Thursday, April 27, 2006

Finally, the global oil market is working as it should...so American politicians want to shut it down.

It has been with great interest that I’ve read the ‘high price of gas’ discussions in the United States in recent months. It seems politicians, be they Democrat or Republican, have been infected not by the H5N1 virus but rather a colossal ‘anti-liberal capitalist’ virus. How else can one account for the calls to investigate ‘price gouging’ by gas stations? Well, the reasons are manifold but I’ll explore some at the end of the post.

Instead of the naïve and useless (in terms of reducing the price of gas right now) ideas being presented by various Congress men and women, such as calling for taxation of oil corporations ‘windfall profits,’ opening up the ANWR for drilling, or giving every American a $100 gas rebate check, in my dream world of ‘what ought to happen’ I see this: All congressmen and women would together – that way no one gets punished more than the other at elections – tell the public: This Is How Capitalism Works! Supply decreases (or even the expectation that it does) and price goes up.

Admitting the obvious, that the market is working exactly as it should and needs to be, is clearly beyond the American political elite. That the American political establishment reacts like this is not surprising. The political history of the country is littered with examples of a retreat from international free trade (liberal capitalism) when important domestic constituencies are threatened.

It is unfortunate that the political elite in the United States have long since conditioned the electorate to punish those politicians running for office that are willing to speak the uncomfortable truths. Yet, just like it is too easy to blame OPEC for high gasoline prices, it is too simplistic to blame only American politicians for the consumers’ inability to accept high gasoline prices. There are strong cultural reasons for why American consumers (and politicians) view the use of and pricing of petroleum products quite differently from their European friends, but I’ll explore those differences in a later post.

Rather, I’d like to close by noting some of the ironies at play in this debate. Nearly all of the proposals mentioned above have also included mentions of supporting research into alternative fuel sources such as ethanol – to create substitutes for ‘Unleaded Premium’. However, rising oil prices are making many current alternative energy sources economically competitive. For example, depending on the location, wind power can become economically sustainable when crude oil hits about $60 per barrel, as of writing the price is north of $70. While this sounds like the beginning of the golden age of energy-fuel alternatives, the rising price of crude actually is likely to significantly expand global oil reserves, continuing the reign of petroleum as the world’s central source of fuels. The reason is that rising crude prices also make it economically profitable to explore previously ‘unrecoverable’ deposits – increasing the recoverable reserves of petroleum in the world. This has recently made Venezuela the country with the largest recoverable crude reserves in the world (Canada now hold third largest crude reserves), a fact that surely has not gone unnoticed in Washington D.C.

What does this mean for the EU and Finland? Tune in next week to find out.

1 comment:

Pekka said...

Charly my man on the know, this is a brilliant piece! You covered the subject like a wet blanket and, despite it's relative shortness, left nothing out.

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