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.