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How to Engineer an Energy Crisis

Written by Gary North on March 12, 2016

And it came to pass after this, that Ben-hadad king of Syria gathered all his host, and went up, and besieged Samaria. And there was a great famine in Samaria: and, behold, they besieged it, until an ass’s head was sold for fourscore pieces of silver, and the fourth part of a cab of dove’s dung for five pieces of silver (II Kings 6:24-25).

Then Elisha said, Hear ye the word of the LORD, Thus saith the Lord, Tomorrow about this time shall a measure of fine flour be sold for a shekel, and two measures of barley for a shekel, in the gate of Samaria (II Kings 7:1).

The two-fold judgment of God against the Northern kingdom was a military siege and the resulting famine. The famine was the product of a war. Famine is basic to the siege plans of any general who conducts a siege. The siege cuts off the enemy’s supply of food, driving the price of food too high for most people to buy it. This weakens the resolve of the people to fight. It brings pressure against the enemy to surrender. This is war, not business.

This strategy is very different from the plans of the monopolist. The monopolist wants to restrict output and therefore consumption, but he still wants to sell a portion of his product. He wants to sell it at a price higher than would have prevailed apart from the reduction of output. He wants a greater revenue from lowering output than from selling everything he can at a market price. In short, he seeks to make more money from the sale of a small quantity of goods than from a large quantity.

A military siege is notable by its high prices. So is a monopolist’s market. There is this similarity: the cause in both cases is a reduction of supply. But there is this difference: the monopolist is not trying to destroy the market. He is trying only to restrict present supplies.

The Monopolist’s Goal: Conservation

The monopolist is, economically speaking, a kind of conservationist: he attempts to reduce other people’s consumption of goods. For this, he receives no praise from modern advocates of conservation, who also recommend that we all reduce our consumption, but without any capitalists making a profit from the reduction of everyone else’s consumption. They want us all to suffer, they tell us. No one should make a profit from the other person’s pain. That this attitude reduces the supply of pain-killers never seems to occur to them.

When we face the tactics of the monopolist, what is the rational economic response? It is to seek ways to increase the supply of the monopolized good. How is this done? By allowing the price of the monopolized good to rise, thereby alerting the monopolist’s competitors that there are profit possibilities available. If they enter the market to sell the monopolized good or a substitute, they can make a profit. What they need is an incentive to break the monopolist’s stranglehold over the market. The incentive is the presence of above-average selling prices. Anything that keeps prices down artificially is therefore a disincentive to the monopolist’s competitors. What the consumer needs is an increase in the supply of the monopolized good, not a reduction in selling prices that is not the result of increased supplies.

The prophet Elisha predicted an end to the siege by predicting lower prices. That prediction came true, just as he said. But it could have come true another way. The king could have declared price controls on the named goods. He could have made it a crime to sell these goods above the prices that Elisha had predicted. Of course, there would have been few sellers of goods at those government-mandated prices. Those people with any food in reserve would have hoarded the existing supplies. This would not have solved the economic problem of the siege. But at least for a while, the prophecy would have come true. Economically speaking, this would have been a false fulfillment of prophecy. The prophet was predicting an end to the siege, not lower official prices.

The economic difference between these two possible outcomes of the prophecy was understood by the king of Israel. It was not understood by President Nixon in 1973.

A National Alert

President Nixon went on national television on November 7, 1973, to announce to the nation that we were in the midst of an energy crisis. He warned about the nation’s heavy reliance on imported oil. He said that citizens and industry should be willing to work in 68-degree semi-comfort, thus cutting fuel use by 10 per cent. We should also drive no faster than 50 miles per hour, he said, thus increasing our gasoline mileage and reducing fuel consumption.

Six years later, President Carter went on national television to tell the nation that we were in the midst of an energy crisis. He warned us about the nation’s heavy reliance on imported oil. He asked Americans to turn off their Christmas lights. The crisis was still with us.

Recently, United Nations military forces, mostly U.S. troops and equipment, fought a war in the Middle East. Another oil dictator was at it again. He was taking illegitimate actions, we were told, that threatened the crucial energy resource: oil. The threat of an energy crisis is with us still. We are still being warned by the experts that the U.S. imports far too much oil. But the solution–lower oil prices as a result of higher output of domestic oil–is not possible. Foreign producers can get it out of the ground far cheaper than U.S. producers can. This is a fact of geography. It cannot be solved by passing a law against imports, except in the economically perverse sense of raising the price of foreign oil to American consumers, which includes American manufacturers. What we would be doing by raising the price of imported oil is to raise the costs of American business. This is not what most politicians have in mind when they proclaim the benefits of a tariff on imported oil.

What we need, then, are cheaper substitutes for oil. How can we get them? By making it clear to potential producers of these substitutes that there is a profit potential available. And how do we do this? By allowing oil prices to rise as high as the market will allow.

Freeways Are not Free

Since the mid-1950’s, when the construction of Federal highway projects was seen as the eighth wonder of the world, we have come full circle. Highways are bad, we have now been told; what we need is rapid transit in every city, meaning a gigantic system of tax-subsidized public transportation. Southern California, which once had a quite serviceable electric trolley car network–the Pacific Electric–was told by experts in Washington that it should spend billions of dollars of taxpayers’ money in order to achieve as good a systems we had in 1950, before the days when government-financed “free-ways” were built. (The delightful movie, “Who Framed Roger Rabbit?”, was based on this historical development.) The new trolley line from Long Beach to Los Angeles runs along the same route that the old PE trolley used. It takes about the same amount of time to make the run. And because of the heavy traffic on the freeways, it is just about as fast as driving.

We have well-engineered highways in this nation–safe at 70 miles per hour on some stretches, safe at 65 virtually everywhere. But in 1973, we were told that we should only drive 50. The government then compromised: a national 55 mph speed limit. This was not for safety’s sake, we were assured, but for gasoline economy’s sake. This led to the classic Texas bumper sticker: Drive 70 and Freeze a Yankee! Then the law was changed again in the 1980’s: 65 mph in some designated areas. But it had all been nonsense from the beginning. During the urban rush hours, when most of our driving is done, no one really worries about driving 55; if you are very lucky, you will average 25.

(For the rest of my article, click the link.)

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