Wednesday, December 31, 2014

Banana Republic

As Paul Krugman points out in a post this week, whether or not you are enjoying the current slump in oil prices depends pretty much on where you live, and it's a lesson Austin Knudsen really ought take to heart.

Krugman is a smart guy, but let's face it, this is not rocket science. For most of the world – the part that doesn’t produce and sell the stuff - cheaper oil means lower fuel costs for families and businesses. Wages go farther, profits grow, and it’s all good.*

On the other hand, for the producers – these days we think of Russia, the Bakken, the Tar Sands, OPEC and so forth – declining prices can hurt pretty badly, with just how badly depending on how dependent the economy is on oil production. Krugman offers as a case in point Texas, back in the mid-1980s. At that point about 5% of Texas’s total economic output was attributable to oil production. Then, as now, the economy was recovering from what at the time was the worst recession on record since the Great Depression. Then, as now, the national unemployment rate, while still high, was drifting steadily downward. And then, but even more so than now, there was a sudden, sharp decline in oil prices; in the first six months of 1986, the West Texas Intermediate spot price fell by 58%, from $26 to $11 per barrel.**

The result, for Texas, was very, very bad. Here’s Krugman’s chart, which shows that in 1986, as the US economy was recovering, the unemployment rate in Texas rocketed up, going from well below to well above the national average, where it stayed for several years.

You might think about all this when you read this Missoulian report on the Republican agenda for the 2015 legislative session. According to Austin Knudsen, who Republicans in the House have tapped for Speaker, more resource extraction is at the top of his party’s wish list, apparently because it will create “long-term new wealth.”

This is pretty standard stuff. Republicans, and a few of my fellow Democrats as well, have been saying for years that Montana is a “natural resource state” and that we can secure our economic future by digging up the ground and cutting down trees. But think about it: is placing all our eggs in the one basket of natural resource extraction really all that smart? Should we really, like Texas in 1986, rely for our prosperity on the notorious vagaries of international oil markets?  Should we really invest heavily in digging up and exporting more coal when our biggest potential customer apparently intends to import less of it? Should we blithely assume the world is going to keep on burning the fossil fuels we’re selling, consequences be damned? Does anyone really believe that in a world economy driven by incomprehensibly rapid change in technology and scientific knowledge, sustainable “long-term new wealth” is going to be found in natural resource extraction?

Speaker Knutsen comes from the oil patch, so his sympathies, and those of his party for the well-being of the oil companies that bankroll it, are easily understood. They make Montana sound like a 19th. century colonial economy, the kind controlled by foreign corporations and local elites with the sole purpose of sending oil or copper or coffee or something off to a hungry imperial power. But come on: If we really care about Montana’s future, can’t we come up with a better vision for it than as a latter day banana republic?

*Well, mostly good. If people respond to lower fuel prices by burning more of the stuff, then we have a problem. Fortunately, in the short run at any rate, that tends not to happen; the demand for oil, as economists like to say, is inelastic.

** For a very useful site for tracking historic crude oil prices, click here.