When governments meddle in the market to protect the consumer, it is the consumer who often suffers in the end. This is precisely what is happening in the energy markets. Last week, at Al Gore's behest, the Clinton administration uncorked the U.S. Strategic Petroleum Reserve in an attempt to bring down oil prices.
It worked. The panic is over and the presidential hopeful warmed the hearts of voters in the chilly Northeast. But the potential for long-term damage is obvious. Artificially low prices can only reduce the incentives to find more oil (or alternatives to oil) and unless more supplies are found, prices will keep rising. A first-year economics student could tell you as much.
A couple of weeks ago, crude oil reached almost $38 (U.S.) a barrel, sending the prices of all petroleum products soaring. Forget gasoline; heating oil, up by about two-thirds since last year, took the biggest jump. Cue Mr. Gore, who found a solution in the form of the 570 millions barrels of oil stored in salt caves along the Gulf coast of Texas. In due order, the Clinton administration announced that 30 million barrels would be released. Since then, oil has declined to about $32, although extra pumping by OPEC can take some of the credit.
The Strategic Petroleum Reserve is not intended to moderate prices but to guard against oil-embargo-style energy crises. The decision to release the oil, coming six weeks before the election, can only be seen as a cynical vote-getting move because it made no economic sense. Mr. Gore himself said as much in February, when Bill Bradley, his main rival at the time, proposed skimming the reserve to keep heating bills down. Mr. Gore argued that the plan could backfire if the OPEC countries retaliated by reducing their output. He has since changed his mind, even though the fundamentals of the market are pretty much the same.
George W. Bush rightly heaped abuse on Mr. Gore's plan. "[The strategic reserve]should not be used for short-term political gain at the cost of long-term national security," he said.
While Mr. Bush's comment could be dismissed as a predictable reaction from a member of a family that made its fortune on oil, he did have a point. When government's fiddle in the energy markets, watch out. Canada is a prime example. Under the Trudeau government's National Energy Program, billions of taxpayers' dollars were squandered under the Petroleum Incentives Program. The notorious PIP grants reimbursed Canadian oil companies for up to 80 per cent of their frontier exploration costs (the Beaufort Sea was the hot area at the time). The effort, of course, was a colossal failure. The grants were paid out when oil prices were in decline, so even if big reserves were found (none was), they would not have been developed. The free money led to a spend-it-while-it-lasts mentality that would have made the Pentagon proud. In 1985, the newly elected Tories killed the PIP program.
Now we come to Al Gore. Dipping into the government's petroleum reserve has helped to lower prices and the mere threat of doing so again would have the same effect. How can this not give the big oil-producing countries less incentive to pump more oil? More importantly, how can artificially low prices induce the oil companies from their 15-year slumber?
The only way that oil prices will level off is if oil reserves, notably reserves outside the OPEC countries, are discovered and developed. The extra supplies will put downward pressure on prices, as they always have. In inflation-adjusted terms, oil prices peaked in 1980 at $80 a barrel and, except for a couple of blips upward a decade or so ago, were in steady decline until the late 1990s. Prices were low because the world was awash in oil.
Canada, to its credit, has not fiddled in the domestic energy market. No government has reduced energy taxes to lower the price of petroleum products at the retail level. (Canada has no stratregic reserves.)
The market is working as it should. Yesterday, for example, Gulf Canada agreed to buy Crestar Energy for about $1.5-billion. Crestar's cash flow from natural gas production will be used to finance Gulf's capital-intensive, long-term projects in the Alberta oil sands, Mackenzie Delta and other areas. Husky Oil recently bought Renaissance Energy for the same reasons. Eventually, the extra production will put energy prices in their place. In the meantime, the high energy prices means they can afford to pay the exploration and development bills.
Mr. Gore's lunge at the Strategic Petroleum Reserve was nothing but pandering to voters in a tight election race. If he really wanted to help consumers, he would have left the market alone. Readers can send e-mail to email@example.com