Viewpoint: The Oil Caper
The oil policy now endorsed by the entire media, and by both Democrats and Republicans, is nothing less than a species of economic insanity. Both the liberal and the conservative wings of the Establishment agree on the basics: that there is a worldwide oil "shortage," imposed by the evil Arabs of the OPEC cartel, and reflected in a price of crude oil that is much "too high"; and that the way to combat this alleged shortage is for the American government to impose further restraints on the consumption of oil, thereby increasing the shortage, and driving the price of oil and of petroleum products still higher! In other words, combat a shortage by deliberately making that shortage more severe! And yet there is almost no one in the media to blow the whistle on this lunacy; on the contrary, all quarters are joining in the hoopla.
To be more specific, the Democrats want to make the oil shortage more severe by imposing gasoline rationing, import quotas on oil, and compulsory allocations by government. In short, combat the oil shortage by really creating a shortage! The Ford administration, on the other hand, has opted for what it laughingly calls the "market" solution for the alleged problem: a high tariff on imported oil, joined with a high tax on domestic production, thereby restricting the supply of oil and gas, and driving the price up. That's the market? (For Greenspan-watchers, it should be noted that the "libertarian" Greenspan has, according to the New York Times, been in the forefront of advocating the Ford import tariff on oil.)
The rationales for this policy are on a par with the rest of the program. We are told that we must all "sacrifice" in order to become "self-sufficient" in energy, thereby flying in the face of the division of labor. Why not become self-sufficient in bananas, and do so by prohibiting the importation of the fruit, combined with a multi-billion dollar Federal subsidy of banana hothouses?
We are told that a higher price will help to "conserve" gas and oil, and stimulate the search for "alternative sources of energy." Yes, indeed, and if we placed a $100 per gallon tax on gasoline it would stimulate such a search even more frantically. The point is that the free market will set a price which will lead to just enough consumer "conservation" and just enough search for new fuels; driving up the price of oil and gas artificially will conserve too much and lead to the search for grossly uneconomic and expensive sources of energy. We are cutting off the noses of the American consumers in order to spite our faces.
If we had eyes to see, we would realize that the oil "shortage" is a farcical myth. If the OPEC countries have been charging $11 a barrel for crude, then we have all quietly and efficiently proceeded to "conserve" enough oil and petroleum products to take account of that situation. The gasoline "shortage" disappeared overnight last year when the U.S. and other Western governments finally allowed most gas and oil prices to rise to free market levels. The price of gasoline went up by 10¢ a gallon or so, and that was that. Has there ever been another time in human history when influential forces have called for the rationing of a product that is in no sense in short supply?
So what, then, has been going on? What's happening is that certain forces in the U.S. oil industry have been anxious to get a cut of the cartel pie. If the Arabs have successfully raised the price of oil, then let us cartellize through our government, and sock the American and European consumers still more! That is the essence of the Ford program. In a time of inflationary recession, we are called upon to raise the price of oil some more, and thereby injure the consumer and the health of the economy. As Dr. Hollis Chenery points out in the January issue of Foreign Affairs, it is far easier on Western Europe to pay the price for Arab crude than to "depress their economies by squeezing it out" by following the Kissinger-Ford program.
In fact, the reality of the situation is that the current cartel price of oil is in the process of being broken. Market forces are rapidly bringing about an oil "surplus" at the current price. The marvelous institution of gasoline price wars is already reappearing across the country. The "shortage" of oil refinery capacity, hooted about only a year ago, is becoming a "surplus." The New York Times (Dec. 19) noted the emergence of a "worldwide oil surplus": "Stocks on hand of all three major petroleum products—gasoline, home heating oil and heavy industrial oil—are all considered by industry experts to be more than adequate in the United States and other industrial countries.…Europe and Japan are virtually awash in supplies." The Oil Daily recently reported that "with less oil being demanded and with more tankers around to carry it, the market has collapsed, pushing charter rates through the floor and leaving dozens of ships totally without work."
In short, the oil cartellists are becoming afraid of surpluses and consequent declines in prices, and they have put over a gigantic swindle on the American public, convincing us all that we must suffer real shortages and stiffer cartels enforced by the U.S. government, in the name of combatting a shortage! It's a massive swindle, but we all seem to be falling for it. What the U.S. Government should be doing is to move in the opposite direction, and to remove tariffs and restrictions on oil imports, as well as proration and other restrictions on domestic production, and allow free competition to work in aiding the long-suffering consumers of America and the rest of the world.
Murray Rothbard is professor of economics at the Polytechnic Institute of Brooklyn. Dr. Rothbard's viewpoint appears in this column every third month, alternating with the viewpoints of Tibor Machan and David Brudnoy.
This article originally appeared in print under the headline "Viewpoint: The Oil Caper".