Carpe Diem

A timely case of ‘rent-seeking’ regarding natural gas exports

It’s somewhat ironic (or timely) that on the day after public choice economist James Buchanan died, a classic, textbook example of rent-seeking emerged from a group called “America’s Energy Advantage,” which might be more appropriately called “America’s Self-Interested Energy (Natural Gas) Advantage for Some Big Private Chemical and Steel Companies.”

The concept of “rent-seeking” was a central part of the “public choice school” of economics that was developed by James Buchanan and one of his main co-authors Gordon Tullock.  Here’s the Wikipedia definition of “rent seeking“:

In [public choice] economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. One example is spending money on political lobbying in order to be given a share of wealth that has already been created.

The net effect of rent-seeking is to reduce total social wealth, because resources are spent and no new wealth is created. It is important to distinguish rent-seeking from profit-seeking. Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth.

Here’s how rent-seeking applies to the current controversy over natural gas exports.

Thanks to advanced drilling technologies (hydraulic fracturing and horizontal drilling), and private risk-taking investors, private oil and gas companies tapped into an ocean of shale gas in America that by some estimates is enough to supply our natural gas demand for the next 100 years. But along with the enormous shale gas bonanza came a hard economic reality – the ocean of shale gas lowered spot prices below the cost of production for many producers, especially the smaller ones. Not to worry though. At such low prices, America’s abundant, cheap natural gas is easily marketable overseas, where prices are frequently many times higher than in the US (4-5 times higher in some cases).  Thus, the natural, market-based solution is for U.S. gas producers to sell their very marketable product overseas to eager buyers in Asia and Europe.  That’s the way the market works, and that’s the beauty of the global economy – both buyers and sellers get access to foreign markets, resulting in lower prices for consumers and higher prices for producers, with overall net gains and a higher standard of living.

But here’s where rent-seeking enters the picture.  Energy-intensive US manufacturing companies like Dow Chemical, Nucor (the country’s largest steel producer) and Alcoa have benefited significantly from historically low natural gas prices, and want to restrict natural gas exports through the political process, to protect their lower energy prices and higher profits. They like the “unfettered” profits they enjoy because of lower energy costs, but they want to prevent the “unfettered” exports of natural gas by the companies that have produced that “wealth.”  In public choice terms, Dow, Nucor and Alcoa are now devoting resources to influence public opinion and the political process “in order to be given a share of wealth that has already been created” by oil and gas producers.

In memory of James Buchanan and his timeless legacy of public choice economics, let me illustrate the concept of rent-seeking with some editing of America’s Energy Advantage mission statement in the spirit of public choice economics:

America’s Energy Advantage (AEA) is a group of self-interested, rent-seeking businesses and organizations (including Dow Chemical Company, Nucor, and Alcoa)  dedicated to raising public awareness of how our companies can increase our profits from the emerging renaissance in American manufacturing made possible by our country’s new abundant and affordable supplies of natural gas, which are private resources that belong to oil and gas companies, but which will increase our profits if we can restrict domestic producers from taking advantage of lucrative export markets.   

America’s Energy Advantage believes in:

  • Supporting the natural gas advantage that has made the U.S. manufacturing sector more competitive and profitable, which has created jobs, spurred capital investment and increased exports of value-added products and in the process increased the profits of Dow, Nucor and Alcoa.
  • Carefully considering the economic consequences to the profits of Dow, Nucor and Alcoa before allowing unfettered natural gas exports.
  • Extending the benefits of America’s natural gas abundance to domestic and industrial consumers by keeping utility bills for Dow, Nucor and Alcoa low, and our profits high
  • Maintaining national energy security by developing multiple domestic energy sources, to the extent that it increases our profits
  • Rules-based free trade and living up to trade commitments made under the World Trade Organization, to the extent that it increases our profits

America’s Energy Advantage aims to:

  • Encourage the federal government to move cautiously on permitting natural gas exports in order to measure impact on price, security and jobs, and the profits of Dow, Nucor and Alcoa.
  • Educate policymakers on the potential risks to the U.S. economy and the profits of DOW, Nucor, and Alcoa of unfettered natural gas exports.

A broad alliance of policy makers, business leaders, and independent analysts have spoken out in support of using our natural gas reserves domestically, even though that may violate the private property rights of companies in the oil and gas industry, who should be able to sell their products in an unfettered global market. 

Bottom Line: In classic protectionist strategy, Dow Chemical, Nucor and Alocoa are engaged in the wasteful use of resources for rent-seeking, in an attempt to influence public opinion and the political process.  Despite their stated concern for the public interest and national energy security, public choice economics helps us understand the true motive of America’s Energy Advantage – to expropriate the private wealth created by private oil and gas companies by restricting the sale of natural gas overseas, and in the process keep their energy costs low and their profits high.

Thanks to Dow Chemical, Nucor and Alcoa for the classic, textbook example of “rent-seeking” as a timely tribute to the father of Public Choice Economics – James Buchanan.

16 thoughts on “A timely case of ‘rent-seeking’ regarding natural gas exports

  1. “In [public choice] economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. One example is spending money on political lobbying in order to be given a share of wealth that has already been created.

    The net effect of rent-seeking is to reduce total social wealth, because resources are spent and no new wealth is created. It is important to distinguish rent-seeking from profit-seeking. Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth.”

    —Sounds like the entire industries of defense, homeland security, and agribusiness to me.

    • Sounds like the 47% of earners who pay no income taxes.

      These tax spenders are always leeching off of the tax payers–the rent that they extract is blood.

  2. “Exports are good, imports are bad” – except when “Exports are bad” (When? “When our profits get smaller and their profits may improve”).

    I am shocked that Saudi Arabia (and other such nations) would export any oil to anyone – Imagine how profitable companies in Saudi Arabia (and others) could be if they were to force companies in other countries to use oil from more expensive sources? Or discover their own?.

    I am also shocked that we allow Boeing to export those amazing products we call “Jets” – those machines that can operate for hours on end and carry hundreds of passengers all over the world. Imagine how profitable airline companies in the US may be if we force other airline companies to purchase (or manufacture) jets from other expensive sources (That there are few other options is irrelevant – they can all go to h&^% or whereever – why should WE help THEM become better?)

    It may indeed be time to stop all this trade amongst nations – so all nations can become much more wealthier and their peoples live better. Trade can only be allowed amongst nations when the brilliant amongst us decide to allow such trades – as long as they can control all of the trades.

  3. Examples like this are rampant and have been…perhaps if we treated corporations as people and let them stuff large sums of money into our politicans pockets this would cease…

    • The amount of money corporations spend on buying politicians is significantly smaller than what they spend in ads. Corporations would much rather work at convincing you to buy their products than buy a vote.

      Besides, rather than taking away the rights of people in groups, wouldn’t it be better, more ethical, to restrict the power the government has in the marketplace? After all, if politicians didn’t have the power to control trade, then companies would have no interest in them at all.

      • Power is power – and it is corruptable, no matter who holds it. The idea that taking power from the government and handing it to corporations would create a more ethical environment seems naive to me. And when the two are as cozy as our Corporate Governemnt is – the sure loser is you and me Jon.

        • Forgive me, Moe, as perhaps I made myself unclear.

          I believe that, by restricting the powers of the government to intervene in the marketplace, the interest of corporations in government policy would dissipate. The question we need to ask ourselves is “why are businesses interested in government policies? Why do they contribute to political campaigns?” I think the answer is simple: because the government has its hands in their pie. In order to protect themselves from the machinations of the government, they seek to influence policy through lobbying, campaign donations, and the like. Just as we all do. I feel that by strengthening the relationship between government and business (which is what regulatory action does), then businesses access and interest in government will increase.

          But let’s take the government out of the question for the moment. Who does a company depend on to survive? Its customers. No business can survive without customers and no business can compel people to buy from them. Even in the event of a monopoly, this is the case.

          So, Moe, what I am talking about is removing power from the government and placing in the hands of the people, not the corporations. Let the people decide from where they should buy their products, not the government and not the corporations. Let the companies face true competition from all over, not just politically correct places. Let the people decide which company shall live and which shall fall.

          Whenever you have a government that has the power to regulate, you will have interested parties attempting to influence that regulation, whether it be the health care companies lobbying for Obamacare, or Bridgestone seeking a tire tariff, or the UAW looking for better wages, or the Catholic Church looking for social programs. As the stakes get higher and higher, groups will pour in more and more money. The best thing for all involved is to nip it in the bud and prevent the government from acquiring too much power in the first place.

          After all, is it really a surprise that lobbying has skyrocketed since the New Deal?

          • I read you.

            The only ones NOT gaining power these days are the people. We seem to have less and less recourse and services – city and state government budgets have been emaciated. In my town and the next one over police forces are less than half they were in 2010.

            I’m all for more power to the people (why do I want to pump my fist in the air everytime I write that?), it just seems like it will be similar to turning the titanic around…we have come so far in the opposite direction.

          • Jon,

            I remember thinking like you when I was protesting the Viet Nam War and the “establishment” with Michael Moore and the like back in the 1970s. We really thought we were going to change the world. Mike’s still acting like he is trying while I found out I could not beat them so I joined them. Keep your idealism as long as you can. I hope you do a better job than we did.

  4. You make it seem like profits are a bad thing. But seriously, they could also decrease the prices of their products, boost their wages, any number of things. It would be more accurate to say they’re trying to contain their costs. This does not make their actions any more justifiable.

  5. Actually this is just harkening back to the economic theory in place before Adam Smith, mercantilism, where one if its tennants held that:” That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.” (from wikipedia article on merchantilism). Of course merchantilism is part of the reason the American Revolution was fought. But the idea at first blush of exporting higher value goods rather than lower less processed goods makes a lot of sense. Of course merchantilism is in the sense used in the post rent seeking by a country as a whole against the whole world, which of course happens a lot see opec for an example.

  6. Throw in the fact that the Sierra Club is also opposing the exports and you’ve got a case study in Bruce Yandle’s “Bootleggers and Baptists”, too. This could turn in to an entire semester’s curriculum!

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