This entry continues my series of entries on free market theory, with this entry being a direct continuation of the entry earlier today on the oil market.
Two oeverall truths:
1. Leftists (by whcih I mean mean the far left people who now control the Democratic Party) do NOT want OPEC, or anybody else, to produce more oil.
2. Leftists regard "energy independence" as merely a phrase to use politically to advance a socilaist/Marxist/leftist (pick your own word or words) CENTRAL PLANNING agenda of having the government decide all of not only the "choices" that we would otherwise have, but all of our industrial civilization (as I hae said, one of the consequences of free markets is FREEDOM to make your own choices). For leftists, independence from OPEC is only incidental. OPEC countries are mainlly CENTRAL PLANNING countires, and leftists clearly want that kind of power in the government. The concept of OPEC is hardly as repugnant to leftists as, say, the religious right.
3. The CARTEL effects of OPEC have been limited in the oil price spike over the past year, as OPEC nations (especially other than Saudi Arabia) do not have the CAPACITY to produce substantial amounts of additional oil. In other words, the MARKET in oil (combined with a somewhat speculative commodities market) has prodcuced a price beyond that aimed at by OPEC. With OPEC pretty close to capacity, at least without substantial additional development of their actual capacity to prouce oil, there is a large question as to where the MARKE T in oil is taking us, and simply saying that OPEC distorts the "free market" in oil bets a lot of questions. In fact, the lack of capacity in OPEC probably has more to do with OPEC countries being generally central planning, authoritarian countries which are inefficient in developing their resources. If those "evil" private oil companies could operate freely in the OPEC countries, the capacity to actually produce oil would probably be much greater.
Even assuming that OPEC can successfully restrict oil ouput, without bowing to market forces, does that mean that free market analysis is irrelevant to the oil market? Of course not. OPEC is best viewed, from the perspective of free market theories in two ways. The first way to to regard it as equivalent to a NATURAL restriction on oil resources. That is, if you assume that OPEC is going to provide only so much oil (like a finite oil field), then the free market has to operate with regard to the REST of the oil available in the world (presumably not subject to limitation, except in terms of the amount of oil discoverable, where we do not yet appear to have reached the limt). The second way is to take action calculated to dESTROY the power of the cartel. Applying free market theory to both of these theoretical approaches leads to the SAME conclusion on what should be done: ENCOURAGE the production of more oil (exactly what leftist Democrats do NOT want to do). Nor do you have to encourage this with subsidies. The PRICE should be enough.
If we assume that OPEC output restrictions are not allowing the free market to operate fully, why not try to counter that with price controls and taxes to prevent oil companies from "benefitting" from the arificial scarcity? Pay attention to my entry describing the three main accomplishments of a free maket (which apply, if with lesser efficiency, even to a partial free market). One of the primary benefits of a free market is proper ALLOCATION of resources. An artificial scarcity of oil is still a scarcity. You have to ALLOCATE the scarce resource among the people using it by some method. PRICE is the method that works the best, and provides the most freedom, in a free market economy.
There is a certain dEMAND for oil. If you assume that OPEC is limiting the supply, then the PRICE has to RISE to put supply and demand in balance. What if you PREVENT the price from rising, by price controls, or profit controls, or whatever. (Note that leftists do NOT seem to want to stop the price from rising so much as they want to PUNISH oil companies, which helps consumers not at all.) Then you merely DISTORT the allocation of resources, causing a MISALLOCATION of resources. If you keep the price from rising to reduce the demand, you are SUBSIDIZING the use of oil. That means the DEMAND for oil stays TOO HIGH (in view of the actual, available suppply). This results in SHORTAGES of oil (as happened with the Nixon price controls), and ridiculous things (like rationing) that occur when you distort the free market. Worse, if the "correct" price of oil (the price that will bring actual supply (taking OPEC into accunt) and demand into balance, is HIGHER than the subsidized price, then people will continue to try to use oil when they should be using alternative energy.
What is the leftist "answer" to this dilemma of government interference in the free market causing distortions in the allocation of resources? You know the answer to that as well as I do. The leftist answer is MORE government control--a spiral that eventually leads to socialism, or an economy totally destroyed by excessive central planning by fallible human beings acting on insufficient informatioin. Leftists don't worry about oil price, and shortages, because their "answer" is to MANDATE people not to use oil (presumably determining those people "worthy" enough to continue to use oil and oil based fuels by some method of government controlled rationing). Do central planners really have any way of knowing WHAT "alternative energy" emthods to MANDATE? Of course not. Unintended consequences will be the norm, and not the exception. Consider the ethanol debacle, where ehtanol MANDATES have NOT helped reduce the price of oil materially, but have helped RAISE the price of food materially (again, causing biofuels to be labeled a cRIME AGAINST HUMANIY by some in the U.N.).
The central planning "answer" is going to be a disaster. What is funny is that history shows that it ALWAYS is a disaster, in the end, and theory suggests it will be a disaster. Leftists like it anyway, because they are coming at this from a MARXIST perspective. They don't care if central planning is a total disaster from all economic points of view. They look at it, as I said previously, as a matter of MORALITY, where the people should not be "exploited" by capitalists.
Setting aside that point of view (correctly) as irrational, what is the free market answer to an oil supply restriction? Tjhat is clear (if not to Congress, or leftists or the media--that unholy Trinity who are One): MORE SUPPLY. That means you try to reduce restrictions on supply as much as you can, even if it means taking some risks. Anwar anyone? Offshore drilling anyone? Nuclear power anyone (a supply of ENERGY, if not oil)? SUPPLY is the only free market solution to excessive demand (excessive in terms of demand exceeding supply at a certain price). Otherwise, you MUST allow the price to rise, if lyou cannot add to supply, in order to bring in alternatives to oil at their "real" price--the price that does not distort the market and represent a central planning choice of the "best" alternatives. Now you can also reduce DEMAND (which is a reason to allow the price to RISE, and therefore both result in as much production as possible AND result in demand SHIFTING to products which do not use so much oil). There ARE some other ways to reduce demand, without th distortions of central planning MANDATES reducing individual freedom, and I will address those in a later entry. I assure you that those suggestions will be in accord with free market theory (a rational response to the raised market price), but in a proactive way.
What is the best way to DESTROY a cartel (if you can't do it with anti-trust laws within a single country). Easy. You do the exact opposite of what leftists want to do. You ENCOURAGE competing supply If a cartel can be made to FEAR competiion (supply from elsewhere), the cartel is on its way to destruction. Members of the cartel will be ANXIOUS to sell their oil while prices are still high. This will BURST the oil price "BULLBEL", and cause a downward spiral in prices. But it requires encouraging SUPPLY, which is exacly what Congress is FAILING to do. If we started showing a determination to increase supply, the psychological effects alone might cause a collapse in the price of oil (as traders became reluctant to be "long" oil). Instead, because of Democrats and leftists, we are doing the exact opposite by conspiciously RESTRICTING supply.
That is another qauestion Congress should have asked oil company executives: WHAT can we do to put pressure on OPEC. Mabybe the oil company executives would even have had some suggestions beyond drilling in Anwar and offshore. But that is the reason that question was NOT asked (at least in a prominent way). It invites the obvious answer: Make OPEC FEAR a coming increase in SUPPLY by removing restrictions on drilling (providing the drilling is done in an environmentally safe way).
Thus, free market analysis results in the SME concusion, regardless of which question you look at. The best way to offset output restrictions of OPEC, and use the free market to reduce prices, is to INCREASE SUPPLY (and reduce restrictions on supply). Further, the best way to destroy OPEC is to INCREASAE SUPPLY, and let OPEC know that you are embarking on a policy of INCREASING SUPPLY (of oil and natural gas).
But what about the distortions in the free market in oil and fuel resulting from MERGERS? What if there is not enough competition in oil and fuel markets outside of OPEC?
Well, the answer should now be obvious to you, if your "central planning" blinkers have been removed (I hope by the logic of these entries). The "answer" is NOT to try to counter imperfections in the free market with central planning, which merely causes MORE distortions and misery. The answer is to try to INCREASE the free market in oil and fuel. That means to STOP any further mergers. You could look at BREAKING up oil companies (such as by separating refining and producing operations, while PREVENTING mergers of eiether; or you might try to recreate Exxon, Mobil. Texaco, Chevron, Conoco, Phillips, etc. as SEPARATE companies). That kind of action is NOT government "intefrence" with free market theory, but a government attempt to ENCOURAGE free markets. Merely STOPPING any furter mergers would be a start, along with removign unreaonable restrictions on drilling.
The point is not that there is one right "solution". The point is that there is ONE right approach: That is the approach of trying to put free market theory in operation. There is ONE wrong approach: That is the approach of trying to "solve" the whole theing by central planning and government distortion of free markets.
(entry to be completed)
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