By Scott Sumner
I just spent some time in California, and noticed that there are a lot of really rich people out there. My hotel was in Santa Monica, a pleasant beach town where the average house costs $2.7 million. One property was available for under a million, a 450 square foot condo. And while Santa Monica is exceptional, much of coastal California is quite rich. In fairness, they produce a lot of neat stuff in California. Internet companies like Google and Facebook, IT companies like Oracle, biotech companies like Amgen, and of course Hollywood.
California’s politicians have done a great job in making sure that their producers can extract as much rent as possible from the rest of America, and indeed with the TPP, from the rest of the world. Most coastal California products have very low marginal costs of production, so the barriers to entry created by IP rules create enormous rents, in many cases far beyond what economic theory can justify. (I’m looking at you, Hollywood). And many of their companies are pleasant places to work:
In contrast, Texas is famous as the home of the American oil industry, and indeed Houston is the most technologically sophisticated oil town in the world. The Texas oil industry did something incredibly important, which has significantly impacted the rest of America, indeed the rest of the world. And as we’ll see, the rewards could not have been more different from the case of California.
The technological innovations that came out of Texas led to an explosion in US oil output. Much of this increase came in south and west Texas, but there were other important fields in God-forsaken places like western North Dakota.
Unlike in coastal California, the work was very hard:
And in the end what did the Texas oil industry get out of all this extra production? All this capital investment and hard work under intense heat and bitter cold? Approximately nothing.
Unlike California’s IP-oriented industries, the oil industry is highly competitive. One company’s oil is pretty much like another, at least of a given grade. Firms are price takers. And in recent months the prices they’ve had to take are pretty low.
The problem is as follows. Oil production has soared in the US from about 5 million barrels a day, to well over 9 million barrels per day.
The 4.5 million barrel increase was equivalent to almost 5% of global output when the fracking boom began.
And of course oil prices have recently fallen in half, from about $100/barrel to less than $50.
Yes, I know that there are other things that have impacted oil prices. But those “other things” cut both ways. Studies suggest that oil demand is extremely inelastic in the short and even medium run, so it’s not that far-fetched to believe that the US production surge was a key factor in all this. Take 4.5 million barrels off the market and you’ll see $100 oil in the blink of an eye.
The net result is that the US oil industry is not making any more money selling 9.5 million barrels a day today then they got selling barely half that amount back in 2007-08. All that hard work for naught.
Every time I drive in to a gas station and fill up at $2.19 a gallon, I think about the selfless sacrifice of the Texas oil industry (including one of my cousins, who lives near Houston.) I’m sure the comment section will include at least one spoilsport, who mentions Adam Smith and butchers and benevolence. But I prefer to think that the oil industry knew this was going to happen. They purposely refrained from lobbying Washington for laws that banned fracking, because they were motivated by the American Spirit of Enterprise. It was a generous act of self-sacrifice by the Texas oil industry, totally unlike those California politicians who pressured Obama to pressure foreign governments to make sure as many dollars as possible can be transferred from the pockets of low income East Asian consumers to the billionaires of coastal California.
PS. California and Texas. Which state’s economy massively increases global inequality? And which state’s economy massively reduces global inequality? And which model do the Dems like best? And which model does the GOP like best?
PPS. On the other hand, on the immigration question you might give a very different answer.