14 June, 2011

High oil prices - regulate, subsidise and fail

There’s an old story about a city whose rulers, facing a local food shortage, put a price cap on carters’ charges to prevent profiteering on bringing in supplies from further afield. However, even though there was plenty of food in nearby areas, no-one fetched it because they couldn’t make money. The carters left town and the city starved.

I mention this in the context of much media and political comment blaming speculators for the sharp increase in oil prices. We’re now hearing calls from some quarters for oil market derivative trading to be banned. The Spectator’s Trading Floor blog dismisses this idea as insane:
All that would happen if it were implemented is that markets would move offshore: is that what anyone wants, that they be even less regulated than they are now?
Economics writer Tim Harford made this point about commodity market players:
… if the speculators are any good, they’ll stabilise the oil prices. Profitable speculators buy low (driving up the lows a little) and sell high (moderating the highs)… If the speculators are incompetent, then they can exacerbate oil prices spikes - but we can take the modest consolation that they’ll wipe themselves out while doing it.
The answer to high oil prices doesn’t lie in oil-related regulation, subsidies or reduced duties. The answer lies in cost-effective alternative fuels and technologies, coupled with smart and non-wasteful applications and processes. High oil prices make that more likely to happen; artificially restrained oil markets won’t.

First posted May 27th, 2008

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