FREEZING OIL PRICES THE WRONG RESPONSE TO MILITARY ACTION

Bob Tippee

A large step toward new military action against Iraq provides the occasion for a reminder to major oil companies: Don't freeze retail prices of oil products.

To show proper concern for consumers, set flexible caps instead.

It would be best, of course, for consumers and everyone else, to simply leave prices alone. Politically, however, that's not always an option.

But freezing prices would be a mistake.

Nobody knows what oil prices will do in the event of a new invasion of Iraq. Congress on Oct. 10 passed a resolution approving a US military move against Iraq, even without support of the United Nations, provided President George W. Bush exhausts diplomatic alternatives before taking unilateral action.

The normal assumption is that war will make oil prices leap. To some extent, however, they already have. War anxiety has kept prices higher than what they normally would be under recent conditions of physical supply and demand.

The market is accounting for the certain loss of Iraqi exports that will occur if war starts. It's also reacting to uncertainty about how hostilities will affect supply from Iraq's neighbors.

Interruption of flow from Saudi Arabia, Kuwait, and Iran would raise prices. Assurance that those producers were safe probably would let prices recede.

Experience of Desert Storm—the invasion to expel Iraqi troops from Kuwait in January 1991—is instructive.

Before the assault, the expectation was widespread that wartime crude prices would reach $50/bbl or more. Major oil companies, worried about charges of profiteering, announced price freezes. On the day of the invasion, some crude prices reached $40/bbl—then quickly plunged to half that level.

That the companies' magnanimous freezes had become price floors—quickly dismantled—didn't escape the notice of critics.

"Some oil companies decided to freeze prices," said Rep. Silvio Conte (R-Mass.). "But they just don't know how to do something without hurting the American consumer. Big Oil announced their price freeze when the price of oil was dropping like a stone."

In some quarters, the oil industry can't win. It can, however, avoid public-relations traps.

(Online Oct. 11, 2002; author's e-mail: bobt@ogjonline.com)

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