by E. Frank Stephenson

E. Frank Stephenson ^[1] chairs the economics department at Berry College in Rome, Ga. He blogs at Division of Labour ^[2].

Folksy oilman T. Boone Pickens has taken to the airwaves with a $58 million campaign to publicize his plan for energy independence ^[3]. His scheme apparently involves building windmills on the Great Plains to generate electricity. Natural gas that had been previously used for electric generation would then be used to fuel automobiles, thereby allowing us to “break the stranglehold of foreign oil.”

Pickens’s commercial no doubt causes FEE readers’ classical-liberal antennae to stand at attention. The word “plan” alone rightly provokes worries of coercive schemes. The notion of being independent of energy or any other commodity from foreign countries goes against the teachings of Smith, Bastiat, and others who recognize the gains from specialization and division of labor. Nor will readers knowledgeable about rent-seeking be surprised that media reports describe Pickens as “heavily invested in natural gas and wind power.” And when Pickens states in his commercials that “this plan will work but it needs your help,” readers familiar with Public Choice rightly suspect that the sort of help Pickens has in mind is tax dollars.

Although all of these cautions are appropriate, let’s ignore for the moment any self-interested motives and take Pickens at face value when he proclaims, I'm 80 years old and have $4 billion. I don't need any more money. Instead, let’s focus on the stated premise for his plan — stopping the the largest transfer of wealth in the history of mankind. As with so many things, it just ain’t so!

Here’s why. The $700 billion annually (according to Pickens) that Americans spend to purchase oil from other countries is a price not a transfer. A transfer — unemployment benefits, for example — is a payment made to someone who provides no good or service in exchange. Transfers, by nature, are zero-sum. One person gives voluntarily or via coercive taxation; the other person receives. (Of course, if one throws a few bureaucrats in the mix the transfer recipients might receive less than the amount taken from the donors or taxpayers.)

By contrast, when one makes a purchase, the money one pays is the price of the purchase – it is one side of a mutually beneficial voluntary exchange. Each party to the transaction trades away something in return for something for which he or she has a higher subjective value. If I spend $2 for a cup of coffee, I’ve made a purchase not a transfer. I get the coffee, which I value at more than $2, and the coffee shop gets the $2, which it values at more than the cup of coffee it served me.

In the instance of the $700 billion we spend on imported oil, we get something — oil! — in return. Our receiving millions of barrels of oil in exchange for $700 billion is hardly a transfer. We receive a versatile commodity that can be used for everything from making to plastics to fueling family vacations; the exporters receive the $700 billion that they can use to purchase other goods and services.

It is true that with oil prices of $113 per barrel (as of yesterday), we’re paying a higher price than we did just a few years ago. People will most likely find some purchases that they might have considered beneficial when oil was, say, $60 no longer to be beneficial. Consequently, almost as if guided by an invisible hand, people will reduce their oil consumption by driving less, buying more fuel-efficient vehicles, and doing many other things. Yet none of this makes the purchase of foreign oil a transfer.

Moreover, it is true that much of our imported oil comes from countries with odious regimes. Indeed, it’s difficult to think of countries more antithetical to classical-liberal ideals than Venezuela and Saudi Arabia. It might well be nice to have our trading partners in the mutually beneficial exchange of oil be nice folks in countries with greater respect for individual rights (the Swiss perhaps), but this doesn’t make purchasing imported oil a transfer.