The Best Oil Policy Is No Oil Policy
After lying low for a couple of decades, the Organization of Petroleum Exporting Countries is back with a vengeance. The cartel has rediscovered its economic muscle and driven up oil prices to more than $30 a barrel. Democrats and Republicans alike are demanding that government bring down prices. But before we dust off the policy playbook of the Carter era, we should recall some lessons learned.</br></br>First, begging OPEC heads of state to increase production -- as Energy Secretary Bill Richardson is now doing -- is a waste of time. Production decisions are determined by financial considerations. Nothing will change that. Trying to convince OPEC that it's in the cartel's best interest to head off a global recession -- thus, that it should increase oil production -- is naive. OPEC members are almost entirely dependent on the oil trade. So long as oil profits remain robust, global recession need not concern them. The recessions of 1974 and 1979 demonstrated that OPEC can make a lot of money during hard times.</br></br>Second, investigating "big oil" for price gouging is counterproductive. In the 1970s those suspicions were stoked by stories of oil tankers lingering offshore, supposedly waiting for prices to go up before they unloaded their cargo. Tankers were indeed lingering, but it was because docks were overloaded and ships had to wait to unload. Big oil -- then and now -- is guilty only of passing on its increased costs to consumers instead of selling at a loss.</br></br>Political saber rattling about alleged corporate profiteering makes the crisis worse. The only hedge against supply disruptions in the near term is inventories. But inventories are costly to maintain. If companies can't cash them out at a profit during price spikes because they fear criminal investigation or the imposition of windfall-profit taxes, they won't bother maintaining inventories.</br></br>Ironically, that is the upshot of the Strategic Petroleum Reserve. Politicians, alarmed that oil companies don't keep stockpiles, decided that the government must do so. Yet the existence of the reserve makes it certain that companies won't stockpile. Oil companies don't know if or when government might flood the market, dropping prices and preventing them from profiting from their inventories.