Governments Shouldn't Meddle in Oil

Natalie Obiko Pearson wrote an excellent article, IEA Sees World Oil Market Tightening, for the online Wall Street Journal (subscription required).

 

"There is no clear sign of a recovery in crude oil [producing] capacity over the medium term," the energy watchdog said. "Despite a considerable downward revision to our global oil-demand forecast ... structural-demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture."

Current oil prices are an accurate reflection of those gloomy prospects, said the IEA. "Everyone wants a simplistic explanation for high prices. The reality is that there are a multitude of interactions" taking place, some of them involving structural changes in the world economy that have been building for many years, the report said in a new chapter dedicated solely to explaining the rise in prices.

...

The IEA also weighed in on the debate over whether the flow of investment funds into the oil market have helped drive up prices. It said it recognizes that speculation can have a day-to-day impact on price moves, but believes current prices are justified by fundamentals. One reason it cited was that physical stockbuilding of oil doesn't appear to be occurring, whereas, historically, speculative bubbles have prompted hoarding of supplies in anticipation of higher prices.

 

I have written previously that fundamentals and not speculators are the root cause of high oil prices. Governments that want to meddle with the ability of investors and speculators to participate in the oil markets will create unintended consequences. The best course of action for governments is to ensure that trading is transparent and fair. Beyond that, governments should not meddle.

Permanently higher oil prices will have a profound impact upon the world. It will affect the political landscape. Venezuelan president Hugo Chavez, for example, will be sustained far longer than he should. And there will be economic consequences as people adapt their lifestyles to higher oil prices. The trick is to properly identify those companies that are effected, either negatively or positively, by these changes.

As an example, consider the Yahoo! stock chart of AMR Corporation (AMR). Not a pretty chart, is it? There will be other causalities and winners as oil prices remain high.

Comments

[Brian Pursley:]

I agree: Democrats shouldn't meddle in politics.

2008 Jul 02 03:46 AM

[john s. gordon:]

dick cheney shouldn't invade iraq or anyplace else.
> jack

2008 Jul 02 08:08 AM

[PAULWOT:]

I would be willing to bet my paycheck that if the government took the oil tax shelters/rebates/incen... breaks/ etc... and dropped it into solar/wind/natural gas/geothermal/etc... that oil would drop like a rock!!! sure the rest of the world is still dependant, but America is the one who sets the direction. If we change, the rest of the world will follow. period.

2008 Jul 02 08:33 AM

[Shenandoah:]

Yes, the oil companies have done such a good job on managing the situation we should leave it to them. NOT!!

2008 Jul 02 09:18 AM

[ART005:]

Paulwot,
I think you've hit it on the head. There are so many viable alternatives to balancing energy supply/demand that just need a little time due to a late start that if the power and ability of the U.S. announced they were aggressively distancing themselves from oil via alternatives I'm sure strong parts of the world would position themselves similarly and then the market for future oil demand would bring a welcome change to prices.

I've read based on recoverable oil, Canada has 30 years world supply, the US a few years, the remainder of the world another 30 years. Plus yest to be discovered or regenerated during that time. Plus coal and nuclear stocks depending on how they're used that much time again. So ~70 to ~200 years depending on how universally adaptable conventional sources are.

With that much time, if development rate of conservation/renewable... was initially ramped up to match increasing demand then current balance would be maintained while conservation/renewable improvements slowly worked ahead of increasing demand. For instance the Prius cuts gas demand by almost 50%, electric car cuts it by another 50%.

So much of it is perception, thus far the futures markets have been reinforcing, buy the dips you can't loose. I hope that strategy gets some threats of its own.

2008 Jul 02 11:29 AM

[Paul Killinger:]

Yes, our government shouldn't meddle in the energy markets any more than it should meddle in retirement, health care, education, savings and loans, rail passenger service or even posting the mail. As a result, all these facets of our economy share one thing in common... They're ALL GOING BROKE.

2008 Jul 03 10:15 AM