Commentary

Market Forces Only Cure for Oil Prices

Little has changed in the 75 years since Spanish philosopher José Ortega y Gasset wrote, “In disturbances caused by scarcity of food, the mob goes in search of bread, and the means it employs is generally to wreck the bakeries.”

Revised for the crisis du jour, that sentence would read, “Whenever the price of oil jumps, the first thing the people’s congressmen do is demonize and punish Big Oil.”

Because worldwide demand for oil is rising, and a quarter of the world’s oil is being produced by saber-rattling socialist/nationalistic governments, the price of crude has more than doubled from its historic average.

Fortunately, with higher prices comes increased economic incentive to find, produce, refine and market oil, all of which brings prices down. The cure for high prices is high prices — if market forces are allowed to turn today’s problem into tomorrow’s solution.

Of course, Congress doesn’t see it that way. Instead, trying to reverse cause and effect, lawmakers assert that high prices are the problem, not uncertain supply in the face of increasing demand.

One “solution,” therefore, is to impose back-door price controls via laws against “price gouging.” But trying to address increased oil scarcity by forcing prices down is like trying to cure a fever by adjusting the thermometer. It eliminates the feedback that prices provide to consumers and suppliers.

With artificially low prices for gasoline, consumers use more of the limited supply than they otherwise would, while suppliers (including gasoline importers) do not receive the economic signal to bring in a greater supply. Soon, the artificially cheap commodity runs short. People begin wasting time in gasoline lines, and burning fuel while they wait.

Another popular “solution” is to impose a “windfall” profits tax. But why, in times of acute scarcity, should money be taken from those who can alleviate the abnormal scarcity and given to politicians?

Congress is not going to drill wells but redistribute tax dollars. Increasing taxes only gives a congressman the appearance of “doing something about this crisis” during an election year. With any luck, by the time the crisis has passed and his “something” has clearly made the problem worse, he will have been safely re-elected.

Today’s petroleum problem is not a shortage of energy resources but a surplus of government. Oil is not the problem, government control of oil is. America is not “addicted” to oil; too many oil-rich countries are addicted to socialism and nationalism, by which problem-solving entrepreneurship is hampered or criminalized.

The solution is not to stop using petroleum — a physically impossible, economically ruinous response. The solution is to start the educational and political reform needed to promote capitalist institutions in the impoverished, resource-rich areas of the world.

A capitalistic transformation would assign private property titles to the subsoil. Such a privatization will promote greater supply and efficiency, and will demote politicians who are the enemies of oil consumers the world over. Ordinary citizens, having become royalty owners, will be the ones to obtain wealth as oil and gas is found and produced.

And these individuals — let there be many thousands of them — will rise from poverty to become part of the investor class, and even philanthropists to their fellow man. Witness the work of oil- and gas-endowed foundations in the United States, for example.

Effecting this transformation will take a lot of hard work. Counting Iraq, a country with a history of repression, three-quarters of the world’s proven oil reserves are controlled by countries that the Heritage Foundation rates as “repressed” (Nigeria, Venezuela, Libya, Iran, Iraq) or “mostly unfree” (e.g., Russia, China, Qatar, Algeria, Brazil, and Kazakhstan).

In all of these lands, the spectre of Karl Marx must be replaced with the spirit of Ludwig von Mises, F.A. Hayek, and Hernando De Soto. The Hugo Chavezes of the world must be replaced with leaders who know that socialism is a dry hole, while capitalism empowers citizens, promotes savings, increases investment, and produces wealth that redounds to the masses.

The United States has a government energy problem too. Witness our folly in mandating quotas for inferior energies and blocking access to (government owned) hydrocarbon-rich areas offshore and in Alaska.

Yet there is a silver lining to this folly, for it means that our government can lead the world through example, ending energy subsidies across the board and privatizing public resource holdings.

To blaze a path away from oil statism, our government’s leaders must let our own oil industry invest the capital it has earned and thereby increase infrastructure. And they must tell the world why they are doing so: because they have learned that the solution to a bread shortage lies in building more bakeries, not in wrecking them.

Robert L. Bradley, Jr. is president of the Institute for Energy Research in Houston, an adjunct scholar of the Cato Institute, and author of Climate Alarmism Reconsidered (Institute of Economic Affairs, 2003).