John Tamny of Forbes, who delivered this year’s Henry Hazlitt lecture at the Mises Institute writes on the impact of oil prices in North Dakota and Texas:
When people ask me what book will most help them to understand economics, Henry Hazlitt’s Economics In One Lesson is one I always mention. It’s truly spectacular (as are Hazlitt’s other books), and one read of it will gift the reader with more knowledge about human action than most credentialed economists generally possess after years of study. So when I was asked to give the Hazlitt Lecture at this week’s Austrian Economics Research Conference in Auburn, AL at the Mises Institute, the answer was very simple.
Hazlitt’s all-too-uncommon common sense approach to economic policy could be applied to all manner of issues from the past and present, and the Hazlitt Lecture this Thursday will show why that’s true. But with brevity somewhat in mind, Hazlitt’s writings will be used here to explain the economic implications of the oil boom and bust that took place in commodity locales like Texas and North Dakota over the last decade or so. Suffice it to say, were Hazlitt around he would have fully understood why something that was initially so profoundly good for Texas and North Dakota was so bad for the rest of the U.S...
To begin, it’s useful to bring up Hazlitt’s essential observation that “What is harmful or disastrous to an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.” Economies aren’t blobs, they’re simply individuals. Hazlitt explained in Chapter 15 that the “whole argument” of Economics In One Lesson“may be summed up in the statement that in studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences,” and most important of all with this op-ed in mind, “not merely the effects on some special group but the effects on everyone.”
Looked at through the prism of oil and the oil boom from the 2000s in commodity locales, the high prices that so substantially boosted the near-term economic fortunes of Texas and North Dakota were very clearly a creation of policy in favor of a devalued dollar. To believe otherwise, as in to presume that the oil boom of recent vintage was rooted in a supply shortfall would be to believe that in the ‘60s global oil producers gauged consumption perfectly such that oil was flat and cheap, but that in the ‘70s those same producers completely missed the boat on the way to oil shocks. This person would then have to believe that the oil industry yet again had its finger on the global consumption pulse in the ‘80s and ‘90s such that oil was cheap for two decades, only for the industry to coincidentally become “stupid” again around 2001 to all of our detriment.
The weak dollar was a subsidy for the oil industry, but as Hazlitt noted, they make “the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller.” While profit margins in the energy space rank 112th in the U.S., this comparatively inefficient industry by U.S. standards saw its fortunes surge from 2001 to 2014. Just the same, readers could count on one hand all the major IPOs of technology companies that took place during the same time period; this despite the much higher profit margins historically earned in that space. The seen in this case was a comparatively inefficient business sector growing by leaps and bounds thanks to a weak dollar, but the unseen was all the much more historically profitable economic activity that never took place due to a subsidy that aided a few at the expense of many...
Some would say it’s the lower oil prices that are causing the malaise in two formerly booming states. Hazlitt wouldn’t have agreed. As he put it, “Contrary to popular impression, profits are achieved not by raising prices, but by introducing economies and efficiencies that cut costs of production.” The problem for the oil industry is that falling oil prices have little to do with production efficiencies, and a lot to do with a stronger dollar that has exposed a great deal of economic activity in the oil patch as non-economic. Once again, a monetary subsidy expanded an oil-patch occupation at the expense of others, but with the subsidy having partially vanished, the energy occupation no longer makes sense to the extent that it did. To put it as plainly as possible, there was never an oil supply problem in the ‘2000s that needed fixing.
Watch Tamny’s talk at the Austrian Economics Research Conference:
