Congress Ignores the Real Cost of Oil

The politicians in Washington are busy declaring investigations into the price of oil and gasoline as a result of the large increases. The boogie man is exclusively the oil companies. Typically the real culprits are beyond the reach of Congress, so they are ignored for a surrogate more easily exploited for political purposes. Indeed they have had regular investigations of the fuel industry, all of which coincided with an increase in price and all of which found no evidence of price fixing.

There is true price fixing going on. It has been for decades. OPEC openly tries to manage the price of oil by agreeing on production quotas. The greatest threat to stable prices however is the resurgence of socialist governments in South America. Just as the oil embargo of the 1970's prompted socialist governments to nationalize their oil production, so the governments of Venezuela and Bolivia are doing the same. Any form of government is inadequate to operate an industrial project. The incentives of government are contrary to efficient and profitable production. A socialist government is even more incapable than a capitalist democracy because investment for future development and improvement of the facilities and equipment is sacrificed to provide funds for social programs. The ultimate result is a squandering of resources and the stagnation of the economy. The supply on the world market quickly dwindles as a result.

The rest of the world will not wait for these situations to run their course. Limited supply will cause price pressure as different interests compete for the energy necessary to do business and grow the economy. Though inconvenient, irritating and unnecessary, this situation presents the environment for innovation. If the government can resist the temptation to try and develop an alternative, the private sector will fill the bill.

There is a real cost to research and development. Rising cost of conventional materials will reach the point where that cost is justifiable. When some entrepreneur sees the opportunity to make a buck on an idea, he will pursue it vigorously. The government will first consider the political aspects of an idea before it's practicality, often relying on inefficient technology the looks good in the news but may cause the problem to fester longer rather than resolve it.

Until we get through the nationalization of oil production in South America and the difficulties of the Islamist war on the west, oil prices will remain high. We will either wait it out, let the government screw it up further or find some bright individual who will discover and develop an alternative. Whatever the outcome, politicians are not our friends.

oil politics Economics