The Conspiracy About Oil Prices

A poor toothless denizen of the trailer park wins the lotto. Look at him today and he is jubilant. Visit him next year you find a sadder, if not wiser, man. Unearned wealth is destructive on the individual level and oil wealth is destructive on a global scale. It seems like the biggest lakes of oil lie under the least developed, most corrupt places on the planet. The people on the surface nearest the oil were (are) usually often unaware of the black gold under their feet and as likely to be able to get it, as they are to mine rocks from the mountains of the moon.

The people living on top of the oil have a disincentive to develop serious skills. Almost nothing they can earn with hard work can measure up to the free money coming out of the ground. It gets worse. Their governments, "blessed" with such wealth can ignore the desires of their people since they are not dependent on them for revenue. (The need to tax at least gives the people some leverage over their rulers.) The damage seems to be related to the difficulty of extracting the oil.

It would be best for everybody if such a high profit, highly concentrated, low effort resource were not the key to the world economies. It wasn't always and it doesn't have to be.

Energy is fungible, i.e. one form can be substituted for or converted into another. That is what puts a ceiling on the price of oil. At some price other forms of energy (and/or conservation) replaces oil. Exactly what is this price is open to some debate and it is not a quick on/off switch. We have significant investment in the current energy system. People don't change their cars every year and they build new houses even less frequently. That means that the price needs to stay high long enough for long-term decisions to have their effects. This happened to some extent in the 1970s and it paved the way for the oil price drops of the 1980s-1990s. Unfortunately, the lower prices had their expected effect and put the brakes on the improvements.

People talk about conspiracies around the price of oil. I am not a big believer in conspiracy theories, but if I were I would say that other conspiracy buffs have it backwards. The conspiracy would not be to raise the price of oil, but rather to keep it low - just low enough to discourage development of viable alternatives. If the prices remain high enough long enough, there will be a tipping to non-oil energy sources. Once they are in place, oil will loose its "establishment" advantage. If that happens, the price of oil crashes and never recovers. All that oil in the ground doesn't lose all its value, but it is worth a lot less than anyone is projecting now. In some places it only costs a couple of dollars to extract a barrel of oil. Maybe that is what it is worth. The Saudis fear this. That is why they have been so generous during the last half century in stabilizing the oil markets.

So I may be the only one - and I will never be able to run for public office for saying this - but I welcome a sustained higher price for oil because I know it can't last forever and after we go through the adjustment we will be better off.

Posted by Jack at August 24, 2005 6:27 PM