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James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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How to Become Rich: Buy Low and Sell High

It's a strategy that works for individuals, and can work for the entire nation as well. If you can figure out a way to find resources whose value in their current use is not very great-- in other words, if you buy low-- and redeploy them somewhere else where their value is much greater-- in other words, sell high-- then you will not only add to your personal wealth, you will be creating new wealth for society as a whole. The process of allocating resources to their most efficient use is the heart of what drives economic growth. The fact that individuals have a strong personal incentive always to be looking for better ways to do that is the primary factor responsible for the standard of living that we enjoy today.

Let me give a concrete example of what I'm talking about. On Friday, you could buy a barrel of light, sweet crude oil produced in North Dakota for less than $81. On that same day, oil refiners in Port Arthur on the coast of Texas were paying around $110 to import a similar grade of oil produced in Nigeria. That's $30 worth of incentive to you to try to figure out a way to transport oil from North Dakota to Port Arthur in order to replace a barrel of imported Nigerian oil with Williston sweet. As a nation, if we could divert some of the resources we are currently devoting to pay for oil imported from Nigeria, and use them instead to enable the Port Arthur refinery to get its oil from North Dakota, we will become richer.

Buy low, sell high.

So there's a very concrete mission. How can you go about implementing it? You could try to ship the oil from North Dakota to Port Arthur by truck, but that would eat up most of your profits in transportation alone-- the combined resources we'd use to produce the oil and then truck it to Texas are not much less than the resources we're currently surrendering to get the oil from Nigeria. Rail is a much better way to get the oil from North Dakota to Texas, and rail is being used more and more, but it's still pretty expensive. And America doesn't have enough of the specialized rail infrastructure to handle the volumes that are needed.

Weekly US railcar loads of petroleum
Source: Association of American Railroads.

A far better idea is to transport the oil by pipeline. We could get the product where it needs to go with a fraction of the resources currently used up trying to move the product by rail, permitting us as a nation to produce more of everything else.

Wealth creation.

Of course, this is not a new idea, but has been the obvious solution from the industry's beginning. The first pipeline for transporting oil was built in 1865, only 6 years after the start of the industry. In the years since, America has laid a half million miles of oil and natural gas transmission pipelines, and millions more in gas distribution lines.

US Oil and Gas Pipelines
Pipeline Photo - Key
Major U.S. oil, gas, and product pipelines. Source: World Factbook.

But now we need some more, to make best use of the growth in new oil production from places like Canada and North Dakota. What we need, for example, is the proposed BakkenLink system to connect North Dakota to the bigger proposed Keystone pipeline expansion.

Proposed Bakken Pipeline
Proposed BakkenLink Pipeline in North Dakota and Montana.

Bakken Pipeline and Keystone XL Pipe
BakkenLink and the Keystone Gulf Coast Expansion.

That obvious solution was proposed some time ago by TransCanada, a private company that's offered to build and pay for the pipeline, and has been waiting now for more than 3 years for the U.S. State Department to do nothing more than say, "OK."

On Wednesday, President Obama announced that he needed more time to study the proposal.For 150 years, Americans understood perfectly well that pipelines are the rational way to transport oil. We've reached a new and very troubling paralysis if we can't even agree on such an obvious fact at this point.

In addition to the question of how to make the best use of productive resources, another issue that has been raised in the debate is whether projects like the Keystone Expansion Project might also be helpful in terms of putting unemployed Americans back to work. Certainly laying more than a thousand miles of new pipe ought to cover a few paychecks. Critics say that these would only be temporary jobs, lasting only as long as it takes to build the pipeline. That's a valid point. But many of those same critics seem to think that America would be well served by other government-funded, temporary stimulus spending, as a good plan for getting people to work.


But here's the problem-- how shall we choose the projects worthy of this government funding? One of the key drawbacks to having elected officials choose which projects get funded is that they are likely to favor the projects that reward their political allies and consolidate their power. For example, U.S. taxpayers might find themselves committed to pay a half-billion dollars to a solar company that ceased operations shortly after receiving the money.

Which is the better strategy for creating new wealth, Keystone or Solyndra? Maybe we need a few more years to study that question.

By. James Hamilton

Reproduced from Econbrowser

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Leave a comment
  • Attila on January 27 2012 said:
    One detail here: the Canadian oil is very different from the Bakken oil, so a separate pipeline would be needed.
  • Renee on January 27 2012 said:
    The critics are wrong that the jobs are only temporary. Yes, some jobs would be - those that are involved in the building of the line. However, a pipeline would also need maintenance and these jobs would be permanent. Although jobs on the Alaska pipeline are not
    the heyday as 1964 when it was under constructions, there are still jobs at pumping stations along the line.
    Government stimulus jobs wear out when the money dries up.
  • Rocketman on January 27 2012 said:
    What about using the same principal to build an oil and gasoline refinery or two just outside the drilling area around Williston basin, then ship the refined material down to the Texas coast? Wouldn't that essentially do the same thing?
  • Vermont Duchess on January 27 2012 said:
    I feel as if I am being forced to watch an execution, that of the US. The president and his minions seem determined to see us dead, at least dead as we have known ourselves for over 300 years. He seems to feel we should be recreated as zombies, death slaves to his satanic vision of socialism. There are so many places in the world that match his vision of Eden that we should start a collection to buy a ticket for him and his fans. I'll donate the first $10 as long as it's only a one way ticket.

    It doesn't take more than a kindergarten grad to see that we are attempting self-anihilsation with this oil is bad, sun is good mantra. Nov. 2012 cannot come soon enough, I just hope it's not too late.
  • Rob on January 28 2012 said:
    Obama is a political animal. But advocates of the pipeline haven't educated the ignorant masses on it's benefits. It's easier for the public to live on government pork and stay on the reservation until the whole business goes down in financial flames.
  • gary hester on January 28 2012 said:
    But if we build a pipeline, Warren Buffet's trains won't be needed to haul the oil.
  • John Sipkens on January 29 2012 said:
    Do we really want a foreign company building a pipeline across our country to transport a product (oil) across our territory? For many years foreign ships have not been allowed to transport goods or passengers from US port to US port. The article says "it may provide construction jobs for US workers". We already have Chinese companies building our roads and bridges, do we need Canadians building pipelines across our land? I was horrified to see that the government was recently strongly considering giving a multi-billion dollar contract to Europe to build tankers for our airforce. The contract in the end went to an American company Boeing. But the government was stupid to even consider having an European company do this. The President is stupid to take so long to consider the request from a Canadian company to build a transportation system across our country, but I hope he is not stupid enough to allow it. We now allow Mexican trucks to transport products from Mexico to US destinations but are we going to allow Mexico to build the highways for them to do so? I think not.
  • Interested Reader on January 30 2012 said:
    I'm surprised no one has mentioned the environmental concerns that I believe are some of the main factors that make the President want to study this further, whether as a temporary stimulus or as a long lasting entity. Aquifers supplying the a large population seem to be one of the most important natural features that need protection from potential contamination. Certainly it's one step forward, two steps back if a project like this were approved - then, oops! - water supply ruined. We only have so much (clean) water on the planet, and we all need it, even more than oil.
  • Uncle Chuck on January 30 2012 said:
    Looking at the map for the proposed pipeline, it looks like we're taking oil from Canada AND North Dakota to shop to China. Aside from generating temporary and some permanent jobs, how does this project benefit America as a whole?
  • KB on February 02 2012 said:
    Why not terminate XL pipeline near Williston ND, where a new refinery operation is to be installed? Then refined product ships by barge down Missouri River. Refinery takes input from both XL and Bakken sources. Why not also install gas-to-liquid technology, which converts CH4 to gasoline and jet fuel? Need a quick build up refinery? Break down an underused old refinery, reassemble in ND. With cheap natgas to fuel refinery operations, ND becomes new TX. (And no hurricanes! Just the occasional blizzard. Ha ha.)
  • scout on February 02 2012 said:
    James you are right. The XL Pipeline is a no-brainer. Manipulated by Warren Buffets money and influence.
  • Robert on February 05 2012 said:
    I can olny assume that the powers that be think that China needs the oil more then we do, much like the last administration...still waiting for change.

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