Robert Pindyck is
writing to promote a policy to reduce America and the West’s reliance on Arab
OPEC oil. The future (the 80s and 90s),
he argues, will require a rethinking of energy resource attainment to prevent
wild fluctuations. The only major
methodological problem that I see with the article is that he focuses too much
(like many economists) on projecting static relationships into a dynamic
future. Even without the benefit of
hindsight, an astute reader can see that Pindyck’s projections leave little
room for real world fluctuations (like the Carter-Reagan Recession).
Pindyck begins
the article with a critique of the Carter administrations energy policy. He essentially argues throughout the whole
piece that the CIA projections that the administration are basing policy on are
wrong. Pindyck believes that with
rational, prescriptive changes in structure, America can be protected from
energy crisis.
After reaffirming
the OPEC cartel’s ability to set crude prices, this second section of the
article begins by advancing the pricing notions that OPEC uses. Pindyck minimizes political pricing measures
and assumes that OPEC will set prices in its best economic interests. However, Pindyck does elaborate on fact that
OPEC’s control over oil prices is really only residual. This means that OPEC only sets prices for
the oil that is consumed after all the non-cartel nation’s output has been
purchased. Although this represents a
huge market, it means that OPEC must be careful in crafting pricing policy not
to:
Therefore,
Pindyck concludes that it is in the best economic interests of the cartel to
maintain current (1978) prices and only raise them to keep with the inflation
of the dollar.
This section
focuses on how OPEC policy will be stable and predictable in the future. Pindyck bases this assumption on historical
OPEC pricing trends and capacity utilization.
He accuses people who believe that an oil scarcity is close are naïve
and do not properly appreciate the in-ground reserves of the Arab OPEC
countries. However, Pindyck still
believes that political forces could destabilize the US oil market, so
strategic oil reserves need to be expanded.
This prescription is in direct response to the Arab Oil Embargo. Even though the embargo failed (problems
being caused more by domestic mishaps than production slowdowns) better
planning with a strong strategic reserve would have helped.
Even though Pindyck argues that
energy prices will grow stably, they are already at a respectively high level
(compared to the 50s and 60s). This has
two recessionary features:
1. Inflation
2. Decreasing output (as money is spent on
inputs)
As energy prices rise, a tradeoff
between labor and capital equipment (read: energy) occurs. Labor replacement has been a significant
engine of growth but high input prices retard this process. This will cause a general rise in the cost
of production throughout the industrialized world, increasing the least in the
US however. On a global scale, this
will probably increase unemployment and reduce production (and enrich Arab
producers).
The article concludes by
postulating that a gradual problem of energy cost squeeze will affect the
industrialized world in an ever-increasing way. The solution requires a few distinct steps:
1. Recognize that inflation can be other than
wage push in short-run
2. Respond to embargoes with expansionary
monetary and fiscal solutions
3. Accept that higher unemployment will occur
4. Assault social benefit programs (read:
wages) in order to lower labor costs to shift dependence away from
energy-intensive capital
~Matt Culler