February 25, 2013

Resource Curse for the USA

Predictions that the United States will become a net energy exporter by 2020 have become increasingly common. The heaviest hitter to weigh in with such a prediction is the International Energy Agency, whose November 2012 energy outlook  predicts that around 2017 the United States will become the largest oil producer in the world. In Bloomberg's summary, "The U.S. will pump 11.1 million barrels of oil a day in 2020 and 10.9 million in 2025, the IEA said. Those figures are 500,000 barrels a day and 100,000 barrels a day higher, respectively, than its forecasts for Saudi Arabia for those years. The desert kingdom is due to become the biggest producer again by 2030, pumping 11.4 million barrels a day versus 10.2 million in the U.S."

Whether these predictions will come true remains, I think, a big question--there are lots of dissenters to that proposition. If it does come true, however, the implications are not all rosy, quite apart from the environmental consequences. The strong dollar that would follow such a profound change would give the U.S. a version of the "resource curse." Daniel Altman of New York University explores the implications in this piece from Foreign Policy:

To buy all that oil and gas, America's new customers will need dollars -- and that will begin to push up the currency's value. It will rise further still if the oil and gas industries energize the U.S. economy enough to pull in new investment from abroad. Offsetting this trend somewhat, Americans might also buy up more assets abroad in a rush of cash similar to the petrodollars that flowed out of the Middle East in the 1970s. But overall, the demand for dollars is likely to climb sharply. The prices of gold and other commodities denominated in dollars will plummet, as dollars will have become more valuable while the intrinsic value of the commodities will not have changed.                                                                 

Though these shifts will be dramatic enough, the most profound effects will be on American workers and consumers. A stronger dollar is usually fine for Americans, as long as their purchasing power keeps up with the currency. Yet this is exactly where the problem will be. The new exchange rates will make it harder for non-petroleum industries -- where many more Americans are employed -- to export their products. At the same time, the strong dollar will make imports more affordable to American consumers. Some of the money generated by oil and gas will still filter through to other industries, but those dependent on exports or competing with imports could find themselves in a dire situation. 

The news for consumers is not all good, either. With more income coming into the country, local prices will creep up as well. The United States might go the way of Norway and Australia, rich countries that have become two of the world's most expensive places to visit and live, in large part because of their resource booms. The combination of higher prices for goods and services and falling wages in industries unable to compete at the new exchange rates will squeeze household budgets from both ends. 

Over time, an economic divide will open between Americans who benefit from the oil and gas boom and those who do not. If the economy does not change in a way that ensures more Americans fall into the first category, then inequalities will continue to widen, and the United States might end up looking more like Brazil or Mexico. 

Of course, the government could have something to say about this. To start, it could try to weaken the dollar. Indeed, for years political leaders and officials have paid lip service to a strong dollar policy while trying to support American exports by pursuing more favorable exchange rates. Sometimes they have told other countries to let their currencies appreciate, and sometimes they have devalued dollars simply by printing a lot more of them. 

But what will they do when the dollar really is strong? The likely answer is not much. With a booming economy -- even if some sectors are suffering -- the last thing the Federal Reserve will want to do is add fuel to the inflationary fire by injecting more cash into the markets. The Fed's job is to keep prices relatively stable and maximize employment for the whole economy; if anything, it will keep interest rates high to stop the economy from overheating. 

Alas, high interest rates will just inflict more pain on struggling families. A boom for the economy as a whole will be a bust for them, several times over, because their wages will be slipping while prices go up and borrowing becomes more difficult. As a result, their fate will depend on those who can extend a helping hand: state governments, Congress, and the White House. 

Analysts of emerging economies have seen all of this before. Windfalls of natural resources are common among poor countries, and the question is always the same: How will they turn these newfound riches, generally controlled by a minority, into long-term economic gains for the majority? The answer is often to retain and set aside a large share of the revenue and invest it in education, health care, infrastructure, and the broader development of the private sector. 

For the United States, the answer is less clear. How much petroleum revenue will be collected as taxes? How will those taxes be used to reduce inequality and put the entire economy -- not just the petroleum sector -- on a solid footing?
Today's politicians can't even agree how to budget for the next 10 months, let alone the next two decades. In this case, however, planning ahead will be absolutely essential.

Daniel Altman, "The United Petrostates of America," Foreign Policy, February 25, 2013

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