Two Economic Facts and One Obfuscation
The only reason American international sanctions work is that they are enforced by the American government against Americans and American companies. I should say it’s “the main reason” because American sanctions are also enforced, although more indirectly, against people and companies in friendly countries. Sanctions are analogous to protectionism even if they can be invoked for other (good or bad) reasons than supporting the prices and profits or wages of American producers—reasons such as national security or countering foreign tyranny. Like sanctions, a tariff against “China,” for example, works because it is enforced by the American government against Americans who want to buy Chinese stuff. (See my previous post “American Sanctions: Why Foreigners Obey,” October 1, 2019.)
Another example of that is provided by the Wall Street Journal (“Chevron Faces Tough Job Restarting Venezuela’s Damaged Oil Fields,” October 6, 2022):
Chevron in 2020 wrote down its Venezuelan assets, taking a charge of $2.6 billion, just months after the Trump administration stepped up sanctions that barred U.S. companies from drilling, transporting or selling Venezuelan crude.
This logic is not well understood by the general public. Governments and special interests don’t go out of their way to explain it.
Speaking of Chevron itself, the story suggests that the company may have, all in all, benefited from pandering to the Venezuelan tyrannical state: “Chevron has been operating in Venezuela for about a century and built a close relationship with the leftist government that has ruled there for more than two decades.” But note that other American producers with an interest in Venezuelan oil, including Chevron’s competitors, were harmed.
Incidentally (second fact), the dire state of oil production in Venezuela also provides a good and useful, even if extreme, example of industrial policy.
But in an otherwise instructive report, the caption of an accompanying picture in the same WSJ story does not exactly contribute to increasing economic literacy:
Oil companies are no longer motivated to drill more as oil prices rise.
Perhaps they are not motivated to drill for new, more expensive oil because of other factors that compensate for the benefit of a higher price. But ceteris paribus, they are certainly not less motivated, and the price may not have risen enough yet. Ceteris paribus, higher prices are the only factor that can effectively motivate them to drill more.