A Free-Market Energy Blog

The Oil Price Boom – We Hardly Knew Ye

By Jerry Taylor -- March 23, 2009

As mentioned in a post yesterday, Cato just published a rather encylopedic Cato Handbook for Policymakers.  Text is due from contributing authors around August, and the tome is published in January to coincide with the arrival of a new Congress (or, when we’re on a four year cycle, at the beginning of the new presidential term).  It’s a nice set of policy discussions and a handy one-stop-shop for what we think Congress ought to do on a number of policy fronts.

My energy chapter, submitted in August, coincided with the peak of the hysteria about oil and gas prices, foreign oil dependence, offshore oil development (“Drill Baby Drill!”), and rampaging congressional search & destroy operations to root out the speculators theoretically at the root of the price spiral.  Hence, my essay was about why oil prices were going up and what Congress could do about it. 

Those issues today, of course, are well off the political radar screen.  But before we forget the events of the last several years, it is worth reviewing what happened and why. After all, the 2003–2008 oil price spiral was the most dramatic run in oil prices in history.  What is more, there’s a good case to be made that the price spiral was a significant factor in the global economic downturn that plagues us today. 

In short, I argued in that chapter that the price spiral had nothing to do with speculators, environmentalists, refining capacity shortfalls, the decline in the dollar, peak oil, price gouging, OPEC, or corporate oil monopolists.  Instead, it was plain-old demand – fueled by an amazing economic boom in the developing world and oil price controls in the same – running up against supply that could not easily accommodate this demand surge in the short run.  Moreover, a plethora of modest but consequential supply disruptions hit the market, making prices higher still.  I also argued that the only way to address high oil prices was to allow the market to adjust without government interference.  Mandating conservation and renewable energy was unlikely to bring prices down by very much.  Nor would turning the oil companies lose on coastal areas or the Arctic National Wildlife Refuge.   And I am happy to report that I told policymakers that the conceit that oil prices would never fall to pre-spiral levels was almost certainly incorrect … and that a price collapse in the near term was as likely as not.

I think the chapter holds up rather well.  I would only add this; those that are arguing at present that the price collapse has played-out and higher prices are on the near-term horizon are more likely to be wrong than right.  While price forecasts are impossible to make intelligently (a point I tried to drive home in my chapter), it is worth remembering that the same thing was heard after the 1986 price collapse.  It took more than a decade, however, for the markets to recover from that event.  Word to the wise ….

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