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Oil price extremes do not repudiate US 'deregulation'

Bob Tippee
Editor

A popular belief deserving stern resistance holds that oil price extremes of 2008 justify the revival of aggressive market regulation.

According to this view, the painful levels oil prices reached in the first half of last year testified to the failure of deregulation; therefore, the government must intensify its incursion into energy markets.

This reading of things takes a short, skewed view of deregulation.

If price is the only gauge, what might be called the era of deregulation in the US was in fact more beneficial than not.

To the extent that the US actually deregulated energy markets, the legislative and regulatory adjustments occurred during the 1980s, in the latter half of which, oil prices crashed.

In the decade of the 1990s, oil prices remained so low that few observers outside the oil business took much note of them.

During that period, the annual average spot price of West Texas Intermediate crude was $19.72/bbl. The highest annual average price came in the decade's first year at $24.53/bbl. The lowest price came toward the end of the decade, in 1998, at $14.42/bbl.

If price is the measure, "deregulation" thus was a very good deal in the 1990s—for consumers anyway. But the comfort couldn't last.

Low prices stimulated oil consumption.

Furthermore, the US never fully deregulated oil and gas markets. It liberated consumption and prices from controls. But it continued to cap domestic supply with restrictive leasing and permitting of federal land, onshore and off.

While demand rose, domestic supply didn't. Imported oil had to make up the difference. And US buyers increasingly had to compete for oil in trade with buyers elsewhere as global demand increased in response to economic and population growth.

So prices in the current decade have risen. They have averaged nearly $50/bbl so far in a strongly upward trend that ended last July.

The price zoom reflects the pressure of demand expansion against physical and regulatory limits on capacities to bring oil to market.

If there has been a failure of deregulation in the US, it's that the process never applied fully to supply.

(Online Jan. 2, 2009; author's e-mail: bobt@ogjonline.com)


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