Oil Prices, Gas Prices and Government

Don't Get Hosed

Every spring it seems we hear the same old refrain about higher oil prices and higher gas prices. Government and media advise that the price of fuel at the pump is going up; there may be shortages in oil supplies leading to higher gas prices just as we head into the summer driving season. In the wake of this noise comes a chorus of calls for more government regulation of the oil industry and of oil traders, paying particular attention to “obscene” oil company profits and speculators.

Cutting through the fog of political rhetoric and media hype, the fundamental issue is one of ensuring adequate oil supplies. Oil prices and gas prices are established by markets based on free-flowing information. Unless government intervenes, prices will move to levels that ensure continuing oil supplies.

Occasionally, something causes a paradigm shift in these concerns over oil supplies and oil prices, such as last year’s blowout of the BP well in the Gulf of Mexico. Not only has this resulted in even more onerous and useless safety regulations but the US government placed a moratorium on the issuance of offshore drilling permits. Oil supplies from this vast reserve were effectively cut off until just recently; one permit has finally been issued after almost a full year of government dithering.

Sources of US Oil Supplies

While the US gets more than one-half of its oil supplies from imports, most of that comes from the western hemisphere. Canada is the largest single supplier by far, followed by Mexico.

Currently there is a legitimate concern that political unrest in Saudi Arabia, third largest exporter to the US, will impact negatively on oil supplies. It was only a matter of time before the Saudi regime started to crack under internal conflict. At one extreme, Saudi oil billionaires drive gold-plated Mercedes, while lower classes beg for bread at the other. Oil supplies from the Middle East generally may be in jeopardy amidst the spreading rebellion.

Well, what if they are? Consider that in the last decade US domestic production was down by 10 percent and is expected to be down again over the next few years, according to industry and government studies. Well, what happened in the market over the last 10 years? Production and exports from Canada and Mexico rose to fill the gap in US production.

Uncertainty over Middle East Oil Supplies

No matter which tribe takes over any fallen regime in the Middle East, some sort of economy will develop. The comparative advantage of this region is oil reserves. They will still need to sell oil for any expectation of prosperity.

The US is a ready market for them. Some neophyte regime may try embargoes to punish the US on some pretext or other, but the world is also one big market. Other buyers in Europe and Asia will mean the oil can find its way to the US, unless the US government does something stupid again, such as imposing price controls.

The 1970s shortages and gas-rationing lines in the US were caused by price controls. With artificially low prices, consumption was unrestrained so supplies were quickly evaporated. The world price was higher, in part due to the Arab oil embargo, so additional oil supplies were difficult to get. When the price controls were removed oil supplies were no longer an issue. The 1973 Arab oil embargo, when OPEC countries would not sell to “friends of Israel”, was a short-lived flop.

Government Intervention and Unintended Consequences

The single most important lesson to learn about price controls is that they cause shortages. Embargoes, it may be observed, penalize the domestic economy at least as much as that of the intended target. But these evils are just two forms of government intervention; all have unintended consequences. Other forms of intervention include:

  • Regulations
  • Subsidies
  • Outright bans
  • Permit approval processes
  • Stockpiling
  • Technical or quality specifications
  • Taxes, of course

The complete list is much longer, but all of these interventions have negative impacts. Most have an impact on oil supplies, primarily by introducing more uncertainty to the industry. Industries that must formulate business plans in terms of decades, allocating billions in financial capital, are hamstrung by such interventions. The losers are anyone using energy. For the assurance of oil supplies to meet needs, the government should just get out of the way. With reliable supplies, prices will be struck where they need to be to assure continuing supplies; that is what markets do when unimpeded.

Free the Markets to Assure Oil Supplies

If there ever is a crisis caused by interruption of oil supplies from the Middle East, the unfettered market will be needed more than ever. Government should restrict itself to fostering the conditions favourable to free markets.

In the long term, the failure of government to restrain itself from market intervention can only lead to less prosperity. Reduced prosperity breeds conflict and despair. The extreme consequences of conflict and despair are currently being played out in the Middle East.

©Copyright 2011 Edward Podritske

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