Jan 31 2010
Foreign Oil for i-Pods: Both Sides Win!
Published by Steve Latter at 1:16 am under Balance of Payments,Balance of Trade,Standard of Living,Trade
More misleading economic statements from uninformed people who have never taken an economics course!
What about, you say?
I’m glad you asked!
I often read and hear in the American press that the United States is creating a giant wealth transfer by buying oil from other countries. Those “wealth transfer” words imply to the typical citizen that somehow our U.S. money supply is leaving our country, never to return again, and somehow our country is pooer after the transaction than if we had produced the oil within our own country.
Yes, the other country becomes wealthier but it has nothing to do with the US currency we send them, for, after all, the US dollars are only useless paper in their own economies as the US dollars cannot be spent in their own economy, but rather those same US dollars can be used to gain access to the US goods and services that those countries covet! The US also becomes financially better off due to the “trade” as the US can aquire our culturally, covetable and inexpensive oil to fuel our cars and heat our homes, in return for the various US products and services traded to the countries from which we imported the oil. In effect, we have “traded”, just like the old western cowboys & indians, US goods for oil, and both countries are better off!
Let me clear about one thing, however; I am fairly confident that it is NOT in our best homeland security interest in purchasing such a large share of oil purchases from countries like Saudi Arabia and Venezuela, whose loyalty to our country is certainly questionable. Luckily, the U.S. produces 40% of its own oil consumed and the other 60% consumed is imported from many different countries. Canada and Mexico are the two largest import countries, which is pretty darn safe.
However, ignoring the aforementioned security issue, when we buy from any of these countries, both countries benefit equally and there is NO transfer of wealth. When the U.S. buys oil from another country those U.S. dollars paid on the oil purchase are immediately returned to the United States and are spent almost immediately in our country since the other country cannot use our dollars in their country. What is really happening is that both countries’ citizens GAIN (not lose!) equally as we are, in essence, trading one product for another for both countries to enjoy!
Let’s use an example. Let’s say the U.S. buys 1000 barrels of oil from Saudi Arabia. At today’s oil price per barrel of $75 that would mean the U.S. would pay Saudi Arabia $75,000 and Saudi Arabia would then, in turn, be forced to turn around and use the paper ($75,000 USD!) on say, a bunch of iPods from Apple. Yes, the Saudi’s are listening to “I Kissed a Girl” by Katy Perry with their IPods hidden under those smart head robes they wear! Ladies and gentlemen: that is why they call it trade: the essence of the transaction is that we have traded some of our iPods for some oil to fuel our cars and heat our homes. Both of us have gained! Katy Perry is hot on the charts and the Saudi’s are boogying in the streets, as US citizens can now drive freely to 7-Eleven for a Big Gulp and stay warm in the winter with the oil received in return.
Also, think of it this way: when an American buys a gallon of gas the money is, ultimately, going to an American business such as Apple! All spending of US dollars is spent back into our economy, and all spending of Saudi dollars (actually they call their currency the “dollar” also but it doesn’t look like ours!) benefit the Saudi economy.
Yes, trade is mutually beneficial. I would rather a warm home this winter and forego another Katy Perry song!
Questions for Discussion:
1. Have you ever realized why they call it “trade”? That each country cannot use the other country’s currency so, in essence, there is a simply a trade of only products and services.
2. The US has a large trade deficit with China and Japan. Why is China and Japan holding on to US dollars and not spending it back into the US? Have they thrown the US dollars away?
3. Do you believe that free trade is a win-win always? If not, why not? Why do nations interfere (tariffs, quotas, etc.) with trade if it is so beneficial?
About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics,
Accounting, Marketing, and Personal Finance.
Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 10 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe. Read more posts by this authorRelated posts:
Hi Steve,
Interesting post. We should keep in mind, however, that not all the dollars spent on Saudi and other foreign oil ends up getting spent on US goods and services. Oil exporting nations, for example, hold $188 billion of US treasuries. In total, foreign countries with whom the US has trade deficits hold over $3 trillion of US debt. In this regard, the dollars we spend abroad beyond what gets spent on our goods and services do not come back to the pockets of American producers and households, rather they are either held on reserve in the central banks of foreign governments or lent to the US government to finance its massive budget deficits. Not quite as straight forward as your oil for iPod example, unfortunately!
Best,
Jason
Like or Dislike:
0 
0
Hi Jason,
Well, it depends on how you look at it.
I say all that import-spent money is immediately spent back in the United States to those countries that we have trade deficits with, although what you are saying is that a portion of it is spent by our US government where those countries fund it.
Foreigners buying US bonds is spending in the US (but saving by foreigners) as our Government is deficit spending. So, as the US buys Chinese products, the US Government is immediately spending those funds on US Government projects (ie, jobs, national defense, etc.) which increases American's income.
So I stick with my original assertion: USD's spent on foreign oil are immediately spent back into our economy creating US income, either spent directly by the foreign nation on our products and services (trade), or by our US government funded with those same US dollars we sent to the foreign nation (bonds).
Like or Dislike:
0 
0