Turmoil in Oil Markets

Let’s look at what a period of relative calm and falling oil prices looks like.

Iran has decided to cock a snook at the UN Security Council, and threaten to cut its oil production and even close the waterway through which most of the world’s oil passes en route to market if the UN votes sanctions. Nigerian rebels kidnap oil workers, forcing the companies to consider shutting down operations. Chad orders international oil companies out of the country. Venezuela signs a deal with China to begin the process of diverting supplies from America to China. Terrorists continue to interrupt the flow of Iraq’s oil. Mexico’s production declines as its inefficient state-owned company proves unable to maintain output from existing wells. A normal week in oil markets.
That should frighten America’s politicians into re-examining the clearly inadequate policies they have been willing to adopt to cope with the nation’s dangerous exposure to a supply cut-off, or major supply cut-back. No such luck.
Fortunately, markets are proving more efficient than legislators. Markets are developing that price carbon at levels that begin to make nuclear power feasible -- maybe, just maybe. High petrol prices -- high by US standards -- are causing Americans to leave gas-guzzling SUVs and pick-up trucks on dealers’ lots. And those same high prices have caused a world-wide pick-up in investment in exploration for new reserves, and in the oil refineries needed to satisfy growing demand for petroleum products.
The oil-consuming countries will never be independent of imported oil, but they can reduce the risks associated with that dependence. If the bureaucrats won’t take the necessary steps -- taxes, trading systems, negotiating to increase production in the Middle Eastern countries that bar Western investment -- let’s hope they don’t interfere with the market forces that might reduce the risks associated with oil imports.

Comments

[Frank Schnittger]

How about putting a dollar tax on every gallon of fuel? This could go a long way towards encouraging a switch towards non-carbon based energy options and help address America's twin deficits at the same time. The shock impact would probably also help to reduce the market (pre-tax) price of oil so that the actual cost to the consumer would only be (say) 70 cents. Oil producing countries would effectively be contributing 30 cents a gallon to the reduction of America's fiscal deficit. A win win - or just totally unfeasible politically, especially for an administration with close ties to the oil industry?