What Hillary Clinton Doesn't Know About the Price of Oil
Ignorance would be bliss if it weren't so dangerous
By blackhedd Posted in Economy | Energy alternatives | Hillary Clinton | oil — Comments (54) / Email this page » / Leave a comment »
Hillary Clinton, campaigning in New Hampshire this weekend, appears to have promised that oil prices will fall as soon as she is inaugurated. Now observe, she didn't promise to reduce oil prices. She just said that they will fall on their own.
For the sake of argument, I'll assume that the reporters of the New York Daily News were actually present when Clinton made the statements they are reporting, and that they transcribed her words accurately. I add this caveat because I didn't know it was possible for anyone to be so ignorant. What exactly did Superwoman say?
It's been hard to miss the spectacular hubris of Hillary Clinton. Whenever pressed on her chances to win the White House, she lashes out with indignation that the question even comes up. She may be as surprised as anyone else that she now faces a credible challenge from Sen. Obama, which would explain how fecklessly her people have responded to it.
So it's easy for me to imagine the excitement she feels at the prospect of finally getting her hands on Washington's big policy levers. She's talking about making America energy-independent through government action as if (like healthcare in 1993) she thinks it's an easy problem. This is what makes ignorance seem so empowering.
Thus the Daily News:
When the world hears her commitment at her inauguration about ending American dependence on foreign fuel, Clinton says, oil-pumping countries will lower prices to stifle America's incentive to develop alternative energy.
"I predict to you, the oil-producing countries will drop the price of oil," Clinton said, speaking at the Manchester YWCA. "They will once again assume, once the cost pressure is off, Americans and our political process will recede."
Oh dear. Oil-producing countries don't set the price of oil. They are one actor among many in a global market that is extremely large, extremely fast, and full of contradictory signals.
In addition, there are precious few countries that have enough incremental production capacity to actually pump significantly more than they do now. In fact, the only ones I can name are Saudi, Kuwait, and maybe the Emirates. Just about every other sovereign oil producer treats oil revenue as free cash flow, without considering the need for continuing capital investment.
The oil-producing countries would have a very hard time reducing oil prices even if they were inclined to try. There are too many buyers out there and too much demand. And a not-small amount of the demand comes from speculators instead of actual energy users, which ties the oil-price picture tightly to markets that are superficially not even related.
So that's one problem. But there's another one: I'm still shaking my head over the idea that players in a four-trillion global market are going to be so intimidated when the smartest woman in the world also becomes the most powerful one, that they'll roll over and show their tummies on the same day. That is what the Daily News says she said, isn't it?
As with so much else, Clinton doesn't bother to spell out what she actually intends to do. (Awfully convenient, because if she did, we'd have the opportunity to stop doubting her ignorance and know it for sure.)
I'm going to assume from her words, however, that she intends to put America on a sustained track to sharply reduce the need to import petroleum, regardless of the commodity's price. More quotes, giving her actual words:
Clinton argued that former President Jimmy Carter in the late 1970s actually started moving in the right direction toward energy independence, but his successor, Ronald Reagan, "dismantled" that work.
"Because costs were low, people didn't care, didn't complain," she said.
Because costs were low, people didn't... follow through on the development of alternatives. Well, yes, of course, that's how rational people operate. So that tells us that Clinton intends to pursue alternative-energy strategies that are not rational, in terms of the pricing signals given off by normal markets.
I think I can see the argument: we don't have time to let the markets work, because if we wait for oil to become too dear, we won't have time to develop alternatives.
This is a very, very powerful argument, folks. It actually works on economically illiterate people (which is to say, most voters) because it sounds completely rational.
But it's not a forgone conclusion that government actors, even if they're the smartest women in the world, will be able to anticipate and develop solutions to problems whose dimensions are not yet clear. There will be a strong temptation to pursue a Manhattan Project-style approach. The Manhattan Project involved simultaneously developing, at extreme cost, at least five different pathways to a nuclear weapon, correctly judging that the cost of failure (Hitler with a nuclear monopoly) was worse than national bankruptcy.
That's the wrong approach to the energy-independence problem. In short, the smartest women in the world don't have the knowledge and insight to know how to approach this, and they axiomatically will waste resources in the attempt.
And again, Clinton vastly overrates her own power by postulating that, simply by coming to office with a promise to pursue oil-alternatives without regard to cost, the oil producers will say "Uh oh, we need to cut prices now, this lady is serious and we need to fear her."
As we've seen, the oil producers aren't the only ones making these decisions. There's a whole market out there too. And they are swayed by their perception of reality, not by the words of one overconfident politician.
If America honestly embarks on a policy of developing expensive energy alternatives, the world price of oil is more likely to rise rather than fall, all else equal.
Think of it as a reverse-substitution effect. If you find a cheaper alternative to a constrained commodity (which free markets do naturally), it has the effect of reducing demand (and prices) for the commodity being replaced.
But if you replace a commodity with something more expensive (considering all the aggregate costs and inefficiencies of developing alternatives before the markets are ready), then the opposite will happen.
Hillary Clinton says often that she learned in 1993 just how little she really knew about how hard healthcare reform is, and she promises to come to power with new approaches to this problem.
Let's make sure she doesn't also get the chance to find out how little she really knows about energy markets.