Why the Price of Oil Is Surging*
By
George Reisman**
Over
the last year, the price of oil has once again been surging. The most
prominent immediate cause has been cutbacks in the production of oil on
the part of the member countries of OPEC, such as Saudi Arabia and Kuwait.
But there are other and deeper causes at work, just as there were in the
1970s, when the price of oil dramatically increased.
First,
the government of the United States was and is bent on a reckless
expansion of the money supply. This acts to raise the demand for
everything and thus the price of everything. Until recently, the main
effect of the current rapid expansion in the quantity of money was to
drive up stock prices and then real estate prices. But now it is spreading
to commodity prices, oil in particular. It is only an expansion in the
quantity of money and the corresponding increase in the overall ability to
spend money that enables people to make sharply increased expenditures for
oil and oil products without having to equivalently reduce their
expenditures for other things and thereby reduce the prices of a wide
range of other things.
And second, it is
the U. S. government, no less than the governments that are members of the
international oil cartel, that was and is responsible for the reduction in
the supply of oil.
The U.S.
government, acting largely under the influence of the ecology movement,
has restricted the supply of oil in the following ways: (1) It has
prevented exploration for and development of oil reserves in vast areas of
territory arbitrarily set aside as “wildlife preserves” or
“wilderness areas.” It has even consistently sought to prevent the
development of the vital North Slope Alaskan oil fields, on the grounds of
alleged concerns over harmful “environmental” effects, such as
disturbance of the feeding habits of caribou herds and deterioration in
the appearance of frozen waste lands. (2) It has joined in an
international agreement to close Antarctica and its potentially vast oil
deposits to all mining operations for the next fifty years. (3) It has
prevented the development of offshore oil wells on the continental shelf.
(4) It has prevented the construction of oil and gas pipelines, of
new refineries, oil storage facilities, and facilities for handling
supertankers. (5) Over the years, the U.S. government has imposed
price controls on oil and has acted further to restrict oil company
profits, and thus oil industry investment, by punitively increasing their
rate of taxation through first reducing and then totally abolishing the
old depletion allowance on crude oil.
In addition, the
U.S. government has been responsible for an enormous artificial increase
in the demand for oil, over and above the increase caused by its policy of
inflation. It has caused this artificial increase in demand mainly by
holding down the supply of substitutes for oil, such as atomic power and
coal. In these ways, it forced, and continues to force, the demand for
fuel to rely more heavily than necessary on oil supplies. Like reductions
in the supply of oil, these measures also increase the scarcity of oil.
In sum, the government and the ecology movement have done
everything in their power to raise the demand for and restrict the supply
of oil.
It should be realized that it was only these actions of the U.S.
government that has made possible the dramatic rise in the price of
oil—in the 1970s and again today. The U.S. government bears a far
greater responsibility than the Arab cartel. It is the party that has made
it possible for the cartel to succeed. All that the cartel did in the
1970s, and is once again doing now, is to take advantage of the artificial
increase in demand and reduction of supply brought about by the U.S.
government.
Had
the U.S. government not restricted the expansion of the domestic petroleum
industry and forced up the demand for oil, the supply reductions carried
out by the cartel would not have had such a significant effect on the
price. Because in that case, such supply reductions would have been at the
expense of far less important wants than actually turned out to be the
case. With the larger domestic supply of oil and competing fuels that a
free market would have produced, the importance of any given amount of oil
would have been far less. The loss of any given amount of oil by virtue of
the supply reductions carried out by the cartel would therefore have been
much less serious. (An analogy would be the difference between someone
having to give up a scoop of ice cream when he has three or four scoops
compared with when he has only two scoops.) As a result, the cartel would
not have been able to raise the price nearly as much by virtue of any
given amount of supply reduction.
In
such circumstances, in order to establish a price of crude oil as high as
existed back in the 1970s, or as high as exists today, the cartel members
would have had to reduce their production far more than they actually did
reduce it. They would have had to reduce their production by an additional
amount equal to the sum of the reduced supply and increased demand for
oil caused by the policies of the U.S. government. This would have
been too great a loss of volume for the cartel to be able to benefit from
the high price.
Furthermore, in the absence both of environmental restrictions on
the supply of domestically produced oil and of controls on the price of
such oil, any rise in the price of oil achieved by the cartel would work
to the advantage of the American oil industry at the expense of the oil
industry in the countries belonging to the cartel. This alone would be
enough to frustrate the plans of the cartel. For in this case, the effect
of the cartel's reduction of supply would be to hand the American oil
industry the profits and the capital required for an expansion of supply.
The cartel would then either have to allow the price of oil to fall or
else it would have to restrict its own production still further, which
would mean that the American oil companies would earn the high price of
oil on a larger volume of production and have still greater profits
available for expansion, thereby creating still worse problems for the
cartel in the future.
It should be obvious that it is impossible for any cartel to
succeed that is confronted with a major competitor able to profit from its
policies and expand his production. The Arab cartel was and is able to
succeed only because the U.S. government did, and continues to do, its
utmost to prevent the cartel's competition—the U.S. oil industry—from
earning high profits and expanding. Although it was and is certainly not
their intent, those elected officials who have been setting the U.S.
government’s energy policy for much of the last thirty years have
behaved as though they owed their election to voters in the member
countries of the Arab cartel, rather than to voters in the United States.
For it has certainly not been an American constituency that their actions
have served, but the interests of the Arab cartel.
In the absence of the U.S. government's misguided policies, the
Arab cartel would probably never even have been formed in the first place,
because the conditions required for its success would have been totally
lacking. If, today, the United States were to abolish its restrictions on
the production of energy and abstain from enacting price controls and any
other punitive measures against the American oil and other
energy-producing industries, the OPEC cartel would be broken once and for
all, and the real price of energy would resume the descent it enjoyed from
the start of the Industrial Revolution until the 1970s.
Such
a policy, of course, would entail removing the prohibitions on the
construction of atomic power plants and the restrictions on the strip
mining of coal. It would also entail the privatization of the vast
landholdings of the federal and state governments in Alaska and the other
Western states and of the continental shelf, and then fully respecting the
right of the new private property owners to use their property as they saw
fit, so that oil, coal, and gas reserves and atomic power could all be
freely developed. That would be a policy of abundant and cheap energy in
all of its forms. It would be a policy that would operate in favor of
the American consumer, not the Arab governments that control
substantial oil reserves.
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