Monday, August 25, 2008
I Have a T-Bone to Pick...
Over at Crash Landing (the "2nd best blog in the world," according to one noted economist) I criticized the Pickens Plan for its awful economic analysis. (Note that I am heeding the conservationists' pleas and have thus recycled my incredibly cheesy post title.) Pickens says:
As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone — that's four times the annual cost of the Iraq war. Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.
In that previous post, I responded by saying: Importing oil doesn't represent a wealth transfer. In exchange for our $10 trillion in cash, the rest of the world is giving us oil. And how much oil, you ask? Why, $10 trillion worth. Ain't that grand!
Today I can now add to this critique. While driving to the office just now (and right before skirting death from a school bus), I heard the familiar drawl on AM radio, talking about the need to end our "dependence on foreign ahhl."
When listing the advantages of his plan, Pickens said something like, "And switching to natural gas for our vehicles will provide us the one thing money can't buy: time."
Huh? If you have money, you can stockpile barrels of oil, which buys you time to adapt if foreign imports get cut off for some reason. As of early August, the government had about 73 days' worth of net crude imports stockpiled in the Strategic Petroleum Reserve.
I confess I haven't done even a back-of-the-envelope comparison, but I bet it would be far, far cheaper to bridge the interval from now until electric cars (or whatever) are cost-effective, by stockpiling crude rather than converting the entire US fleet to run on natural gas. Keep in mind, the relevant cost isn't the upfront price of a barrel of oil. Rather, the relevant issue is the storage cost per unit of time, which includes only interest on the upfront price of the barrel.
(On a side note, I have wondered why the private sector hasn't been accumulating larger crude inventories, especially as tensions heat up with major oil exporters [Venezuela, Iran, and now Russia]. But it's really no surprise, because the government would either slap a huge windfall tax on domestic "evil profiteers" who were selling their inventories at $200 per barrel during an OPEC embargo, if they didn't just confiscate their oil outright. With that kind of risk, it would be ludicrous to make purely speculative investments in physical crude stocks, at least for investors in US jurisdiction.)
Pickens is plain wrong when he says that money can't buy "time," meaning time to deal with a disruption in oil imports. Not only can money buy extra time through stockpiling crude, but it would probably be much cheaper than Pickens' proposal.
For more criticisms of the plan--especially to see the pitfalls in wind power--see this IER analysis.
As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone — that's four times the annual cost of the Iraq war. Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.
In that previous post, I responded by saying: Importing oil doesn't represent a wealth transfer. In exchange for our $10 trillion in cash, the rest of the world is giving us oil. And how much oil, you ask? Why, $10 trillion worth. Ain't that grand!
Today I can now add to this critique. While driving to the office just now (and right before skirting death from a school bus), I heard the familiar drawl on AM radio, talking about the need to end our "dependence on foreign ahhl."
When listing the advantages of his plan, Pickens said something like, "And switching to natural gas for our vehicles will provide us the one thing money can't buy: time."
Huh? If you have money, you can stockpile barrels of oil, which buys you time to adapt if foreign imports get cut off for some reason. As of early August, the government had about 73 days' worth of net crude imports stockpiled in the Strategic Petroleum Reserve.
I confess I haven't done even a back-of-the-envelope comparison, but I bet it would be far, far cheaper to bridge the interval from now until electric cars (or whatever) are cost-effective, by stockpiling crude rather than converting the entire US fleet to run on natural gas. Keep in mind, the relevant cost isn't the upfront price of a barrel of oil. Rather, the relevant issue is the storage cost per unit of time, which includes only interest on the upfront price of the barrel.
(On a side note, I have wondered why the private sector hasn't been accumulating larger crude inventories, especially as tensions heat up with major oil exporters [Venezuela, Iran, and now Russia]. But it's really no surprise, because the government would either slap a huge windfall tax on domestic "evil profiteers" who were selling their inventories at $200 per barrel during an OPEC embargo, if they didn't just confiscate their oil outright. With that kind of risk, it would be ludicrous to make purely speculative investments in physical crude stocks, at least for investors in US jurisdiction.)
Pickens is plain wrong when he says that money can't buy "time," meaning time to deal with a disruption in oil imports. Not only can money buy extra time through stockpiling crude, but it would probably be much cheaper than Pickens' proposal.
For more criticisms of the plan--especially to see the pitfalls in wind power--see this IER analysis.
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