Monday, August 31, 2009

Poor Statistics, Even Poorer Economics

From the FP:
Third, end the self-defeating U.S. dependence on the Venezuelan oil that finances Chavez's anti-democratic and anti-American aggression. The United States can find new sources for 8 percent of its imports much more quickly than Venezuela can find an alternate market for 72 percent of its exports.
It seems as if the author is suggesting that since 8% < 72%, it will be easier for the US to make the switcharoo. To the average reader (correct me if I am wrong) the 8/72 comparison makes it appear as if the US has less to change than Venezuela. Obviously, this is not the case. The amount of oil that comes from Venezuela to the US is necessarily the same amount of oil that comes to the US from Venezuela. The difference in percentages merely reflects different base levels of imports and exports, respectively. After clearing this up, it is no longer obvious that the US can find new sources of X amount of oil quicker than Venezuela can find new buyers for X amount of oil. But that's just the statistical problem. The economics of the situation are much more damaging to the argument.

Oil is fungible. Suppose that the US passes a law that bans the purchasing of oil from Venezuela. This effectively reduces the supply of oil available for Americans to purchase. Since demand has not changed (Americans still want to drive their cars and heat their houses as much as before), this puts an upward pressure on price. Of course, the actual supply of oil has not changed. The easiest way for other nations to increase their oil production is to buy oil from Venezuela. Since one barrel of oil looks more ore less like any other barrel, it is difficult to determine whether Venezuelan oil ends up in the US. Whether or not the oil consumed in the US is Venezuelan oil (bought by another country and then sold to the US) or the reserves from another country (now using Venezuelan oil) is irrelevant!

Venezuela is no worse off, but US citizens are paying more for gas. I hope the US ignores FP's recommendation; it is a policy of poverty.

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