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Saudi
Arabia’s King has accused speculators of driving up the
price of oil to 140 dollars per barrel. Saudi Arabia has
increased output to dampen speculation, but as an oil
seller, the Kingdom also has an interest in selling more oil
when the price is higher. If the Saudi chiefs really believe
that oil speculation is the main cause of the rapid rise in
the price of oil during the first half of 2008, they have an
effective remedy.
They can go into the futures market and sell billions of
dollars of contracts. Even the news of them doing this would
make the price plunge. The fact that they have not done this
puts a question mark on their blaming the speculators.
There are real elements in the rise in the price of oil.
First, there are supply problems. There has been trouble in
Nigeria, where rebels have blown up a pipe. The war in Iraq
has reduced output there. More fundamentally, the world is
experiencing peak oil.
Mexico,
for example, is expected to reduce its exports substantially
during the next decade. Venezuela’s nationalization of its
oil industry will dampen investment there. US oil production
peaked out 30 years ago. Environmental concerns have limited
production in the US, but even if Alaska and the offshore
fields were opened up, the oil increase would be minor
compared to global output.
The rising demand from rapidly developing economies is the
fundamental reason driving up the price of oil. But much of
that demand is artificial, due to subsidies. China and other
countries subsidize the sale of gasoline. The greater
subsidy is implicit, due to not making car owners and
drivers pay the full social costs of vehicle use. Worldwide
we see congestion and pollution from motor vehicles,
indicating that governments have failed to apply the tolls
and pollution charges that would eliminate these problems.
The falling value of the dollar relative to other
currencies has also contributed to the rising price measured
in dollars. When the dollar has less exchange value, the
price of oil in euros and other currencies becomes lower,
and so the price of oil gets bid up. But oil priced in euros
and other major currencies has also been rising.
The price of oil has also risen relative to gold, so the
rise is mostly fundamental, and not due to the value of the
dollar.
Speculation does sometimes carry the price of commodities
and stocks to extreme levels. This happened to stocks during
the Internet boom of the 1990s, to gold during the inflation
era of the 1970s, and to real estate during the boom up to
2006.
But attempts to limit speculation are futile, since
commodities trade in a global market, and activity will flee
to friendlier areas if governments crack down. The remedy
for speculation is to play their game.
Petroleum users could form a group or consortium to sell
oil futures contracts. Users such as airline and trucking
firms would massively sell oil contracts, which would drive
the price back down below 100 dollars and create huge
profits from the contracts. The fact that there has been no
movement to organize selling in the futures market casts
doubt on the proposition that speculation has driven the
price up beyond the fundamentals of supply and demand.
The main
problem is that the market for oil has been distorted by
very deep interventions. The cure for the high price of oil
is to liberate the market. Here is what is needed:
 Install toll charges on all crowded streets and highways
just high enough to eliminate the traffic
congestion. The tolls would be payable through electronic devices
in cars, and only apply to places
and times that would otherwise be congested.
Taxes on fuel would be replaced with pollution charges.
That would require the economy-wide
installation of remote sensors that measure the pollution as cars
drive by.
Congestion tolls and pollution charges would also replace
regulations on gasoline, engines, and
smog tests.
Eliminate taxes and restrictions on the use of grease and
vegetable oil for fuel.
Eliminate restrictions on building oil refineries.
Pollution charges and strict liability laws would
be sufficient to protect the environment.
Eliminate restrictions on building nuclear power plants
while making the providers fully liable
for any damages to the surroundings.
Stop subsidizing alternative energy. Congestion and
pollution charges would automatically
shift users to environmentally friendly alternatives.
Make mass public transit free to users. Tolls will not
help much if transit alternatives are
not present. If they are useful, urban trains and busses raise land
rent, and so they should be
paid for by tapping the site rents of the communities. The use of
geo-rent (ground rent) would
not be a subsidy, just as hotel guests are not subsidized if they
pay for the elevators from their
room charges rather than with elevator fees.
Legalize all private transit. Vans and jitneys should be
allowed to operate to carry passengers
who seek more frequent and flexible routes and are willing to pay
for it. These services should
be provided with curb rights, places where they can stop and pick
up passengers.
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