetious at best, and this is due to the tiny impact any offshore drilling would have in overall worldwide supply. According to the National Resources Defense Council (NRDC), America's oil production has been in decline since its peak in the early 1970s, at which time the U.S. was the world's largest producer, a title since assumed by Saudi Arabia. “With just three percent of the world's oil reserves, our nation simply doesn't have enough oil to impact the global market or drill our way out” of our dependence on foreign oil. (NRDC, 2008)

The real driving force for U.S. Energy independence will not come from drilling into what amounts to an additional 920 days of oil supply, which, according to the DoE, is what comprises the proven reserves of the outer continental shelf. (DoE, 2007). Instead, McCain's arguments for drilling obscure the real solutions for energy independence such as conservation, new technologies, and greater maximization of available sources such as solar, wind and nuclear power. While, to his credit, McCain does mention these additional solutions (especially nuclear), they often come across as secondary, almost token, policy positions built around the centerpiece of increased domestic oil production. But as McCain’s rival for the presidency, Barack Obama, often remarks, any policy involving increased oil production amounts to nothing more than a “gimmick.” (CNN, 2008)

Even independent sources such as influential Texas oilman T. Boone Pickens have begun to call for energy independence through a set of initiatives aimed at reducing our dependence on foreign sources of crude oil. For example, the “Pickens Plan” calls America the “Saudi Arabia of Wind Power” and makes the claim that nearly 20% of electricity power could be supplied by wind farms alone:

The Department of Energy reports that 20% of America's electricity can come from wind. North Dakota alone has the potential to provide power for more than a quarter of the country. A 2005 Stanford University Study found that there is enough wind power worldwide to satisfy global demand 7 times over — even if only 20% of wind power could be captured. (Pickens, 2008)

It’s particularly noteworthy that a plan such as this comes from a billionaire oilman, who made his fortune importing and reselling foreign oil. This fact alone lends a certain credibility to his claims, and flies in the face of McCain’s political posturing around offshore drilling. The Pickens Plan makes no mention of increased offshore production, other than to call it a mistake.

Pickens goes a step further with his plan, calling for increased domestic natural gas production to “bridge the gap” between oil-based gasoline energy and future clean technologies such as hydrogen. In fact, he suggests that we are already well-prepared to transition directly into this cleaner and more abundant source of energy:

Natural gas is significantly less expensive than gasoline or diesel. In places like Utah and Oklahoma, prices are less than $1 a gallon. Natural gas is our country's second largest energy resource and a vital component of our energy supply. 98% of the natural gas used in the United States is from North America. But 70% of our oil is purchased from foreign nations. (Pickens, 2008)

Logically, this makes perfect sense. Why, argues Pickens, should we continue to import oil, or increase offshore production, when we are already in possession of more than enough energy to fuel our country? Any increase in offshore production signals either an ignorance of the potential alternatives; or, more ominously, the immense clout of the vast oil lobby in Washington, D.C.

- - - - -

Claim 3: Offshore Drilling will help Reduce the National Trade Deficit

Discussion of the U.S. trade deficit is generally reminiscent of a complex shell game---it is incredibly easy to highlight one area (in this case, oil imports) while obscuring another (domestic fiscal policies such as the recent “stimulus package”). Politicians love to talk about the trade deficit because it is incredibly easy to manipulate statistics to favor one’s position. McCain’s claim that 41% of the U.S. trade deficit is due to oil, while factually-based, obscures many of the intricate and sophisticated factors which contribute to that deficit. The most glaring obfuscation is that of the role of the global currency market on imports and exports. Over the past 8 years, the value of the dollar has declined by nearly 60% when measured against the Euro and other major international currencies (OANDA, 2008). This raises a simple economic question of purchasing power, and McCain’s claims completely ignore the fact that the purchasing power of the dollar is considerably less than it was even just a decade ago. Even though we’re not importing much more oil today than in 1998, it costs considerably more to do so today because of the incredibly weak dollar. While McCain is correct that 41% of import expenditures are due to oil, he fails to mention this important economic component. Were the dollar to regain its footing in international currency markets, the trade deficit would be immediately reduced without producing a single additional drop of oil.

Another major factor impacting the U.S. trade deficit is the impact of the recently-passed “Economic Stimulus Package” of 2008. In order for our empty Treasury to provide $600 individual tax rebates to millions of citizens, the government had to borrow billions of dollars from international investors (coincidentally, from rich oil-producing nations benefiting from the recent skyrocketing oil prices). This, along with the aforementioned weakness of the dollar, drove up the trade deficit this year more than any other mitigating factor, including oil. According to the Congressional Budget Office, the nonpartisan financial wing of the government, the deficit had been reduced to less than $170 billion for fiscal year 2007, but had grown to a projected record high of $482 billion for 2008. Jim Nussle, the director of the CBO, confirmed the dynamics behind this rapid increase: “The primary reasons that there will be larger deficits in 2008 and 2009 are because of the bipartisan growth package or stimulus checks… as well as slower economic growth.” (CBO, 2008).

Interestingly (and quite compellingly), some economists have even indicated that the current deficit and related economic woe is good for the long-term energy outlook in the United States. While noting the short-term hardships on the current economy, most notably the trade deficit, the Federal Reserve Bank of San Francisco argues that such hardships will force a change in the oil-based economy and lead to a broader change in habits in both business and public usage:

…It could take a while for the U.S. trade deficit to adjust in response to persistently higher oil prices, as businesses need time to install new, less energy-intensive equipment. However, one positive and important implication is that eventually the U.S. Economy will become more energy-efficient, which, in turn, would help contain the cost of oil imports and increase the economy’s flexibility in absorbing future oil price increases. (FRBSF, 2006)

It is certainly not unusual for politicians from either the liberal or conservative sides to lack a long-term outlook on most policies. However, when a supposed long-term solution is sold to the public, such as McCain’s claim that increased offshore drilling will bring down prices, it is important that voters remember the facts and not be distracted by the shell game.

- - - - -

Emotional Appeal: Should We Pump Every Last Drop of Oil out of the Ground?

The previous sections of this essay have focused on factual refutations to the three main points of John McCain’s plans to lift the ban on offshore oil production. However, at this point, I would like to make a more personal, emotional argument against offshore drilling, in the hopes of appealing to one of the main traditional platforms of the Republican Party: Family Values. For the party so closely associated with these values, it often strikes me as ironic that there is not more of a concerted effort to provide a long-term plan to make the world a more livable place for our children and grandchildren. “Drill, drill, drill” seems incredibly short-sighted.

Oil is almost always closely associated with gasoline and energy, but rarely mentioned is its greater impact on our quality of life through the thousands of other products derived from it. Plastic, one of the most ubiquitous innovations of the 20^th Century, has made an incredible impact on today’s modern society. It is almost impossible today to imagine a world without plastic. Our quality of life would be nowhere near what it is today without this amazingly flexible and malleable substance, and it is an integral component in almost every aspect of our modern lives. Plastic, for example, provides safe repositories for food, has been critical in the development of computing technologies, and has allowed the inhabitants of our large planet to feel closer to one another through improved communication. And there are a million more uses for plastic. For proof, just look around you!

Other usages for oil run the entire spectrum of the modern economy, with important niches in medicine, technology, construction, and many other industries. For example, polyester, an oil derivative, is the most prevalent fabric in the world, long ago replacing cotton (an incredibly energy-inefficient crop which drains the world’s rivers) as the foundational basis of the textile industry. Chemicals derived from oil are used in many of today’s complex medicines, such as treatments for cancer and multiple sclerosis. Our roads would still be paved with cobblestone if not for the invention of asphalt, which uses oil to bind together gravel as a solid, durable substance. This is only the tip of the iceberg of the overall oil economy (one could spend an entire essay discussing only the non-fuel-related uses of oil), but even these few examples underscore our modern reliance on petrochemicals and their importance in our daily lives.

While scholars have debated the coming of “peak oil” for decades now (“peak oil” refers to the point at which we as a global society have used more oil than is remaining in the earth’s crust), it is not debatable that oil is a limited resource. Some scholars have said that peak oil has already occurred, as far back as the 1970s, while others say it won’t happen until the 2050s. Regardless of the details, the simple fact is that one day our global supply of oil will run out. It is unavoidable. Thus begs the ethical question: Should we continue to drill for oil until every last drop has been exhausted in order to save a few pennies at the gas pump? Or, considering all the amazing non-fuel uses for this wonderful resource, should we leave some in the ground for future generations? This is not a question I aim to answer, and I really have no right to answer it anyway. This, instead, is a question for every parent of every child on the planet. While consumers are most certainly under strained financial pressure due to current high energy costs, this pressure pales in comparison to the post-modern nightmare one imagines when considering a future without petrochemical products. Surely the party of Family Values needs to consider the implications of a drastic drop in our quality of life.

- - - - -

Clearly, the presidential campaign is not, and has never been, a place for factual-based claims and big-picture analysis. Instead, for centuries, our candidates have played off our emotions, hopes and fears in order to win elections and control policy from the White House. Both of the major political parties are players in this traditional pageant, and neither party is innocent of the transgressions of truth germane to a country which values free speech and democracy. Deception is a “necessary evil of democracy”, as F.F. Centore has said, and it has always been our duty as informed democratic citizens to sift through the marketplace of ideas with our own rationality and attention to critical thinking. Yet, the recent debate over offshore oil drilling is one of the most blatantly fallacious arguments ever to grace the campaign trail, coming at a time when this issue instead requires hard truth, new ideas, and forward thinking. John McCain’s cunning obfuscation of some of the most basic economic facts behind this argument is nothing short of stunning. These false claims need to be addressed and inserted into the public debate, especially with polls showing overwhelming support for the lifting of the ban on offshore drilling. And after we’ve debunked these false claims and have moved beyond this specious discussion, perhaps it will finally be time to address some of the larger concerns our oil-based society faces as we move into a future with oil as a limited, and not abundant, resource.

Bibliography

Centore, F.F. Two Views of Virtue: Absolute Relativism and Relative Absolutism. Greenwood Press, Boston, MA. 2000

CNN. “Obama Slams McCain’s Energy Policy.” http://www.cnn.com/2008/POLITICS/06/24/campaign.wrap/index.html

Congressional Budget Office. “2008-2009 Budgetary Forecast” http://www.cbo.gov/search/sitesearch.cfm?criteria=trade+deficit+forecast

Federal Reserve Bank, S.F. “Oil Prices and the U.S. Trade Deficit.”http://www.frbsf.org/publications/economics/letter/2006/el2006-24.html

McCain, John. “Presidential Campaign Website.” www.johnmccain.com. 2008.

NRDC. "Take Action: Tell Congress You Don't Buy the Lie" http://www.nrdconline.org/campaign/stop_arctic_and_offshore_drilling

OANDA. “Currency Converter and Historicals.” http://www.oanda.com/convert/fxhistory

Pickens, T. Boone. “The Pickens Plan.” http://www.pickensplan.com/theplan/

Rasmussen Polling Service. 2008. http://www.rasmussenreports.com/public_content/politics/general_politics/67_support_offshore_drilling_64_expect_it_will_lower_prices

U.S. Department of Energy. “2007 – Annual Energy Outlook.” Energy Information Administration.

Wangsness, Lisa. "New Offshore Drilling Not a Quick Fix." Boston Globe, June 20, 2008.