Energy ministers from the world’s largest oil consuming nations
are meeting in Beijing tomorrow to see if they can agree on a
coordinated response to high petroleum prices. Action items
include diversification of energy resources, improving stockpile
strategies, removing obstacles for investment in oil production,
and promoting energy conservation. If past is prologue, any
agreement will likely make things worse.
What’s wrong, say, with diversifying energy supplies? Nothing at
all. What’s wrong is giving that job to government planners
rather than market actors. If diversification makes sense,
private investors will diversify of their own accord. Government
need not put a gun to the head of businessmen to get them to make
sensible investments. Force 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, market actors will do exactly that.
And in fact, that’s what they’re doing at present. Inventory
levels are very high by 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 demonstrates that public officials
are pretty poor inventory managers. They tend to buy high and
sell never. What makes anyone think that politicians know better
than businessmen when to buy, when to hold, and when to release?
Removing obstacles to oil development is all well and good, but
even if the industry were allowed to drill wherever it pleased
within the borders of the countries meeting tomorrow in Beijing,
prices would remain relatively high as long as OPEC, Russia, and
other major producing countries keep their fields closed to
foreign investment and impose limits on total extraction. Fully
96 percent of all proved reserves are controlled by state-owned
oil companies that for the most part take their orders regarding
how much to drill and how much to invest from their respective
governments.
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 rise or
fall freely 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 government
allows me to do so. 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, or (b) lying
to me about the true scarcity of gasoline by imposing an
artificial tax on the product to make it seem more expensive than
it actually is. In either case, both personal well-being and the
economy as a whole are made worse off.
If the countries attending this summit were truly interested in
reducing oil prices, they could go a long way towards that end by
reducing geopolitical tensions in the Middle East. Uncertainty
about future production in that region is fueling inventory
buildup and thus keeping oil out of the market for present
consumption. The Beijing attendees could also treat OPEC nations
as the economic predators that they are. If participants simply
refused to help countries that are engaged in international
price-fixing — meaning no economic aid, no military assistance,
and no favors of any kind in any policy arena — then countries
might think twice about keeping the market starved for oil.
Otherwise, the meeting simply amounts to a planning exercise for
more state control over private energy investment decisions. Good
luck with that.
