Saturday, July 19, 2008

Foreign Oil Blockade

Looking into next month, I realized I have a lot of careful work to do (see here and here) in terms of economics education over the coming years.

I'm always taken with the special claim on "Foreign Oil" as being particularly evil (it is always foreign oil to me). Oftentimes, the concern is that by buying foreign oil we are directly funding terrorism. There is of course no evidence for that, and before you snark at that remember all the "evidence" we had for weapons of mass destruction in Iraq. Logically speaking, given the ruling monarchies of the Middle East seem to to be interested in wealth maximization, how would it be in their interest to kill off their best customer? What kind of business model is that? (A: Tobacco, but they would make a cancer free stick if they could!)

Secondly, what would happen to the flow of foreign oil into the U.S. if we imposed a full embargo on foreign oil? Even if the black market for foreign oil could be exterminated, we would still import foreign oil, but in the form of an input to foreign made oil-based products. We would clearly find ourselves buying "Made In China" plastic much more often, as any comparative advantage in things requiring oil would disappear. The service sector of the economy would become quite large indeed.

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