The Oil Market Panic
The high price of oil is once again a front page story in The New York Times. Part one of its story asks why the prices are high now. Part two of that story asks what, if anything, should be done in response to those price increases. The short answer to the first question is that the increase in prices is due to contractions in the supply of oil driven by the instability in the Middle East. The short answer to the second question---which I take up in my weekly column for Defining Ideas---is that we should do nothing at all.
The greatest casualty of the current debate over the price of oil is to turn sensible market responses to its scarcity into grist for a political mill in an election year. The blame game between the political parties is likely to lead to flawed reform proposals that offer no short-term relief, but do impair the long-term efficiency of oil markets.
The “hands off” motto of laissez-faire capitalism has never been more pertinent than in this oil crisis. But both Democrats and Republicans are proposing policies that will meddle with the oil market. The imposition of any system of government subsidies or price controls will disrupt the market’s vital process of continuous adaptation; it will also cost a fortune to put into place.
Start with the Republicans, who are now salivating at the prospect of using the rising price of oil against President Obama. But just what does House Speaker John Boehner hope to accomplish when he tells his fellow Republicans to seize on the gas-pump anger, bemoaning the $4.00-plus prices at the pump? He can’t responsibly say that he wants these prices to be lower if they rose in response to scarcity. Nor can he lay the blame for the current dislocation at the foot of Obama, whatever else the president may have to answer for.
The only way in which to lower oil prices is to subsidize its consumption in some form, which is where Boehner’s thinking necessarily leads. Those subsidies have to come from somewhere, which means new or higher taxes. Another problem with subsidies is that they lead to the relative overproduction of the subsidized product and the relative underproduction of its close rivals. The president himself has called for greater subsidies for solar energy, whose entrepreneurs should be left to sink or swim on their own. Boehner is making the same mistake for oil. He needs to not panic in response to bad news.
Senator Rick Santorum must also tone down his rhetoric when he bashes the Democrats: “They want higher energy prices. They want to push their radical agenda on the public. We need a president who is on the side of affordable energy.” Not so. In this environment, higher prices are the best response to contracting supplies. There is, therefore, nothing radical in President Obama’s decision to stay on the sidelines on this matter. But there is a great deal of freighted meaning when Santorum mentions “affordable energy,” for it calls to mind a policy of state subsidies that distort relative prices across the board.
The political ignorance on the Republican side of the aisle is, alas, fully reciprocated by the unwise pronouncements that come from the Democratic side, as I explain in my over at Defining Ideas.
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Mar '11
Re: The Oil Market Panic
Perhaps Boehner has the Keystone XL pipeline in mind?
Mar '11
Re: The Oil Market Panic
And off shore drilling, ANWR, a more vigorous policy towards Iran. There are more ways to skin a cat, Mr. Epstein, than just subsidies. Obama and his crew have driven up petroleum prices by discouraging production.
May '10
Re: The Oil Market Panic
I haven't had my coffee yet, but I'm missing something. Why cannot, and should not Romney and the rest point blame at the Democrats and enviro-wackos for blocking gas and oil drilling in Alaska, offshore, and most recently, NEW YORK STATE(!) as a partial cause for the high price; and throw in the wrecking of our currency as well? Ten years ago, one of the objections to drilling in ANWR was that it would take ten years for such oil to get to market (which, I suspect, was always a lie).
Sep '10
Re: The Oil Market Panic
The rise in oil prices is a result of more interest in buying future contracts for oil than selling future contracts. The supply of oil may have little to do with it, but the expectation of future demand/supply does. You write as if both parties are not already involved in the energy markets. I would simply point out there has been a Department of Energy for several decades. Whats its function if not to involve the government in the energy markets? In Europe there are 40+ models of natgas cars available. In the US 3 or 4. Yet natgas is five times more plentiful and cheaper by a factor of fine in the US. Do you think this is a function of the market? Face it both parties have been screwing things up for some time now and will continue to do so. The current rise in gasoline prices has more to do with the expansion of the crack spread, which was at an all time low for several months and is related to refiner capacity, than the price of oil.
Feb '11
Re: The Oil Market Panic
Advice to all Republicans: ignore Prof. Epstein's "a pox on both their houses" argument. We absolutely can and should blame the Democrats for high energy prices, for the reasons cited by the other commenters. It is rare (maybe the very first time) that I read an opinion by Prof. Epstein and think "wow, that's just completely, spectacularly, wrong."
On the plus side, there's something comforting to us mere mortals when a big giant head screws the pooch.
Edited on February 21, 2012 at 5:11pmMay '10
Re: The Oil Market Panic
I agree with the general tone of the comments so far. Supply is contracted in the Middle East, but we have contributed to this through a policy of not exploiting our own resources. We also have adopted policies to not take advantage of the resources of close neighbors.
That all said, I agree with Mr. Epstein that Republicans should not be looking to enact any kind of special subsidy. Rather, I think the proper policy response to this is to reduce onerous regulation and clear the way to develop the energy supply in North America.
Also, we should do the same for close competition to fossil fuels. The Obama policy of picking winners in alternative energy is likely doing more damage to genuine development in this area. Pouring tax payer money into a select few companies in this area is certainly pushing out unsubsidized players with valid ideas that could compete in the market place, leaving large subsidized players to eventually fail.
May '11
Re: The Oil Market Panic
Allow me to join the chorus of those who respectfully and astonishedly disagree with Prof. Epstein.
The correct response is that which Republicans have urged and which Democrats have refused for decades, namely, expansion of production at home. A few years ago I recall seeing clips of President Clinton explaining his decision not to expand drilling because it would take a decade to have any effect. That was oh, about ten years after he had spoken while in office.
Dec '10
Re: The Oil Market Panic
The scarcity is artificial. That makes an enormous difference.
Jan '11
Re: The Oil Market Panic
I'll not buy into dissin' the Prof... dangerous game for a dill like me.
Interesting sidelight in this recent bit of Australian market analysis. These market lurkers are generally relentlessly "correct" in their public pronouncements, so this is a sign to me of another sacred cow heading out to pasture.
May '10
Re: The Oil Market Panic
I agree with we should increase our use of resources locally. I also think the best thing for the government to do is get out of the way.
I am not sure that Mr. Epstein is wrong on the basic premise.
Oct '10
Re: The Oil Market Panic
More bi-fuel autos would lessen the impact of high oil prices.
As of 2010, Brazil had over 1.7 million CNG vehicles, the vast majority of which are also bi-fuel (CNG and gasoline), and the U.S had less than 150k.To get around the dearth of CNG fueling stations, there's actually a device that enables refueling at home, with a supply of natural gas.
Why doesn't the U.S. have millions of bi-fuel CNG vehicles? Is it because of iWc's Business Buffet Bear?
Mar '11
Re: The Oil Market Panic
jhimmi:
Why doesn't the U.S. have millions of bi-fuel CNG vehicles? Is it because of iWc's Business Buffet Bear? · 7 minutes ago
For those who missed it.
A very pithy and tragicomic summary of economic history throughout human existence - and especially once freedom was "discovered".
Mar '11
Re: The Oil Market Panic
Add me to those who are simply astonished at Prof. Epstein's advice to do nothing.
Nuts.
We could open up drilling onshore and offshore. We could remove double taxation on oil revenues. We could pass a "cap" on federal taxation, so that the government (which does nothing to contribute to oil supplies) cannot make more profit per gallon of gas sold at the pump than the oil companies make (Right now Exxon makes 3-4 cents per gallon - the government profits by 48 cents per). We could reduce or remove all the crazy regulations that have kept any new refineries from coming on line for decades. We could build Keystone.
We are sitting on hundreds of years of petrochemical reserves. But the government won't let us get at it. There is PLENTY the government can do: GET OUT OF THE WAY.
Edited on February 21, 2012 at 3:26pmJan '11
Re: The Oil Market Panic
Allow me to contribute hearsay ...
I happened to catch Lou Dobbs on O'Reilly the other night. (I'm actually not a big O'Reilly fan, but football's over, baseball is still many weeks away, and my Flyers weren't on TV that night.)
Dobbs argued that the recent spike in oil prices may not have been caused by any scarcity. Instead, there's plenty of oil available. However, because it's more profitable to ship it overseas, American oil companies take the oil and sell it to China and others. Even if we had the Keystone pipeline, they'd only take that oil and sell it elsewhere. We Americans would get no benefit from the increased production.
I know squat about the oil industry. I can't verify or deny what Dobbs said. I freely admit that this is pure hearsay testimony on my part. But Ricochet isn't a court, and what Dobbs reported seems to make sense. And if it's true, then it might call for a different response than the Professor's suggestion - even if it's only crying "shame!"
I'm curious how Ricochet's more informed members will respond to this.
Mar '11
Re: The Oil Market Panic
KC Mulville:
Dobbs argued that the recent spike in oil prices may not have been caused by any scarcity. Instead, there's plenty of oil available. However, because it's more profitable to ship it overseas, American oil companies take the oil and sell it to China and others. Even if we had the Keystone pipeline, they'd only take that oil and sell it elsewhere.
Markets are fungible. If supply rises somewhere, it will have an impact on prices everywhere. Price rises are a way to ensure supply does not drop.
So overall if supply goes up in relation to demand, prices will drop (barring market distortions by governments). And that will be a global response, which is why there is a global "price" for a barrel of oil that everyone references.
Edited on February 21, 2012 at 3:48pmMar '11
Re: The Oil Market Panic
KC, the oil companies won't sell it to the Chinese. They'll sell it at the best price they can get. We will buy it at the best price we can get. It will all even out.
Lou needs to get out more.
Opening Day in 43 days, 9 hours. Not that I'm counting or anything.
Sep '10
Re: The Oil Market Panic
Richard Epstein:
Senator Rick Santorum must also tone down his rhetoric when he bashes the Democrats: “They want higher energy prices. They want to push their radical agenda on the public. We need a president who is on the side of affordable energy.” Not so. In this environment, higher prices are the best response to contracting supplies. There is, therefore, nothing radical in President Obama’s decision to stay on the sidelines on this matter. But there is a great deal of freighted meaning when Santorum mentions “affordable energy,” for it calls to mind a policy of state subsidies that distort relative prices across the board.
From a recent Rick Santorum post on Ricochet:
Obama is in favor of higher energy prices, so that his favored green energy sources look more practical by comparison. He has said it himself with regards to coal:
Obama has a radical energy policy. This is plainly obvious, and should be shouted on the rooftops by every Republican.
Dec '11
Re: The Oil Market Panic
Obviously, as others have noted, oil prices can be lowered by increasing production. Obama, and Bush as well, can be rightly blamed for discouraging and limiting production. As well, the likelihood of greatly increased production in the near future would lead to the expectation of lower prices in the future. This would lead current producers to sell more oil now at the higher prices and thus lower current prices.
It would seem that Professor Epstein hopes that blaming both sides in relatively equal terms will make him appear less bias, and clearly Republican deserve plenty of blame.
As well, such an obvious error compels one to read his article which does not repeat the error. But maybe the above quote is meant to describe Boehner's view and not his own.
Edited on February 21, 2012 at 4:21pmDec '11
Re: The Oil Market Panic
Mark Belling Fan
From a recent Rick Santorum post on Ricochet:
Obama is in favor of higher energy prices, so that his favored green energy sources look more practical by comparison. He has said it himself with regards to coal:
Obama has a radical energy policy. This is plainly obvious, and should be shouted on the rooftops by every Republican.
· 28 minutes ago
If only Santorum could be as committed to limiting all subsidies, not just energy, then Ron Paul voters and true economic conservatives could settle for him.
Sep '10
Re: The Oil Market Panic
Ralph Baskett
Mark Belling Fan
From a recent Rick Santorum post on Ricochet:
Obama is in favor of higher energy prices, so that his favored green energy sources look more practical by comparison. He has said it himself with regards to coal:
Obama has a radical energy policy. This is plainly obvious, and should be shouted on the rooftops by every Republican.
· 28 minutes ago
If only Santorum could be as committed to limiting all subsidies, not just energy, then Ron Paul voters and true economic conservatives could settle for him. · 7 minutes ago
I know that he favors a special corporate exemption for manufacturers, but is there something else you had in mind?
Are you saying you won't vote for him in the general election?
I just went to Ron Paul's website, and found this interesting nugget: