Streetwise Professor

February 25, 2013

Gaseous Mercantilism

Filed under: Commodities,Economics,Energy,Politics,Regulation — The Professor @ 11:36 am

I am adding a new entry to my list of phrases that put me on guard that someone is trying to con me: “balanced approach.”  Obama is always blathering about balanced approaches to fiscal matters.  And in today’s WSJ, Dow Chemical CEO Andrew Liveris pleads for a “balanced approach to shale gas exports.”

To say that “balanced” is highly subjective is the understatement of the century.  In Obamaland, “balanced approaches” mean large tax increases now, and hazy promises of spending cuts in some distant future.  In Leveris’s oped, “balanced” means imposing restrictions on exports of natural gas to lower the cost of his most important input.  Funny, ain’t it, that things seem to tip the way of those advocating “balanced approaches”?  In other words, if it helps me, it’s fair and balanced!

Liveris couches this as a means of stimulating employment in US manufacturing and increasing GDP:

Moving manufacturing facilities back to the U.S. from abroad—the trend known as “reshoring”—could create up to five million American jobs over the next seven years, according to the Boston Consulting Group. This figure is so high partly because in the chemical industry jobs created by investing in domestic manufacturing are eight times more beneficial to gross domestic product than are simple gas exports, as documented by the American Chemistry Council.

To which I reply: Bull.  National income is maximized when goods are allowed to flow to their highest value use.  If domestic gas prices are $3/mmBTU and foreign prices (net of transportation, etc.) are $4, that means that at the margin 1 mmBTU of gas consumed in the US-including by Dow-generates $3 of value, and if consumed overseas it generates $4.  Letting that mmBTU go overseas therefore generates $1 of value-of income.  No BCG or American Chemical Council mumbo jumbo can change that simple fact.  And I’m sure that the ACC is totally objective.  Totally.

Leveris pleads that all he wants is a rule-based system:

The truth is that every firm in every sector benefits from exports and rules-based free trade. But what are the rules for exports of liquefied natural gas? Who sets them? Oil and gas companies, states, Japanese government agencies? Or are they part of rules-based free-trade agreements that the U.S. government has negotiated so as not to disadvantage domestic consumers, manufacturers and workers?

Here’s a balanced rule for you, Mr. Leveris: Producers can sell to whomever offers them the highest price.  Short. Simple. Easy to understand.  No bureaucrats required.  And to show what a broad minded guy I am, I propose that the rule be applied to Dow.

But Leveris wants to insert bureaucrats into the process:

The Department of Energy has already received applications for the export of half the gas consumed in the U.S. today. Under a 1938 law, the department must determine if those applications for exports are in the national interest (taking into account all segments of society).

Several manufacturers, including Dow, are calling for faithfulness to current law. We are concerned that hasty government action, coupled with growing domestic and international demands for natural gas, will trigger a severe supply pinch that will send the U.S. back to the days of higher and more volatile domestic natural-gas prices.

Ah.  “The national interest.”  That’s the ticket.

The 1938 law inserts a government bureaucracy that can distribute rents among rent seeking supplicants-such as firms like D0w-based on political calculations.  Resources are wasted in the influence process: e.g., chemical companies and energy companies engage in an influence arms race employing lobbyists and other resources to importune the bureaucrats.  More resources are wasted as this process inevitably leads to inefficient outcomes.  The uncertainty generated by the vagaries of this process also serves to damp investment.

So here is my balanced proposal: scrap the 1938 law.

Everywhere you look you see that energy is highly politicized.  Politicians and bureaucrats exert a huge influence over the allocation of energy resources.  Look at Keystone XL.  Look at cockamamie subsidies for solar and wind.  I could go on and on.  These interventions destroy huge amounts of value.

Balance is a relevant concept here, because politicians and bureaucrats balance competing political interests when choosing policies that divide up the pie.  But that “balanced” process destroys wealth.

We need less politicized energy market.  Allowing free export of US natural gas-and oil-should be a no brainer if your object is-as Mr. Leveris claims his is-to maximize national income.  But that’s not his real objective.  His real aim is to maximize Dow’s income, to redirect wealth from the shareholders of E&P firms to his shareholders.

Leveris’s piece is a gaseous plea for mercantilism, though of a rather apostate form since traditional mercantilism advocates the maximization of exports.  But the essence of mercantilism is government control and manipulation of trade.  And moreover, one staple of mercantilist thought is that domestic raw materials should only be used in domestic manufacture because manufactured goods are more valuable than raw materials.  Leveris repeats this long discredited fallacy in his oped.  Proving that few things live longer than bad arguments.

Sadly, it is likely that the chemical industry, and other energy consuming industries, will exert some influence and succeed in restricting the exports of natural gas.  That’s the way things work, alas.  But don’t buy the bilge that these restrictions are part of a “balanced approach” that advances (ill-defined) “national interest.”  Instead, they are inherently unbalanced and advance very specific economic interests.

And one last word of advice: when anyone says they are only advocating a “balanced approach”, grab your wallet and call bull.

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  1. That was a simple, John Galt-style post.

    Comment by Highgamma — February 25, 2013 @ 1:58 pm

  2. @Highgamma-that’s a good thing, right?

    The ProfessorComment by The Professor — February 25, 2013 @ 8:53 pm

  3. What if national income isn’t 100% domestic because of foreign JV drilling carry?

    Exports may be limited by simple s/d that breaks down some of the economics as HH rises and JKM falls with greater waterborne supply (not just from our export terminal[s]). The DOE may never have to use that footnoted loophole on page 32 or 34 from that May 2011 Cheniere ruling. We shall see.

    Comment by Strigidae — February 26, 2013 @ 2:57 am

  4. […] Gaseous Mercantilism. […]

    Pingback by Breakfast Links - Points and Figures | Points and Figures — February 26, 2013 @ 4:14 am

  5. Why do politicians take a perfectly good word with a well defined meaning and turn it into a euphemism for “do it my way”.

    Comment by Rick Caird — February 26, 2013 @ 9:54 am

  6. Jeez-I hate to take this position but it seems to me that economic theory is often based on system level analysis that assumes all participants at the national level should act rationally and that irrational action (within the framework of the analsyis) results in sub optimum results. I agree that at the system level that is the case but I do not think that at the national level that must be the case.

    If sufficient gas were available in the US and energy costs overcame the labor advantage elsehwere for maunufacturing then I do not see reduced unemployment in the US would be a sub optimum national result. This would imply that optimum system level (at the global level) results are not necessarily optimum for the US and I think that is an entirely reasonable position based on the current situation vis a vis low labor cost producers. Presently lower costs for multi nationals often just means increased costs for those of us still paying taxes. God knows how long this has been hashed about by economists I am sure, but in a mercantile world with substantial social burden born by the taxpayers is mercantilism a necessarily bad strategy for the US.

    I certainly am not making a philosophical argument in support of the nanny state just an observation about the situation as it exists.

    Is it really appopriate to analyze at the system level when major national participants do not subscribe to acting rationally for optimum system results? Heck for that matter I prefer national results to optimum system results.

    Comment by pahoben — February 26, 2013 @ 11:59 am

  7. This is neoclassical voodoo magic. First, trade between parties is never free or equal, since the parties are never equal to begin with. Thus one party can always to some extent take advantage of the other in the trading. Second, mercantilism is a long-standing economic theory that was put into practice and worked successfully for over 400 years. Much longer than our current economic theories. Not saying it is superior to our current theories only that it has proven itself successful. This is more than can be said for neoclassical economics. Third, free trade and its supposed benefits completely vanish or even become overall harmful at less than full employment. Unemployment goes up, purchasing power goes down and economic well-being disappears. As Henry Ford knew well if his workers weren’t paid well enough to purchase the cars they were making then the whole system collapses. Free trade only works for all and in the long-term if it’s fair and equal. So far no one has managed to figure out how to do that.

    Comment by Ken Zimmerman — February 27, 2013 @ 1:20 am

  8. […] it is not opposed to all LNG exports, it just wants a “balanced” approach.Economist Craig Pirrong (a.k.a. the “Streetwise Professor“) deftly pops this rhetorical balloon:I am adding a […]

    Pingback by A Modest Proposal: Restrict Dow Chemical Exports to Make U.S. Paint, Cosmetic, Fertilizer, Pharmaceutical, Cell Phone, and Computer Companies More Competitive — March 15, 2013 @ 6:15 pm

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