Original URL: http://www.theregister.co.uk/2008/05/22/gordon_brown_opec_attack/

The economy: A big Arab did it and ran away, claims PM

'Scandalous' OPEC to blame for slump, by-election results, weather etc...

By Tim Worstall

Posted in Government, 22nd May 2008 11:41 GMT

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.

But there's one very much more important point that needs to made here. Why in hell is anyone trying to reduce the price of oil? Aren't we facing a problem greater than terrorism (attrib. Sir David King)? Isn't the end of the world nigh? Don't we have yoghurt knitters camping out at Heathrow insisting that yurt production must rise to save Gaia? And look what's happened: the markets have done our work for us!

Allow me, for the sake of this argument, to take the IPCC reports at face value. The world is warming, our use of fossil fuels is causing it and the only interesting and important question left is, what are we going to do about it? Well, as all the lentil munchers keep telling us (and some sane people as well) we need to de-carbonise our economy. Stop burning so many damn fossil fuels. Excellent, so how are we going to do that then?

Umm, how about this radical idea.... let's raise the price of them! With the exception of the near mythical Giffen Goods (now finally found, noodles in China) we're certain that raising the price of something lowers consumption. Sure, it can take time for things to work through the system: raising petrol prices doesn't cut driving all that much in month one, but in year 20 it does, as the difference between the high tax countries of Europe and the low tax US shows. This is indeed what everyone is calling for as well: there's all the discussion over EUTS (the EU's version of a cap and trade system for CO2 permits) or the imposition of a carbon tax. That's exactly the point of all such schemes: to raise the costs of fossil fuels relative to other forms of energy production.

OPEC, climate hero?

We're looking for at least two effects here: the first is a reduction in the use of that more expensive energy itself, the second in making it more attractive, more profitable, to develop other less polluting methods. This is precisely what Kyoto I and II are all about, those anguished gatherings of the Great and the Good in Bali and other places with good food and great beaches. How can we raise the cost of fossil fuels?

Regular readers might recall this, where I explain that the required rise in a litre of petrol in the UK is about 10 pence. The rises needed on other petroleum derived products (remember, we're buying the whole gorbal wormening argument wholesale here still) are proportionate as well. So what have the recent market driven price rises been? More or less than that 10 pence? As anyone who has been to the petrol station knows, they've been rather more (and yes, even in the US gas prices are now above their optimal level in respect of climate change). It's also true that natural gas prices move largely in step with oil ones, so we've really only got coal left to worry about.

So why is anyone trying to lower the price of oil then? It's exactly where we want it: high enough to start choking off demand and push us into that structural change of decarbonising the economy but not high enough to be destroying the economy. We don't actually need all those other, extra, measures that the politicians so love to orate about. Indeed, rather than attempting to lower oil prices from where they are, what we really want is a committment that if they fall, taxes will rise so as to keep retail prices where they are and thus continue to keep the pressure on consumption.

I'd actually love to think that Brown's insistence that he's going to work to lower prices was a result of mendacity: you know, that necessity for politicians to prove themselves useful and thus the requirement for those conferences where they can orate, the schemes that they can point to to show that they've saved us. Unfortunately, I don't think it is: I think he's simply ignorant of the fact that markets alone, so far entirely unaided by the plans of mice or men, ganging agley or not, have provided us with exactly what a decade and more of international scheming has been straining to push forth. The impetus for us to reduce our fossil fuels usage.

And in his ignorance the Prime Minister wishes to undo that good work. ®

Tim Worstall knows more about rare metals than most might think wise, and writes for himself at timworstall.com, and for The Business, among others. He is a Fellow of the Adam Smith Institute.