And It'll Reduce Honduras's Trade Deficit

by Don Boudreaux on January 14, 2007

in Property Rights

I seriously doubt that the Honduras government’s "temporary" confiscation of oil-storage terminals owned by private oil companies will lead to long-run reductions in the price of fuel oil for ordinary Hondurans.  But, hey, there’s a silver lining around this confiscation: by making investment in Honduras less attractive, it will lower Honduras’s trade deficit!

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{ 19 comments }

undergroundman January 14, 2007 at 7:13 pm

If these companies are (continually) charging high and excessive rents, then why shouldn't the price of fuel oil drop when it's nationalized? Certainly in the short-run?

It seems, in effect, a wealth transfer from the owners of these companies to the rest of the people of Honduras.

Now, I'm not really going into the long-run here…but in the short-run, why not lower fuel oil prices?

beeper January 14, 2007 at 7:45 pm

That's an easy question. There will be less fuel becuase of the government's actions.

What if the government confiscated your time for a week or a month or what ever in the name of lowering prices for the common person? How long would you work?

undergroundman January 14, 2007 at 7:49 pm

As long as you knew that if you didn't work, you wouldn't be getting -any- money, bud. Use your brain.

Alan H January 14, 2007 at 9:49 pm

If these companies were supposedly charging "high and excessive rents" why didn't other companies come in and undercut them and still maintain a healthy profit? Oh, maybe because the market was setting an appropriate cost for the conditions and the risk inherent in doing business in Honduras… (a level of risk that seems to have been justified).

Now, add in the new lack of experience, the likelihood that croyniesm and corruption will be the order of business – in addition to a bunch of people running businesses that probably aren't suited for leadership positions there and you have a recipe for cut supplies and higher prices.

That's not even looking at the chilling effect this will have on other potential investors

Sam January 15, 2007 at 12:13 am

"then why shouldn't the price of fuel oil drop when it's nationalized"

Well, in the USSR, the government kept the price of everything low. OF course, many things weren't available at those prices in the government stores, so people had to pay black market rates for many things.

Sam January 15, 2007 at 12:40 am

The market rules, whether you like it or not.

ben January 15, 2007 at 3:04 am

Without knowing any details, it is conceivable that this government intervention could produce lower prices. But lower prices aren't always good, and if government intervention rather than competition is behind the price reduction then I am skeptical any good will come from this. Last I heard, Iraqis were paying 4 cents for a gallon of gasoline. They were also queuing for something like four hours on each visit to a gas station.

Nationalisation is also a strong negative signal to investors about security of property rights. That is a recipe for disaster.

undergroundman January 15, 2007 at 9:58 am

A congressional study by Honduras found that it would save them 66 million dollars. Why could that be? It has to do with rents.

Likely there's something about the way that these fuel oil storage facilities are set-up that allows them to charge high rents without being undercut by competitors. Perhaps a widespread placement and exorbitantly high capital costs involved in building a competitive facility.

Don Mynack January 15, 2007 at 11:58 am

"As long as you knew that if you didn't work, you wouldn't be getting -any- money, bud. Use your brain."

He wouldn't be getting any money if the gov't took it either, bud. Did you even read what he wrote?

Don Mynack January 15, 2007 at 12:12 pm

From the Article, a bit off topic: "He said Venezuela was "almost ready" to take over the foreign-run oil projects of the Orinoco Belt run by heavyweights such as Chevron, Conoco Phillips and Exxon Mobil, that produce about 600,000 barrels per day."

Anybody else think that Hugo is really trying to keep prices UP with this action? He's certainly going to create more uncertainty in a market that is steadily moving downward, plus he needs high prices to support his state…

Kent Gatewood January 15, 2007 at 5:39 pm

Are the oil companies going to be compensated at all? Given this lack of respect for property rights, shouldn't the U.S. invade and confiscate the Orinoco Belt for the benefit of American consumers?

ben January 15, 2007 at 10:02 pm

Undergroundman said: "Perhaps a widespread placement and exorbitantly high capital costs involved in building a competitive facility."

I'd be surprised if that were the reason. If the existing facility is being used to extract monopoly rents from downstream purchasers then there is money to be made (by purchasers) by writing contracts to construct rival facilities then taking them the oil companies and demanding a price reduction. The owner of the existing facility (which is presumably sunk) is subject to the threat of holdup – I don't understand what is preventing purchasers using that against the existing facilities providers.

Ray G January 15, 2007 at 10:24 pm

Kent,
A country protecting its citizens' interests abroad used to be a given. Only in relatively recent history is it seen as an evil mechanism of capitalist greed and govt corruption.

A country's strength is its economy, which is to say its business interests, which is to say the individuals involved in those businesses.

Now of course, we're past the days of blasting another country's frigate out of the water because they confiscated one of ours. There are other, more effective ways of influencing parties through economic methods, though certain kinds of people are still convinced that those methods are just as evil and corrupt as gunboat diplomacy. (And of course, those other economic methods are so effective for the very reason that I've already stated, that a country is in net, is economy.)

eldridge wood January 16, 2007 at 12:48 am

What I have dubbed 'smiling expropriations' are continuing, now with mini-step in Honduras. Venezuela and a few others are not
a big surprise. In Latin America it is to be expected, almost forecast. [First in Asia was Thailand, recently, a big surprise.]

The path to a 21st century protectionist era is being gradually paved. Who will raise the red flag, and when? Will the Chicago, GMU, Hoover, Rochester, AEI, et al crowd be tardy?

Martin January 16, 2007 at 1:36 am
undergroundman January 16, 2007 at 1:46 am

"If the existing facility is being used to extract monopoly rents from downstream purchasers then there is money to be made (by purchasers) by writing contracts to construct rival facilities then taking them the oil companies and demanding a price reduction"

If investors are too worried about their property rights to enter into the country in the first place then it could happen. Plus, it's not like there is automatically capital allocated to places where it's needed. It could be hard to break into a market like Honduras. It could be that nobody did the research. Who knows. The assumption that every good idea is immediately acted upon is one of the more problematic assumptions of economics.

We have to wonder why, if there were no rents, the Hondurian government believes that they can save 66 million dollars with this action.

I'm not going to argue against the fact that this will scare away investors, and I agree that scaring away investors is a bad thing.

Will C. January 16, 2007 at 1:24 pm

Is it possible the government thinks they will save $66 million because they seized $66 million worth of oil? (Like Al Capone "saved" what he took when he robbed that bank?) What happens when the tanks run dry? What if instead of seizing the oil from the tanks the Honduran Navy had seized one of Venezuela's tankers? Is there any difference?

Adam Malone January 18, 2007 at 11:07 am

Will C-

I am not sure that the Honduran Navy is much of a force to be reckoned with…!

But I would find it a little humorous if Chavez got up in arms about this. Isn't this what he did a few years ago when he seized petreleum infrastructure and the assets of those companies? The Hugo Chavez, Evo Morales, etc. crowd are growing in power thoughout South America, at least partly due to the vast desparity between the two classes. These countries are fairly good examples of what happens when corruption is so extremely pervasive within a government.

Robert Barro's Determinants of Economic Growth has some interesting information about what corruption, communism, etc do to the growth of an economy. Seems pretty relevant to South America right now.

El-Visitador January 25, 2007 at 12:27 am

"If investors are too worried about their property rights to enter into the country in the first place then it could happen."

Spot on. Honduras has a long tradition of the government arbitrarily and unpredictably abrogating all or portion of property rights. In my experience, this risk, coupled with too-small-to-matter deal sizes, is what prevents infrastructure investors from entering the market.

"The assumption that every good idea is immediately acted upon is one of the more problematic assumptions of economics."

It only is if one assumes a frictionless marketplace. In reality, and when speaking about investment overseas, there are numerous small hurdles that, taken together, produce great friction: language, culture, education, court system, currency regime, banking system, presence of each firm's ecosystem of suppliers and clients, etc.

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