International Energy Blather

December 21, 2006 • Commentary
This article appeared in the South China Morning Post on December 21, 2006.

Energy ministers from China, India, Japan, South Korea, and the United States — which, collectively, account for nearly half of the world’s oil consumption — met in Beijing last Friday to see if they could agree on a coordinated response to high petroleum prices.

On Saturday, the ministers reported that they will henceforth work together when engaged in the project of picking winners in energy markets, redouble their efforts to subsidize and mandate energy conservation and efficiency, cooperate in the management of their respective government‐​owned oil stockpiles, and improve flow of oil market data between their respective economies. Let’s hope this vague blather remains exactly that, because if it were actually translated into concrete action, it would harm, not help, the world energy market.

What’s wrong with coordinating governmental energy research, development, and technology deployment? Plenty. While the ministers justified this joint undertaking as a means to efficiently diversify their energy sources, decisions about what energy sources to invest in and what energy technologies to deploy are best left to market actors, not government bureaucrats. If diversification makes sense, private investors will diversify of their own accord. Likewise, if energy technologies have merit and hold economic promise, businessmen will bring them to market without government assistance.

Government intervention is only required when politicians think energy investments should look like this but private companies think investments should look like that. Which party do you think is best informed to make such decisions? Which party do you think has the greatest incentive to get it right?

The same goes for oil inventories. If it makes economic sense to increase inventory holdings to hedge against future scarcity, market actors will do exactly that. And in fact, that’s what they’re doing at present. Inventory levels are very high given historical norms and private inventories worldwide are at least three times larger than public inventories. Oil analysts understand that public oil inventories to some extent displace private oil inventories, so it’s unclear to what extent — if any — total inventories are increased by public inventory build‐​ups.

Regardless, the history of the U.S. Strategic Petroleum Reserve — by far the largest such government inventory in the world — demonstrates that public officials are pretty poor inventory managers. They tend to buy high and sell never. What makes anyone think that politicians — whether operating independently or jointly with politicians across international borders — know better than businessmen when to buy, when to hold, and when to release oil?

Promoting conservation seems reasonable enough, but isn’t that what market prices do of their own accord? Rising oil prices induce conservation whether politicians lift a finger or not. Given that many of the countries at this summit impose artificial caps on fuel prices to some degree, simply letting prices freely rise or fall as supply and demand dictates would be a positive thing.

The real question, however, is whether government should substitute its judgment regarding the merits of conservation for millions of private judgments exercised every day in the market. If I decide that the price of gasoline imposes less of a burden on me than the benefit I gain from buying the gasoline, then I will likely buy and my well‐​being will be enhanced. If the price goes up, my calculation may change.

When government “promotes” conservation, it’s either (a) telling me that I’m not allowed to exercise my preferences when given honest prices, or (b) lying to me about the true scarcity of gasoline by inflating the price to make it seem more expensive than it actually is. Either way, both my personal well‐​being and the economy as a whole are made worse off when government prevents market actors from making those decisions for themselves.

If the countries attending this summit were truly interested in reducing oil prices, they could go a long way towards that end by adopting two policies. First, they could agree to joint action to reduce the geopolitical tensions in the Middle East. Uncertainty about future production from that region is fueling inventory buildup and keeping a vast amount of oil out of the market for present consumption.

Second, they could agree to treat OPEC nations as the economic predators that they are. If the Beijing attendees simply refused to help countries that are engaged in international prices fixing — meaning no economic aid, no military assistance, no defense agreements, and no favors of any kind in any policy arena — then cartel members might think twice about keeping the market starved for oil over the long run.

Unfortunately, that doesn’t seem to be on the agenda. Instead, the meeting treated us to a call for state planning in microcosm. That shouldn’t surprise. Governmental ministers are all alike; they distrust decisions made by people who don’t answer to their bureaucracies and think the economy would work better if they were giving the orders.

Good luck with that.

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