Oil Econ 101 & Economic Attribution Errors

By Arnold Kling, from TCS, two articles for further review: a great article on why the US can never truly be "free from Saudi Oil", among other basic Oil Economics points, and a somewhat psychological article on misattributing economic performance to individuals who have little control over what has just happened (or is currently happening).

Excerpts below- but read the whole articles. Excerpt from Oil Economics 101:

If we reduce oil consumption by 10 percent, then we will not cut 100 percent of our imports from Saudi Arabia. We cannot arrange to consume only American oil and no Saudi oil. Oil is oil. If we reduce demand by 10 percent, we probably will reduce our demand for Saudi oil by 10 percent, not by 100 percent.

(Actually, oil is not exactly the same everywhere. Saudi oil is somewhat cheaper to extract and refine than other oil. What this means is that if we reduce our demand for oil, the impact is likely to be felt somewhat more on other oil, and somewhat less on Saudi oil. Lowering our demand by 10 percent might not lower Saudi oil exports much at all. But we can leave that aside for now. Just keep in mind that oil is oil.)

But what if we passed a law against importing Saudi oil? In that case, the Saudis would export their oil to us via Venezuela. They might not physically use this channel, but if the Venezuelans sell more oil to the U.S. and the Saudis sell more to other customers no longer served by Venezuelans, it has the same effect.

and from Economic Attribution Errors:

"Psychologists call this tendency the Fundamental Attribution Error (FAE), which is a fancy way of saying that when it comes to interpreting other people's behavior, human beings invariably make the mistake of overestimating the importance of fundamental character traits and underestimating the importance of the situation and context."
- Malcolm Gladwell, The Tipping Point, p. 160

Recently, a book club in which I participate met to discuss Gladwell's book. Ironically, one of the participants proceeded to commit what I think of as the Economic Attribution Error. That is when someone attributes the behavior of key macroeconomic indicators, such as the exchange rate, the Budget deficit, or the unemployment rate, to the fundamental character traits of government officials, such as the President or the Chairman of the Federal Reserve. In fact, the values of these variables depend mostly on the context provided by the private sector - the influence of fiscal and monetary policy tends to be vastly overstated.
In his analysis of monetary policy in the 1990's, Greg Mankiw, now President Bush's choice to be chairman of the Council of Economic Advisers, does not share the widespread view that Alan Greenspan's brilliance is what accounts for the strong economy.

"A large share of the impressive performance of the 1990s was due to good luck. The economy experienced no severe shocks to food or energy prices during this period. Accelerating productivity growth due to advances in information technology may also have helped lower unemployment and inflation."

Journalists see the economy as a puppet, with Greenspan pulling the strings. But the reality is quite different.

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