OPEC, OIL MARKETS, AND TAX URGES

"There is no free market for oil." When policy makers start saying things like that, as some no doubt will in discussions of President Bush's proposed National Energy Strategy, energy consumers should hide their wallets. Once the no-free-market claim turns enough innocent heads, the discussion proceeds like this: "Governments-members of the Organization of Petroleum Exporting Countries-set the price of oil." Gasp! "National interests are at stake." Of course they are. "The U.S. government

April 1, 1991

4 min read

"There is no free market for oil."

When policy makers start saying things like that, as some no doubt will in discussions of President Bush's proposed National Energy Strategy, energy consumers should hide their wallets.

Once the no-free-market claim turns enough innocent heads, the discussion proceeds like this: "Governments-members of the Organization of Petroleum Exporting Countries-set the price of oil." Gasp! "National interests are at stake." Of course they are. "The U.S. government can't sit idly by and let this happen." What to do? What to do? "Let's raise taxes!" Take that, OPEC.

Before it makes some expensive mistakes, the U.S. should take a close look at this nonsense. And oil companies, whose customers would pay for the errors, should lead the review.

THE FREE MARKET QUESTION

Technically speaking, it is true that a free market doesn't exist for oil. Technically speaking, a free market doesn't exist for any commodity. Freedoms give way to practical necessity. Motorists can't haggle with retailers over the price of gasoline any more than shoppers can haggle with grocers over the price of orange juice.

Some observers nevertheless consider the oil market less free than others because of OPEC. Indeed, the exporters' group influences the price of crude oil. It functions as the essential marginal crude oil supplier in a world that can produce more than it needs. OPEC does not, however, set the crude price. It apportions idle production capacity, which is how it influences price. But other forces are at work.

This month OPEC set a second quarter production quota of 22.3 million b/d. In relation to expected demand, that's too high. But the Soviet Union plans to cut exports. The reduction won't offset the surplus that OPEC seems determined to create, but it might keep the excess manageable until demand rebounds in the third and fourth quarters.

The near term consequence will be price weakness, which should help revive recessionary economies. Low prices might stimulate consumption enough to absorb the surplus faster than anyone expects. In that case, prices might approach $25-30/bbl again, and motorists will drive slower and buy smaller automobiles, and nonoil fuels will begin to look attractive, and OPEC will have to consider producing more in order to preserve market share.

Wait a minute. Doesn't this sound like a market freely at work? It certainly does. It sounds like a free market on the floors of oil futures exchanges, where contracts are bought and sold by open outcry. It sounds like a free market in oil company trading rooms, where negotiators have instant computer access to the latest spot transactions. It even looks like a free market on the streets, where gasoline prices are posted daily for all to see.

CLUMSY INFLUENCE

It's not perfect. OPEC often exerts its influence clumsily, especially when maverick members demand that the group try to dictate price instead of keep supply in line with demand. And yes, OPEC members represent governments; its decisions are political. But OPEC officials know how to act in their economic interests and usually do. Consumers know how to act according to their economic interests, too. That's why OPEC's occasional efforts to set oil prices always fail.

OPEC does nothing sinister when it acts as marginal supplier. As long as the market has excess production capacity, some producer or group of producers must determine who doesn't produce. Performance of the function detracts from market freedom no more than do decisions by motorists to drive less when gasoline prices climb too high. It's certainly no reason for the U.S. to raise energy taxes again.