Thursday, April 02, 2009

Taking Apart T. Boone Pickens' Transfer Nonsense

According to T. Boone Pickens:

At current oil prices, we will send $700 billion dollars out of the country this year alone. Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.

E. Frank Stephenson responds in the April issue of The Freeman:

The $700 billion that Americans spend annually to purchase oil from other countries is a price not a transfer. A true transfer— unemployment benefits or a taxpayer subsidy to a failing company—is a payment made to someone who pro­vides no good or service in exchange. By nature transfers are zero-sum. One person “gives” through coercive taxation; the other person receives.

By contrast, when one makes a purchase, the money one pays is the price of the good, one side of a mutually beneficial voluntary exchange. Each party to the transaction trades away something in return for some­thing else he or she values more highly. If I spend $2 for a cup of coffee, I’ve made a purchase not a transfer. I get the coffee, which I value more than anything else I could have bought for the $2, and the coffee shop gets the $2, which it values more than the coffee.

For the $700 billion we send to oil exporters, we get something in return—oil. Our receipt of millions of barrels of oil in exchange for that money is hardly a transfer. We receive a versatile commodity that can be used for everything from making plastics to fueling family vacations. The exporters receive the $700 billion that they can then use to purchase other goods and services.

MP: Last summer I wrote:

Foreign oil producers like Canada, Saudi Arabia, Mexico (top three countries for U.S. imports) send us their oil, and we send them "green pieces of paper with dead presidents' pictures," aka as USDs. That imported oil helps to fuel our economy, cars and factories, raising our standard of living.

Oil producers in Canada, Saudi Arabia and Mexico now have US dollars, which must be spent back in the U.S. on American goods and services, or invested in the U.S. financial markets, either by the oil producers, or by those who buy the USDs from them.

Importing oil certainly involves a transfer, but it's not a transfer of wealth, it's a market transaction involving the exchange of oil for currency. If it IS a transfer of wealth, it seems like we got the better end of the deal: Their valuable natural resources get transferred to the U.S., in exchange for paper currency, which gets spent back here eventually.

In T. Boone Pickens' version, it seems like wealth gets transferred overseas without any benefit to the U.S. But oil imports, like all trade, involves mutually beneficial exchange. Remember trade is win-win, not win-lose (like T. Boone Pickens suggests).

One dictionary definition of "wealth" is "an abundance of valuable resources." In that case, wouldn't T. Boone Pickens' "greatest transfer of wealth in the history of mankind" actually be a transfer of wealth in the form of valuable natural resources (oil) TO the United States, and not a transfer of wealth FROM the United States in the form of paper currency?

16 Comments:

At 4/03/2009 12:34 AM, Blogger Audacity17 said...

I agree its not a transfer but an exchange. I think he's upset these governments are using the money to fund terrorists. However, the truth is that if we stopped buying it tomorrow they would still sell it to everyone else. Plus, I had another thought. If we cut off money to the middle east would be really be safer, or could it actually be worse. The governments over there are more moderate than the terrorists. It could be worse.

 
At 4/03/2009 2:15 AM, Blogger 1 said...

"If we cut off money to the middle east would be really be safer, or could it actually be worse. The governments over there are more moderate than the terrorists. It could be worse"...

Hmmm, on the face of it, I find it hard to disagree with this thought...

I'm just not sure what sort of success we can point to with regards to $1.7 billion through USAID since 1994 spent/wasted on Gaza and the West Bank...

 
At 4/03/2009 6:26 AM, Anonymous richard said...

Mark,

How would you include other considerations into this explanation?

For example:
- Some people say there are large national security risks associated with buying oil from unstable regions
- Or buying oil may increase global warming

 
At 4/03/2009 7:03 AM, Blogger Golfintiger said...

What is the, to make up a phrase, "wealth multiplier" of the oil? We buy a barrel of oil for $50 and that oil is turned into (to name a few):

- gasoline - making money for the refinery, the transportation company, the wholesaler, the retailer and wherever the person who bought the gas is going.

- a bunch of plastic cups - the refiner, the polymer manufacturer, the cup manufacturer, the cup distributor, the transportation company, the retailer selling the cups, and, nowadays, the recycler of the evil plastic cup.

Picken's view of this "wealth transfer" is short sighted.

 
At 4/03/2009 7:13 AM, Blogger JimJinNJ said...

I'm not convinced. The definitional difference makes sense--transfer vs exchange.
But, once complete, the seller is in a position to buy the means by which "we" make Styrofoam cups.

If somehow we could purchase the energy from a party we trust (ie, another US citizen), they also could buy the cup factory--but I would trust them them more.
So my naive question is: is an exchange within the US system more to our advantage as a country than a transfer with a part outside it?

At the extreme, consider we are at war with country X, would we "exchange" with them? The issue is not cleanly circumscribed by economics, but must include some geopolitical aspect I content.

 
At 4/03/2009 8:55 AM, Blogger QT said...

JimJinNJ,

Why is trust even a consideration...you are buying a commodity not getting married.

I can understand if one is worried about whether the profits will be used to fund terrorism. In Mexico, the profits are used largely to fund social programs. In Canada, the profits will be invested in oil exploration, and technological innovations to help reduce carbon emissions and a portion will be distributed to shareholders like public pension funds. In Saudia Arabia, profits again pay for social programs.

Saudi Arabia has a real problem with terrorism and seems to be trying to fight it.

 
At 4/03/2009 9:04 AM, Anonymous Anonymous said...

How many people will be put out of work in the oil industry if we lower our consumption of oil? How many children will be homeless?
How many single mothers will be living on the streets when the gates to their refinery are chained shut? How many children will be hungry at night because daddy lost his job at the refinery?

Apparently, the democratic party doesn't care about the answers to these questions. As democrats in their cushy Washington offices work to destroy the oil and coal industries, working families will will suffer the consequences.

 
At 4/03/2009 10:24 AM, Anonymous gettingrational said...

RE: "Transfer of Wealth"
When we buy oil from the OPEC monopoly we are sending dollars away that can be spent by OPEC countries just about anywhere in the world. The world reserve currency aspect of the U.S. dollar is not taken into account by this lecture. The OPEC members can buy Chinese apples and the Chinese can buy oil in return. Did the dollars return to buy U.S. goods and services? The velocity of money (dollars) has been lost to the U.S.! It is no wonder we are being hollowed out as an economy.

 
At 4/03/2009 12:16 PM, Anonymous Anonymous said...

T. Boone long ago became a political entrepreneur--a looter, in the words of Ayn Rand.

 
At 4/03/2009 2:39 PM, Blogger PeakTrader said...

Yes, I agree, we exchange paper for oil, and that paper erodes in value.

I stated before, the best outcome for the U.S. is when oil exporters hold worth less U.S. paper, rather than buy U.S. goods.

 
At 4/03/2009 6:42 PM, Blogger Craig said...

"The world reserve currency aspect of the U.S. dollar is not taken into account by this lecture. The OPEC members can buy Chinese apples and the Chinese can buy oil in return. Did the dollars return to buy U.S. goods and services?"

But that doesn't change the fact that buying foreign oil is not a "transfer" of wealth. As has been stated already, we spend billions on foreign oil and then turn that into trillions of new wealth -- year after year after year.

Now, I would certainly love to see even more wealth created here through lowered restrictions on domestic oil-drilling, but, absent that, we do the best we can.

Our problem is not that we buy so much foreign oil, it's that we have to because of our own government.

 
At 4/04/2009 12:04 AM, Blogger bob wright said...

"Our problem is not that we buy so much foreign oil, it's that we have to because of our own government."

Well said Craig.

 
At 4/04/2009 10:14 AM, Blogger retire05 said...

Dr. Perry, I would advise your readers not to trust anything said by T. Boone Pickens.

Case in point: Pickens touted the construction of his west Texas wind farm, but never mentioned that he had gotten a contract from the City of Dallas for $500 million to sell that city electricity. But he had one major problem; the transfer of the electrical power. So he coerced the State of Texas and managed to have a three member board approve a $4.6 billion utility lines upgrade, a charge that was put on the backs of all consumers in Texas by adding the averaged cost to their monthly electric bill that started immediately.

Pickens was also working D.C. like a carnival huckster, trying to get the government to pay for his wind farm, although his own personal wealth is great enough to cover the cost. When the feds didn't come through, he shut the construction down. A friend was driving the flag car for the trucks that hauled the wind blades after they were picked up at the port of Galveston. The blades were made NOT IN THE U.S. so they were shipped to Galveston, picked up and hauled by truck to the west Texas site. When the Fed did not come through, Pickens has shut all construction down.

Pickens had a good deal going: he was getting the state of Texas to pay for power line upgrades and upgrades to the grid, he was going to get the Feds to pay for the wind farm, and once built, Pickens would reap the profits from the wind farm by selling power to Dallas.

But it doesn't end there: Pickens also had his wife and son create a "water district" and using ETJ laws, would have been able to tap into the aquifer that provides precious water to ranchers in the area. Pickens would have then been in a position to sell water, as well as power, to Dallas, and the ranchers wells would eventually run dry.

T. Boone Pickens is the modern day version of Billy Sol Estes. Only smarter, and classier, not to mention a lot wealthier.

Cost recovery on his wind powered generators was over 10 years. So of course, he wanted someone else to pick up the tab, and he would act as the construction guy reaping profit from the site long before the state and nation saw a return on its investments.

Pickens was counting on the "cap and trade" policies being implemented. He would have also profited from that, just as GE, a company driven into near bankruptcy with Jeffrey Immelt at its stern, will profit from cap and trade through its new company, Greenhouse Gas Services. Immelt is currently on Obama's Economic Recovery Advisory Board which is really rich considering GE has been driven into the ground by him even as he trades with Iran.

Immelt and Pickens are two peas in a pod and not to be trusted.

 
At 4/04/2009 11:24 AM, Blogger marketdoc said...

Of course, Mr. Pickens has spent alot of his own money on wind power. He has a vested interest in converting the world to wind power. The answer lies, rather, in Coal Liquefaction to Oil. The U.S. is considered the "Saudi Arabia" of low rank coal reserves. The Coal Liquefaction (Fischer-Tropsch) Process uses low rank coal, has been proven to work, and has been refined to become environmentally friendly at a cost of about $20 per barrel when compared to drilling for oil. There are alot of low rank coal mines just sitting there dormant across our country which could be reopened to utilize this process. Canada and South Africa already mass produce it. There would be no retro-fitting of vehicles necessary and it is estimated that the U.S. has enough coal to supply this form of energy for our domestic energy needs for over 150 years. Implementing this process would shift the world's economic focus away from the Middle East almost overnight!

 
At 4/04/2009 3:32 PM, Blogger QT said...

marketdoc,

$20.00 per barrel seems pretty optimistic. This technology has been around since WWII suggesting that there are other costs.

Another challenge that coal advocates face is the hefty cost and manufacturing logistics of converting the mineral to liquid. A coal-to-liquid plant typically requires 300 to 700 acres, a rail spur for coal and fuel deliveries, and access to roads, water and power lines, an Air Force fact sheet says. The proposed plant at Malmstrom is expected to take at least five years to complete.

The technologies for coal liquefaction have been available since before WWII and can produce a barrel of oil for about $30. Opposition derives from the fact that these technologies release more CO2 in the conversion process than the extraction and refinement of liquid fuel from petroleum.

The noises coming from Joe Biden and the Obama administration suggest that there is little interest in clean coal. The administration seems to prefer the least efficient forms of energy generation, wind & solar to coal, nuclear, or hydro-electric.

 
At 12/06/2011 10:09 PM, Blogger sf_jeff said...

The point of the wealth transfer comment is not the problem with buying something on the open market, it is that the purchase would be unnecessary if we spent our money locally.

Let's cut back a little bit on the rhetoric, guys.

 

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