Must the Government Combat Americans’ Addiction to Foreign Bananas?
By Robert Higgs on Aug 12, 2008 in Economics, Energy, Middle East, Politics, The State, Trade, War
Americans, we are told again and again, are “addicted to foreign oil” and “in love with the automobile.” These phrases are so common in news commentaries that they glide past our intellect almost unnoticed. Yet, they are the sheerest claptrap, and the arguments that accompany them are a waste of the electrons required to carry them along in the World Wide Web.
Suppose a serious policy of “energy independence” were actually implemented, rather than being merely spewed out along with the rest of the political hot air. Would we be better off? Absolutely not. We would be vastly poorer because we would have to sacrifice a great deal more of the non-oil products we now produce and consume in order to acquire the petroleum products we demanded.
In a sense, every good or service we wish to consume raises the same question: make or buy? If we choose to make it ourselves, we must forgo the value of the goods we might have produced had we allocated our time, effort, and other resources in alternative ways—in the economist’s lingo, there’s an opportunity cost. If we choose to buy the desired good or service instead of making it ourselves, the value of the goods we could have enjoyed had we spent the money for them, rather than for the good actually purchased, represents the opportunity cost. So, whether we make or buy, there’s always an opportunity cost. Rational people answer the make-or-buy question by choosing the option with the lower opportunity cost.
If we were talking about bananas, everybody would see immediately the foolishness of seeking “banana independence.” Nobody would fall for half-baked arguments about our addiction to foreign bananas or our love affair with banana bread. It’s obviously uneconomic to grow millions of bananas in this country; it could be done, but doing it would entail much greater costs than buying them from producers in places better suited to their production (that is, places where they can be produced at lower opportunity cost).
The argument with regard to oil, or anything else, is identical.
Nor is it necessary for the U.S. military to police the Middle East in order to ensure access to oil for Americans. The Gulf sheiks have no desire to drink the oil brought up from beneath their desert despotisms; they have every interest in selling that oil. And once it has been sold, it enters, as it were, a vast worldwide supply pool from which all of the world’s demanders draw, because a barrel of (a given grade of) oil here is the same as a barrel there, and the barrels get shifted around to minimize transportation costs while accommodating everyone willing to pay the world price.
Arguments that we must resort to U.S. imperialism in order to enjoy the imported oil or the security of having continued access to it are bogus. If policy makers really believe such nonsense, they are bigger idiots than we thought—and they ought to fire those thousands of economists on the government payroll on grounds of rank incompetence. U.S. imperialism may spring from various motives, but the popular notion of “war for oil” makes no economic sense.
The U.S. government may wish to exercise hegemony in the Persian Gulf so that politically well-connected big oil companies can reap a bigger share of the handling income from producing and transporting the Gulf oil (but if these companies didn’t perform these tasks, other companies would do so). It may wish to intimidate or suppress Israel’s enemies. It may wish to discomfit the Russians. And so forth. But the idea that unless the U.S. government stands astride the Middle East, Americans will be unable import oil or to have confidence in their ability to import in the future (always at the prevailing world price, of course) is a contemptible argument.
David Ricardo explained these sorts of things clearly two hundred years ago. They are explained in every introductory economics course taught in college. It’s high time the pundits caught up with the essentials of their subject.
If a cartel of banana-producing countries were to, for politically motivated reasons, refuse to sell bananas to the United States and take steps to shut down secondary markets (by threatening to stop selling to anyone who sells to the U.S.), what would be the effect on the U.S. economy?
Dave | Aug 13, 2008 | Reply
Bananas have many cheap, quality, substitutes. Also, because they aren’t a natural resource, production could be started somewhere new. These seam like pretty significant differences to me.
If proven scaleable, coal -> liquid would be a solid substitute, and I could see bananas and oil in the same category…
Don | Aug 13, 2008 | Reply
If you recall, the gas lines of the 1970s were not caused by a shortage of production, they were caused because the Cartel refused to sell us oil. Gasoline at $4/gallon? Think what the cost would be for gasoline and the thousands of products derived from oil if political situations like the one in Georgia today would escalate into a shut off of imported oil. I think you are stretching economic principles a bit too far.
william | Aug 14, 2008 | Reply
The gas lines of the 1970s were not caused by a supply disruption; they were caused by a political response to the disruption, namely the decision to fix prices below what they otherwise would have been. When accounting for the wasted time and effort of gas lines and associated activities, consumers would have been better off with market-determined prices.
As for the current price of gas and other commodities, the primary cause appears to be the decline in the value of the U.S. dollar. If dollars are worth less, they can buy less, so the price in terms of dollars for the same good must increase. See http://www.cato.org/testimony/ct-sh-20080730.html for a fuller explanation.
Kurt | Aug 14, 2008 | Reply
If there were a cartel of banana-producing countries limiting production, the price of bananas would rise. (Assuming bananas, like oil, are traded globally, they can’t just target specific countries and refuse to sell to them.) Higher prices would decrease demand as people found alternatives or did without, forcing prices a bit lower. Moreover, higher banana prices would provide an incentive for others to grow bananas, thus increasing supply and again forcing prices lower. It may be harder (i.e. less efficient, i.e. more expensive) for these new banana-producing regions to grow bananas, but the higher prices would make it suddenly worthwhile.
Seeking “banana independence” in an effort to isolate ourselves from the global price increases caused by the cartel makes no sense. If we were to limit our banana consumption to US-grown bananas, we would have to pay astronomical prices for bananas grown much less efficiently than they could be grown elsewhere.
Ted | Aug 14, 2008 | Reply
This would be a reasonable analogy if bananas were vital to our health and were irreplaceable in our diet. If bananas were that important, I think you would care a lot more about domestic supplies, especially if much of the supply were in US-hostile nations.
RM101 | Aug 14, 2008 | Reply
I would agree with you if we ran our economy on banna oil.
PJ Yogus | Aug 14, 2008 | Reply
You’re missing the point. The idea is that if we were to become ‘banana independent’ you will see extremely high prices for bananas. The same concept applies for ‘energy independence’ where extremely high energy prices will be the outcome.
sam | Aug 14, 2008 | Reply
Excellent article. If you’re looking for an issue that makes politicians look bad, you don’t have to look hard and you don’t have to pick oil.
I would like to know the cost of extracting a barrel of oil from the outer shelf or ANWR. Likewise, what’s the cost of extracting oil from shale?
What does our government do to earn their profit from a gallon of gas?
For many, the real reason is conservation and greenhouse gas. They actually want the price high to lower usage.
Garry | Aug 14, 2008 | Reply
I wonder about equating energy independence with oil independence, unless you equate fruit independence with with banana independence. Neal
Neal | Aug 15, 2008 | Reply
I think the problem with oil is that it’s vital for the economy and forces US foreign policy to sacrifice a lot, such as maintaining a large military presence in foreign countries.
Karl | Aug 17, 2008 | Reply
It is not that we are dependent on foreign oil, foreign countries are dependent on American money. This is a symbiotic relationship, if one of us changes the rules both of us die.
Ben | Sep 20, 2008 | Reply