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.