Commentary: Market Forces Are the Only Cure for High Oil Prices

Published August 1, 2006

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.”

Markets Cure Price Spikes

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 incentives to find, produce, refine, and market oil, all of which thereafter bring prices down. The cure for high prices is high prices–if market forces are allowed to turn today’s problem into tomorrow’s solution.

Congress Impeding Markets

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

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 gives a congressman only the appearance of “doing something about this crisis” during an election year. With any luck on his part, by the time the crisis has passed and his “something” has clearly made the problem worse, he will have been safely re-elected.

Energy Resources Not Scarce

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, which hamper or criminalize problem-solving entrepreneurship.

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 free-market institutions in the impoverished, resource-rich areas of the world.

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

And these individuals–let there be many thousands of them–would 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.

Repressive Regimes Control

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 The Heritage Foundation rates as “repressed” (Iran, Iraq, Libya, Nigeria, and Venezuela) or “mostly unfree” (e.g., Algeria, Brazil, China, Kazakhstan, Qatar, and Russia).

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

U.S. Can Lead

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 our government can lead the world by 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 domestic 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. ([email protected]) is president of the Institute for Energy Research in Houston, an adjunct scholar of the Cato Institute, and coauthor (with Richard Fulmer) of Energy: The Master Resource (Kendall/Hunt: 2004).