by Karl Lembke Iain Murray, on The Corner at NRO, suggests we might not want to cut back on our oil consumption.
Reducing US energy use generally hurts all of these trading partners; unless we're advocating a Cuba-style boycott of Saudi (but not, according to the President, Venezuelan) oil that would simply increase the pain felt by American consumers at the gas pump, because the price of oil is set in a global market.
It's an interesting thought. What would the effect be if we cut back on the amount of oil we use?
All things being equal, the world price of oil would drop.
The world price of oil is set, as Murray notes, in a global marketplace. Since oil is fungible, we don't care who supplys any particular barrel of the stuff, and within limits, neither does anyone else. If any consumer cuts back on oil consumption, this has the effect of pushing the price down the supply curve.
At first blush, you'd think falling oil prices would hurt oil producers. And indeed, that's the case Murray makes.
But your first blush is wrong.
Lower oil prices are good for everyone, consumer and producer alike.
The lower the price of oil is, the more people can afford it, and the more people can afford to put it to uses that were not practical when it was more expensive. The result is, more oil gets sold. Generally, oil suppliers don't make as much money per barrel, but they sell more barrels.
We also have to consider reason why oil consumption is lowered. Whether consumption is lowered due to conservation or finding alternatives to oil, there are two effects lower consumption could have – our production either increases or decreases. If it decreases, that's a net loss, and it hurts everyone by the decrease in value of what we produce. If it increases, it's a net gain to everyone for the same reason.
Sound simplistic? Maybe so, but we can blame that on my physics background.
Physics is full of what are known as "state functions". These are functions that depend on the state of a system at the time it's measured. All that matters is what the value of the function is at the time of measurement, and nobody cares how the system got there. State functions also tend to summarize a huge amount of aggregated information. For example, the pressure of a gas is a state function. It depends on the speed and mass of each of the molecules in the gas. Every individual particle contributes to pressure as it bounces around in a completely unpredictable fashion. However, when you measure the pressure, you don't care what each individual molecule is doing.
Likewise, when we look at energy policy, we can track every barrel of oil from the well to the end of its path through our economy. We can measure all the trade-offs as we weigh alternative energy sources and implement this or that conservation program, and we can come up with an estimate of what works and what doesn't. Or, we can measure a variable that summarizes the entire process – how does our productivity change as our oil consumption changes.
On balance, anything that increases the amount of energy we can put to use is a win for everyone.