“Falling commodity prices in general are a good thing in a free market because, as economist Ludwig von Mises emphasized, the sole end of production is consumption. Consumption first, production second. Also the US is a net importer of both oil and natural gas, which means we consume more than we produce. So provincially speaking, the US gains more than it loses from well-to-pump or well-to-burner-tip price drops.”
Business consultant Carlos Lara and I produce a monthly financial publication, the Lara-Murphy Report, which highlights the Austrian School of economics in both academia and the financial markets. The January 2016 issue interviewed Rob Bradley of Houston, Texas, who was trained in Austrian-school economics and is a longtime historian of oil markets. This interview is reproduced below.
Robert L. Bradley Jr. is the founder and chief executive officer of the Institute for Energy Research (IER), a 501(c)3 educational foundation with offices in Houston, Texas, and Washington, D.C. [DISCLOSURE from eds.: Robert P. Murphy is currently the Senior Economist for IER.]
Bradley, who holds a BA and MA in economics and a PhD in political economy, received the Julian L. Simon Memorial Award in 2002 for his work on free-market approaches to energy sustainability. Bradley is author, most recently, of Edison to Enron: Energy Markets and Political Strategies (Scrivener Publishing and John Wiley & Sons).
Lara-Murphy Report: How did you discover Austrian economics?
Robert L. Bradley, Jr.: I read an Ayn Rand novel, The Fountainhead, in high school. I loved the book and went on to read Rand’s edited book of essays, Capitalism: The Unknown Ideal, which was basically an introduction to free-market economics. From there I discovered Henry Hazlitt and started hearing about Ludwig von Mises.
Early on at Rollins College, I read an obituary by Robert Bidinotto in an Objectivist magazine. “Von Mises: A Final Salute” in Unbound!, published by Individuals for a Rational Society, was a huge eye-opener. I started reading von Mises and was captivated by his logic and clarity.
And guess what? In my sophomore year at Rollins, stagflation blew up the Phillips Curve and put the whole Keynesian economics paradigm on trial. The Austrians had the explanation, and my raised hand in class got some of the professors to consider Mises, Rothbard, and Hayek.
LMR: We interviewed originally back in March 2014, but we wanted to get you back since you are both an Austrian economist and an expert on oil markets. To start things off, can you explain what the exact situation is regarding oil prices? How big a deal is what we’re seeing, from a historical perspective?
RB: Recent developments in the oil and gas market, coming on top of a lot of change last year, remind me of a von Mises quotation. Near the end of Theory and History, he stated: “The outstanding fact of history is that it is a succession of events that nobody anticipated before they occurred.” I certainly did not, and I am a resource optimist.
Even Julian Simon, if he were alive, would surely be surprised, although he predicted that oil would become plentiful again when no one else was saying so in the early 1980s. Oil peaked then at just over $31 per barrel, which in today’s dollars would be about $83 per barrel.
Historically, as you Bob know, having put together the inflation-adjusted spreadsheet, oil and natural gas prices today are below their post-World War II average, some 65 years. I do not think that means that prices today are ‘too low’—only the sweep of history can answer that.
LMR: Economists are now arguing about whether falling oil prices are a good thing or bad thing for the United States, but (of course) they typically adopt a Keynesian framework. For example, Paul Krugman analyzes the situation in terms of: what will get Americans to spend more? (His tentative answer is that moderate falls are good for the economy, because it redistributes money from rich oil tycoons to working folk, but large drops in the price of oil are bad for the economy, because it makes some firms go under.) What do you say as an Austrian?
RB: Falling commodity prices in general are a good thing in a free market because, as von Mises emphasized, the sole end of production is consumption. Consumption first, production second.
Also the US is a net importer of both oil and natural gas, which means we consume more than we produce. So provincially speaking, the US gains more than it loses from well-to-pump or well-to-burner-tip price drops.
The other part of the equation that has not gotten as much attention is the boom in refining and petrochemicals that has occurred from lower feedstock (crude oil and natural gas) costs. Here in Houston, the east side is in a boom and the west side is languishing because of the two energy worlds. I’ll let you guess which side of Houston is related to downstream, and which to upstream.
LMR: We know that certain analysts—such as David Stockman—for some time have been warning that the Fed’s cheap credit policy was (at least partially) fueling the fracking boom, and that a lot of those operations were vulnerable. Do you think that is a big part of what we’re seeing—as opposed to, say, blaming slowing growth in China?
RB: There are two concerns I have about the price roller coaster, which creates a mini-business cycle, if you will. One, artificially low interest rates encouraged debt drilling—and those companies and their banks are in big trouble now. And the oil they produced is contributing to the price doldrums that the better financed producers now have to endure.
Second, government policies to restrict demand because oil and gas are thought to be environmentally bad, even at the given level of regulation, have exacerbated the cycle. Low oil prices, in other words, are generating less demand than would occur in a truly free market where, say, federal fuel economy standards were absent. Virtually all energy appliances are subject to forced conservation standards, creating a problem for the old adage that “low prices are the cure for low prices.”
Also remember the ‘seen’ versus ‘not seen.’ We witness and can compute the resource losses in the upstream oil and gas industry. We cannot see the thousand small demand increases for all of the things that get purchased from consumers paying less for energy. There could be increased savings and investment too, creating economic activity in those directions.
LMR: Finally, a lot of progressives have been applauding the recent Paris deal, in which many nations made unilateral pledges to reduce their greenhouse gas emissions. What’s your take on the Paris conference, and the issue of climate change more generally?
RB: It seems to be a moral victory for the alarmists to say that ‘the world agrees’ to a role for government to control and plan the energy economy, not to mention land-use changes tied to the carbon cycle. Climate intervention is the new central planning for governments that want or need to do something with the intellectual case for central planning having lost favor.
But climate and energy reality point in a different direction. There is not much of a problem, much less a potential catastrophe, from higher atmospheric concentrations of CO2. And as you know, Bob, the real problem is government policy in the name of climate change rather than climate change itself.