EDITORIAL Oil crisis in the stars

History cannot speak more clearly on the subject of governments and markets. The two do not successfully mix. This lesson radiates from the economic wreckage of the formerly Communist world. And it haunts the record of energy policy failures in the U.S. Economies and people are served best by markets free to work. Energy markets are no exception. Governments have never allocated energy supplies and determined energy prices more efficiently than the market could have done if left to its own

Oct. 7, 1996

4 min read

History cannot speak more clearly on the subject of governments and markets. The two do not successfully mix.

This lesson radiates from the economic wreckage of the formerly Communist world. And it haunts the record of energy policy failures in the U.S.

Economies and people are served best by markets free to work. Energy markets are no exception. Governments have never allocated energy supplies and determined energy prices more efficiently than the market could have done if left to its own devices. They never will do so. By their nature, they cannot do so.

Lessons of past crises

In 1973-74, Arab exporters quit shipping crude oil to a few countries with which they had quarrels, and the price response derailed the worldwide economy. In 1990, when Iraq invaded Kuwait, about the same amount of oil vanished from international trade, yet the economic shock was not nearly as great. Why? The market was much freer to adjust to change in 1990 than it had been in 1973-74.

In the U.S., in fact, market controls in effect at the time of the Arab embargo and expanded afterward created shortage and aggravated the economic problem. They stimulated U.S. demand and discouraged domestic production-amazingly perverse incentives under the circumstances. The lesson is clear: Government should stay out of the energy market.

Three Democratic lawmakers from the Northeast need remedial training. Sens. Joe Lieberman and Chris Dodd of Connecticut and Rep. Joe Kennedy of Massachusetts panicked last week when they noticed that heating oil stocks were running 15% behind their levels of a year earlier. An aide to Lieberman put it this way: "All of the stars are aligned for a heating oil crisis."

Good grief. The Energy Information Administration says heating oil supplies will be adequate this winter. American Petroleum Institute says heating oil supplies will be adequate this winter. Neither forecaster has anything to gain from inappropriate optimism. Yet Lieberman's star-gazers see a looming crisis, so the government is supposed to blunder back into the energy market and set everything afoul.

Lieberman, Dodd, and Kennedy called on Energy Sec. Hazel O'Leary to draw down the Strategic Petroleum Reserve (SPR) and exchange the crude for heating oil to store in the Northeast. SPR, of course, is the hoard that U.S. taxpayers maintain against supply emergencies. An inventory lag is no emergency. O'Leary, bound as she is to treat all congressional requests as though they originate with serious adults, politely promised to inquire as to whether she even possessed authority to use SPR in this way. Indeed.

The Energy Secretary also promised that the Department of Energy would not intervene to control prices, and thereby cut to the core of the matter. The "crisis" in the stars is an increase in the price of heating oil.

Yes, heating oil prices might increase this winter. Temperatures lower than normal would make them all the more likely to do so. What's wrong with that? A price rise is the market's way of keeping people warm when supplies are tight, which they may or may not be when cold weather arrives. Rising prices stimulate refinery production of heating oil and ensure imports are available to supplement supply. Competition will keep them from getting out of hand.

Undermining the market

Lieberman, Dodd, and Kennedy will hear none of this, of course. They would rather undermine the Northeast heating oil market. They thus would corrupt what history shows to be the only mechanism capable of balancing supply, demand, and price with maximum efficiency over time.

If government will only let the market work, there will be no heating oil crisis-this year or any year. And it is certainly no crisis that prices in some years turn out to be higher than they are in others. Panicky intrusions by governments into energy markets only point toward the proverbial extreme that no one wants: people freezing in the dark.