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By Andrew Holland on Mar 16, 2012 with 8 responses

Oil — Easy to Produce, But Not Easy to Buy

Robert Rapier had an interesting post on his R-Squared column. He claimed that Tom Friedman was mistaken in his most recent column (Pass the Books. Hold the Oil) in saying that Taiwan has succeeded because they have no natural resources; therefore they can be a model for how other countries can become successful by investing in their people. Robert says that’s not the whole story: even though they don’t produce oil, they are still dependent upon it. Again, I find myself defending Friedman, and that’s really not my default.

Robert does a good job of showing how much oil Taiwan actually uses, and his numbers here are great – and important. I had no idea that Israel consumes more oil per capita than the EU. The common thread, unfortunately, is that growing economies require growing amounts of oil.

However – I think Robert overlooks a big difference here. Friedman is talking about production, while Robert is talking about consumption. Because the Saudis can produce oil by sticking a drill into the ground, they don’t have to learn how to get hard currency in another way. Essentially, because they can sell oil to the world, they don’t have to learn how to build factories. They sell the oil, then they get cash, which they use to buy Mercedes and extra-tall skyscrapers.

The Taiwanese on the other hand have to buy all the oil they use. And – where do they get the money to pay for the oil? By building factories and selling things that the world needs.

I have noticed a difference in writing about energy depending on whether you come from an engineering background or an economics background. International trade economics (my MSc) says that countries will trade that area that they have a competitive advantage in. An engineer only looks at total inputs.

The Saudis produce more oil at a cheaper price than anyone else. Selling that oil allows them to import lots of other stuff that they want. Taiwan has to export other things, like manufactured electronics, in order to get hard currency with which it can import the oil it needs.

The Saudi way requires heavy investment, but very little mass education. The Taiwanese way requires investments of a different sort: an educated population and the infrastructure to support a strong manufacturing base.

  1. By Robert Rapier on March 16, 2012 at 1:22 pm

    Friedman’s narrative leaves the clear implication that Taiwan did not need oil to succeed. After all, part of the title is “Hold the Oil.” The point is, they are not “holding the oil” nor are any of the other countries he cites. But look at the comments following the article, and the implication is “they succeeded without oil because they invested in their people.”

    Further, we can look at plenty of countries that are major oil producers that did build factories and have high standards of living: Canada, Norway, the UK, the U.S. So that suggests that it isn’t oil that is the issue here. When he writes that governments should invest in their citizens, he is on firm ground. When he tries to extend that into “they are more likely to succeed since they have no oil” he leaves that firm ground. We have plenty of examples of countries that have or had rich natural resources that built complex economies with high standards of living. We can also cite plenty of countries without natural resources with low standards of living and simple economies. That argues that this is a much more complex issue than he has tried to make it.

    RR

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  2. By Samuel R. Avro on March 16, 2012 at 1:56 pm

    To me, Friedman’s underlying point was to knock the proponents of drilling at home by pointing to the fact that many oil producing countries have low standards of education while countries that don’t produce much oil have higher standards of education.

    But I think this argument is baseless, because it’s not the oil that’s ruining the countries he lists, but in spite of it. As Robert pointed out, just take a look at countries like Norway and Canada to see what can be done with the money earned from oil production.

    Additionally, here in the U.S., there are no national oil companies. So any money earned from oil production is like any other industry bringing in revenue from their product, which is good for the economy and brings in tax revenue that can then be spent on education (just like any other tax revenue) or wasted away by politicians. It’s no different than the wheat industry; would you argue that since it’s so easy to produce and sell wheat, it’s going to make the country lazy?

    For a country to rely solely on oil production is one thing, but for most developed countries that have many other sectors in their economy, if they can add to that by developing their resources I don’t see how that can be bad for education.

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  3. By Robert Rapier on March 16, 2012 at 2:06 pm

    International trade economics (my MSc) says that countries will trade that area that they have a competitive advantage in. An engineer only looks at total inputs.

    By the way, I didn’t really follow this. Could you elaborate? Where am I looking only at total inputs? I do actually understand why New Zealand produces sheep, Canada produces timber, and the U.S. imports oil. So I was unclear on the basis of your comment.

    RR

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  4. By Andrew Holland on March 16, 2012 at 3:28 pm

    I’m writing this from my phone in a cab to Dulles airport, so apologies if it’s garbled. 
    First- on the question ofwhether they’re ‘holding the oil’ – you’re right- Taiwan and other developing countries do need a lot of oil to grow: if that difference wasn’t clear in friedman’s piece, that’s on him. I thought it was pretty clear that he was saying they were lucky because they avoided the resource curse- which I think is the most salient point.  
    There’s a pretty rigorous academic debate going on right now about the extent of a ‘resource curse’. If you look at the examples you cite, though, those countries all had pretty well developed institutions and economies before they found oil. Norway, the US, Canada were rich before they struck oil. Saudi Arabia was just a nomadic desert kingdom. Nigeria and angola were conflict- struck post-colonial states. 
    Sam- as for your question about laziness- oil production is extremely capital intensive, but very low labor intensive. That means that an economy can get a lot of money (to be taxed or distributed as dividends or even given away as charity) for very few (relatively) actual jobs. So- you’ll get an economy with a lot of money going around, and no real need to work. To take your wheat example, I would argue that exactly as you said, if wheat sold for $110 per bushel. 
    But- overall, I think we’re all talking a bit passed each other: Friedman and I are mostly talking about developing economies. In a modern,diversified economy like the US, there is plenty of room for all sorts of industries, without affecting the political or social system. I don’t see this as an argument against drilling at home, at all.

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    • By Greg on March 17, 2012 at 2:09 am

      The resource curse is substantially worse than Andrew describes. It’s not that there’s no need to work – nearly everyone likes to have a reason to get out of bed. It’s that you can’t make anything else profitable.  Exporting the resource causes the currency to rise, meaning that imports are cheaper than the same product made locally – no matter what the product is. 

      Unless, of course, the receipts from export of the oil are quarantined from the rest of the economy, as Norway has done with its sovereign wealth fund. It took a while to figure this out, and such an advanced nation as the Dutch struggled with it:  the resource curse used to be called “the Dutch disease”, in reference to their North Sea gas bonanza making their other exports unprofitable. 

      If any of those countries had been located where Tibet or Zambia is – well away from trade routes – without they would not have had the same success no matter what their policies.

      Now, Taiwan.

      Taiwan is exploiting a natural resource, and a social resource too: its geographical position, and its kinship links with the Chinese mainland. 

      To be sure, the Taiwanese government’s educational and industrial policies and its general supply-side orientation were very important. But they wouldn’t have mattered a hill of beans had Taiwan not been located near Japan (Taiwan being at first a source of cheap manufacturing labour for Japanese companies), and then near mainland China (as logistics managers and controllers of distribution channels).

      The same applies to Singapore, located hard by the biggest shipping bottleneck in the world; Hong Kong, which exploited its harbour, its links with Britain and its ability to tap unlimited labour from the mainland very skilfully; and Korea, again located near Japan.

      If any of these countries had been located where Bhutan is, or where Zambia is — away from trade routes — without resources they wouldn’t have been nearly so successful whatever their policies and institutions.

      Remember: resources don’t just come out of the ground. Sometimes, they are the ground.

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      • By Greg on March 17, 2012 at 2:11 am

        Oops, please ignore the paragraph about Tibet and Zambia.

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  5. By Andrew holland on March 16, 2012 at 3:35 pm

    And- on your question, Robert. Maybe the fault is on my end for not explaining myself very well. It just seems to me that whenever I talk to engineers, there’s a temptation to just look at inputs or outputs andforget about costs. Sorry if I was unclear ( or continue to be unclear)

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  6. By Optimist on March 16, 2012 at 8:54 pm

    But I think this argument is baseless, because it’s not the oil that’s ruining the countries he lists, but in spite of it.

    It’s not? You could have fooled me!

    Like Andrew says, the resource curse is a well known, and widely observed phenomenon.

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