The IEA and Norway

The International Energy Agency has added an interesting twist to observations about the glutted oil market. IEA Executive Director Robert Priddle called it "regrettable" that Norway decided to join an effort by leading oil exporters to trim production in defense of the price of crude. "Managed markets," he said in a statement, "are not stable or efficient markets."

April 6, 1998

3 min read

Priddle pointed out that Norway, "as a member of IEA," is committed to a program, called Shared Goals, that declares, "In formulating energy policies, the establishment of free and open markets is a fundamental point of departureellipse."

Norwegian officials might take a different view of their commitment to IEA's goals for policy-making. Technically, Norway hasn't joined IEA but rather, according to IEA documents, "participates in the agency under a special agreement."

Managed markets

The easy way for Norway to resolve these issues is simply to ignore them. That would leave open the question of why Priddle bothered to scold Norway publicly in the first place. More important than the answer to that, however, is the IEA executive's assertion about managed markets.

To decry the inefficiency and instability of managed markets is, of course, appropriate. But is the modern oil market really managed to the degree Priddle implies?

It certainly appears to be so when producers meet to coordinate production cuts because prices have dropped to unbearably low levels. Most of the time, however, the market is blissfully unmanaged. Efforts to manage the modern oil market always self-destruct. This one will, too, as low prices of the moment revive demand growth and as rising prices later encourage violation of voluntary limits on output.

Besides, what stands subject to management is not the market itself but an adjustment that the market must make. Production will be cut. Growth in worldwide demand for oil has slowed. Iraqi exports have doubled. Oil in inventory is approaching physical storage limits.

So who cuts production? Ultimately, the answer depends on economic considerations of individual producers. A complication highlighted by Priddle's comment is that much of the world's production is owned by governments, to which economic considerations are never the only criteria for immediate decision-making. When the market forces decisions about production cuts, therefore, the decisions involve some measure of politics and diplomacy.

To call this market management, however, is a bit much and might invite a consumerist political reaction that isn't warranted. In the context of IEA's own "shared goals," moreover, the allegation looks strained.

The shared goals don't just salute market efficiency and transparency, although they certainly and very properly do so. They also reserve space in the market for government involvement.

The sentence in Priddle's statement about free markets' being "a point of departure" for policy-making ends with this: "ellipsethough energy security and environmental protection need to be given particular emphasis by governments." In pursuing those particular emphases, governments usually end up managing markets. And the methods-whether they involve tax preferences, fuel-choice mandates, price controls, or pressures more subtle-nearly always have more durable and profound economic effects than whatever temporary production cuts may be coordinated among producing-nation governments in response to the current price slump.

Politics and diplomacy

The IEA executive is right to regret that decisions about production cuts involve any politics and any diplomatic coordination at all. Efficiency does suffer as a consequence. How the decisions to cut production are made, however, is less significant than the necessity that they be made. And that necessity arises from a market that is anything but managed, or even-thanks in part to IEA's exertions-much subject to management.