Commentary

Markets Work Magic

By Jerry Taylor
This article was first published in USA Today, Dec. 24, 2001.

Last spring, energy prices were skyrocketing and politicians far and wide warned that a long, dark, energy night was falling upon America. While the policy prescriptions offered by President Bush and the Democratic leadership differed, both parties were convinced that markets were broken and only a muscular federal intervention could end the crisis.

They were wrong. Energy prices collapsed across the board this year without any help from the federal government.

What happened? First, the economy slowed down, which reduced demand and retail prices. Second, political gridlock prevented politicians and regulators from doing harm while markets did that supply-and-demand voodoo that they do so well. Third, the unique problems plaguing disparate energy sectors — such as the run in natural gas prices that triggered the California electricity crisis and the sluggishness with which domestic refineries responded to tightening gasoline markets — proved temporary and remediable by the market’s fabled invisible hand.

The moral of the story is that markets aren’t “broke” when prices spike. They’re simply relaying important information about temporary problems to producers and consumers. For instance, on the supply side, high prices boosted profits, increasing investment and supply, thereby pushing prices down. On the demand side, high prices lead to reduced demand and declining prices.

Now politicians have found a new rationale to monkey with energy markets: our supposedly crippling dependence on foreign oil. But that concern is likewise bogus. Even if all of our energy came from within these shores, a cutback in OPEC production would increase the price of domestic crude oil just as much as it would increase the price of Saudi crude oil. As long as oil can be easily traded across borders, regional oil prices will always equal global oil prices.

Nor do we have to worry about an oil embargo. As Saudi Arabia’s Sheik Yamani has noted, the 1973 embargo “did not imply that we could reduce imports to the United States… . The world is really just one market. So the embargo was more symbolic than anything else.”

Government should get out of the way and leave energy markets alone.

Jerry Taylor is director of natural resource studies at the Cato Institute.