Editorial: Sources of instability

May 22, 2006
A prominent feature of the oil market these days is instability. Because global spare capacity to produce crude oil is perilously low in relation to consumption, worry about the potential for disruption to supply has risen, boosting instability’s influence over the price of crude.

A prominent feature of the oil market these days is instability. Because global spare capacity to produce crude oil is perilously low in relation to consumption, worry about the potential for disruption to supply has risen, boosting instability’s influence over the price of crude. Countries popularly branded “unstable” are Venezuela, Iran, Nigeria, and Iraq. But the standard criteria for that designation require only modest adjustment to bring other candidates into view.

In Nigeria and Iraq, instability grows out of problems of governance. Threats to oil production in these countries come from barely controlled rebellion. In Venezuela under President Hugo Chavez and Iran under President Mahmoud Ahmadinejad, the instability has more to do with unpredictability. Both leaders have hinted recklessly about curtailing oil production to influence geopolitics. Given the heavy dependence of their countries on oil revenue, carrying out the threat would be thoroughly irrational. The problem-and the essence of this type of instability-is that neither mercurial leader can be counted on to act rationally.

Unstable importers

Unpredictability born of tolerance for the irrational can destabilize oil importers as well as exporters. In fact, instability pesters any country that consistently acts against its economic interests on oil then responds to the costly consequences by threatening to compound its errors. By this measure, the rogue’s list of the unstable must reserve a place for the US.

The country needs oil and gas in large and growing amounts, yet its government won’t make available for oil and gas leasing huge areas with the potential to increase domestic production. The country makes solid efforts to improve air quality, but the government piles on unnecessary regulations that drive up the costs of making vehicle fuel. The government makes permitting difficult and in many cases impossible for the infrastructure needed to keep supply in step with consumption. It does political favors with fuel choices that consumers should make for themselves. And having ignored supply issues while prices were low and stimulating consumption, it responds to an inevitable supply crunch and price increase with appallingly unlearned indignation.

Panicked by constituent anger over $3/gal gasoline, US lawmakers are heaving one mistake after another at what passes for energy policy. The standout features of that policy, expressed in the Energy Policy Act of 2005, are suppression of supply of high-volume oil and gas and promotion of low-volume, costlier alternatives. Those priorities perfectly contradict the concerns manifest in a national snit over energy prices.

But that hasn’t stopped the panicky lawmakers who now propose to heap special taxes on the industry that must risk capital and commit personnel to the development and delivery of the cheapest and most plentiful fuels. They suggest nationalization of part of the refining industry. They file legislation criminalizing “price-gouging” without defining the offense. They demonize oil and gas, fuels representing nearly two thirds of total energy supply, and the industry that produces them. And they exaggerate hopes for and spend public money on energy options that cannot yield anywhere near as much useful energy as oil and gas do except at intolerable cost.

Instead of unshackling domestic supplies of economically proven oil and gas, the US chases chimeras such as energy independence and a carbon-free economy. To the exporters whose oil the US always will need and who now must make decisions about investments crucial to future supply, US shenanigans over oil must seem irrational. Indeed they are.

Practical orientation

On energy, the US government is alarmingly disoriented. Its costly mistakes and omissions of the past and proposals for new errors make the world’s largest oil consumer and third-largest oil producer as unpredictable concerning oil as Venezuela and Iran are. The instability is good for neither US consumers nor a world that needs the US to act judiciously in economics and politics.

Correcting these failures requires a practical orientation to fundamentally practical energy challenges. Choices in this area boil down to two questions: How much energy? How much money? Policies disengaged from those metrics create instability. A practical orientation to energy remembers that markets don’t make that mistake.