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Oil Feeding Frenzy


The feeding frenzy in Washington over oil prices and profits may win pander-points for cynical politicians, but it takes the public’s eye off the ball.

The regular outcry over rising prices, which, you’ll notice, requires a previous period of falling prices, highlights some fascinating puzzles. For example, there is a considerable gaggle of folks who think world oil production is reaching its peak and will soon decline. If that is correct, then where’s the mystery in rising prices? Furthermore, if the “peak oil” theory were correct, there would be no need for oil executives to conspire to gouge the public. In fact, the peak-oil theory is wrong. People have been predicting imminent exhaustion of world oil reserves since shortly after the first reserves were discovered. The world is actually awash in oil, not only the conventional kind, but other kinds, such shale and tar sand.

But if there’s plenty of oil, shouldn’t that rehabilitate the collusion theory? Occam’s Razor says no: explanations should be kept as simple as possible. If two equally satisfactory explanations account for a phenomenon, but one is more complex than the other, common sense says to go with the simpler.

Outright collusion might explain rising prices, but that’s a more-complex explanation than the combination of things going on that already account for the price rise. The list has been enumerated many times: increased demand from newly growing economies (China and India, for example); troubles in oil-producing nations (Iraq, Iran, Venezuela, Nigeria); President Bush’s continuing military threat in the Middle East; the depreciating dollar fueled by deficit spending; environmental regulations that mandate different kinds of gasoline in different states at different times of year (yet do little to clean the air); conservation mandates (ethanol) that raise costs; government ownership of land and offshore locations, prohibiting exploration and drilling. The list could be extended.

In other words, if you are an oil exec, you don’t have to collude. World events are doing your work for you. Besides, collusion is risky; you might get caught. Repeated investigations have failed to uncover evidence of price fixing. And the spot oil market behaves in a way that suggests the lack of collusion.

Nor do large, even record, profits prove collusion. A profit figure says nothing if you don’t know the sales figure. A large profit that amounts to ten cents or less on the dollar isn’t so extraordinary. Oil is a heavily used commodity produced by a complicated industry requiring large-scale capital investment. Even so, profits have not always been so attractive. Much of the time profit rates have been below those of other industries. It’s even true in some cases today.

But this doesn’t mean all is well with oil (pun not intended but noted), and that’s why I say the Washington caterwauling misdirects us from where we should be looking. The talk about punitive taxes, forced conservation, mandated auto fuel economy (which encourages driving and endangers lives), and subsidies to alternative fuels distracts us from seeing that our mixed economy exists to ensure the health of large, politically connected companies that fear free competition in the unfettered marketplace. Practically from the start, the oil industry has been coddled, cartelized, and subsidized by state and federal governments. Taxes and regulations tend to favor incumbent firms over challengers. Road and interstate-highway construction financed by the politicized gasoline tax rather than by market transactions, and built with eminent domain, have externalized costs and perhaps subsidized users of gasoline-powered vehicles. U.S. policy in the Middle East has socialized the costs of securing the sources of crude oil. If, as a free market would require, the oil industry (and other private interests) had footed those costs, retail prices would have reflected them, and consumers, facing higher prices, would have acted accordingly. The world might have looked very different today.

What’s to be done? Don’t give the government more power. That’s what got us into this mess. Let’s take power away. That would also take it away from the privileged corporations.

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    Sheldon Richman is former vice president and editor at The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.