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It's all OPEC's fault, according to Gordon Brown. Speaking at Google's recent Zeitgeist conference, the UK prime minister told the audience that the world's current economic woes can largely be blamed on the scandalous behaviour of the oil producer's cartel. They're just not pumping enough oil, he claims:

Gordon Brown yesterday signalled a new determination to defend Britain's hard-pressed consumers and motorists when he denounced the oil cartel OPEC as a scandal and called for the EU and the G8 to break down its control, saying it was holding back the development of the world economy. It is the first time the prime minister has spoken in such stark terms about the causes of the tenfold rise in oil prices, and it follows a conscious decision to speak up on behalf of voters' sense of fairness.

Number 10 rejected the view that the huge oil price rise was due to speculation, saying that on the contrary the speculation was a function of signals by OPEC, and the lack of balance between supply and demand.

Brown's pitch can't exactly be categorised as a major contribution to economic rationality; but although the audience of the Great and Googled was a significant pile of intelligent people, aside from Hal Varian it was pretty short on great economists - which is why he could get away with such nonsense.

His first blooper is the claim that there is some imbalance between supply and demand: of course there isn't, how can anyone be quite so silly? Everyone who is willing to pay the current price is getting just as much oil as they wish, so there is no mismatch at all. Complaining that there's not enough $80 oil or $10 oil around is misunderstanding the price system: it's like complaining that there's a shortage of cheap and decent whores. Prices adjust exactly and precisely so that supply and demand equal each other. He's on sounder ground insisting that speculation doesn't explain recent rises: there's been no great increase in oil stocks so there's no hoarding going on, that's true.

But even if there were speculation and it was driving up prices, this is indeed exactly what we would want to be happening anyway. If there's going to be a shortage of some item in the future we would much rather prices rose now so as to equate supply and demand temporarily as well as currently and speculators do indeed provide us with that service. The higher prices now reduce usage now and thus make the future shortage (at a price, don't forget) less intense.

Fight OPEC? Use tax hikes

So much for the economic rationality: why is this a bad thing for us? Well, you're not going to like this, but the method usually laid out by economists to break the power of a cartel like OPEC is to tax the imports of their production more heavily. We've not really got any other way to go after them, certainly, as there's no legal mechanism by which we can punish the mono- or oligopo-listic machinations of a nation state. All we can do is whack a heavy tax on the import of crude oil from such places (although under WTO rules we'd have to do it to all imports). This of course means a higher price to domestic consumers (that's us folks!) and, in the way that such taxes tend to get partly borne by producers, lower revenues to the OPEC members. The difference ends up in the Treasury coffers and, if we weren't ruled by spendthrifts, could be used to lower other taxes. The only problem with this technique is that we've probably already reached the limit of what UK consumers are prepared to pay in tax upon oil and oil based products.

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Next page: OPEC, climate hero?

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