Wednesday, May 03, 2006

Acting in their own self-interest

And there's nothing wrong with it.
Saudi Minister Says Oil Prices Too High

WASHINGTON - Saudi Arabia's oil minister said Tuesday that currently high crude oil prices are of no long-term benefit to either producers or consumers and contribute to market instability.

"Energy security cannot be sustained when prices are extreme — too high or too low," Saudi Oil Minister Ali al-Naimi said in remarks to an energy conference.

He said Saudi Arabia is committed to working with the United States to keep oil markets stable, including plans to increase production to 12.5 million barrels a day by 2009. But he said that producing adequate supplies must involve other suppliers and conservation.

Oil prices went above $74 a barrel Tuesday, flirting with their record high of just above $75 reached last month.

Al-Naimi, who was joined in a panel discussion by Energy Secretary
Samuel Bodman, sought to dispel the notion that U.S. energy independence could drive down prices, although he did not specifically refer to the phrase frequently use by the Bush administration and members of Congress as an answer to America's energy problems.

It is "a myth" that countries can lower prices by reducing their oil imports or that they can achieve greater energy security by blocking imports from a region of the world, said al-Naimi. He said oil is traded on the global markets, and even if a country has no imports it will cost whatever the international market dictates.

President Bush in his State of the Union Address pledged to increase development of alternative fuels with a goal of reducing U.S. oil imports from the Middle East by 75 percent. Bodman reiterated that goal.

During a question-and-answer period, the Saudi official was asked if he viewed that as unwise protectionism. "I don't call it anything," he replied.

But in his speech, al-Naimi cautioned against a country "backsliding into protectionism" by seeking to block imports from any region.

"Not only is a country worse off when it builds walls around itself and slips into protectionism, but the global system as a whole suffers," he said....

Bodman said the market is worried about a supply disruption — in part because of the standoff with Iran over nuclear issues and the war in Iraq — and "there's no doubt a (fear) premium" is reflected in today's prices....
A long time ago, talking about Malthus' philosophical descendants who claim we're running out of oil, I first explained that OPEC doesn't want oil prices as high as possible, because if they're too high, people seek alternatives. The Saudis aren't looking to ease high oil prices to be good buddies; they're doing it so they won't lose business to other energy sources. OPEC is continually investing profits in new oil fields and new technology, seeking that equilibrium point of maximum profits. They won't try to undercut others, but they

Remember last February when terrorists tried to attack Saudi Arabia's main oil refinery, only to be detonated prematurely? The Saudis didn't have tight, effective security out of friendship with the United States, or because they really hate the terrorists. They had heavy protection so that terrorists couldn't interrupt their profitable business.

al-Naimi sounds like he's studied practical (market) economics, for he has a good grasp of things. As I've explained, the Democrats' call for energy independence will certainly cost us more. Is it worth it to pay more at the pump so that we don't indirectly fund Muslim terrorists? I think the losses far outweigh the gains, and al-Naimi brought up a concept I hadn't considered in that entry: fungibility. If we buy oil from others or produce it ourselves, Saudi Arabia and others will still get their oil and still get money that's eventually channeled to terrorists. Protectionism to starve our enemies won't work unless everyone else joins us.

Energy Secretary Bodman correctly stated why oil prices have recently gone up again. Prices are a reflection of buyers' perception of present and future supply, and a possible armed conflict with Iran makes for great uncertainty. The situation reveals who's betting on a cut-off of Iran's oil exports, and who's willing to pay more for oil deliveries at a specified date in the future. The best thing we could do right now is to enact legislation so we can drill in ANWR. Even if Congress merely voted to allow it, as I explained before, it would release a great deal of pressure on the market and immediately help bring prices down. We wouldn't see $40 per barrel oil, but at least buyers would have more favorable expectations of supply


Blogger septagon said...

You know how they will justify the so called authority. They will invoke the Commerce Clause. Since Wickard v Filburn, it has been used to rationalize just about every expansion of governmental power into the economic sphere. It is easy to ignore the Constitution when you twist the meaning of plain english to get the answer you want.

Wednesday, May 03, 2006 12:40:00 PM  
Anonymous wom said...

What's wrong in acting in their own self-interest? At least people aren't being murdered over their decisions as in Iraq. If it wasn't for the United States' self-interest, there wouldn't even be a war.

Saudi Arabia is in the process of diversifying the economy. The higher oil profits are, the faster that process can move forward. China, India, and other emerging economies will be using oil for decades to come so Saudi Arabia has that to fall back on but the faster we decrease our dependence on oil exports the better. Our GDP is growing at a substantial rate and it's showing signs of that diversification.

Wednesday, May 03, 2006 1:24:00 PM  
Blogger CaptiousNut said...

Good post. But I wouldn't hitch my wagon to the "oil is high because of Iranian tensions" theory.

When oil first hit the 30s, they blamed it on Bin Laden. Then higher oil was blamed on Iraq (where we went soley to get "cheap oil"). Today it's Iran.

When Iran settles down, one way or another, they will invariably come up with another scapegoat.

Are copper, gold, silver, sugar, and real estate high because of Iran too? I think not.

Wednesday, May 03, 2006 6:47:00 PM  
Blogger Perry Eidelbus said...

septagon: all too great a possibility. Even Scalia has fallen for that fallacy, if you rememer.

wom: where did I ever say it was bad for Saudi Arabia to act in its own self-interest? And I'm not sure what you mean by the United States' self interest, because our "interest" was generated by people who (without provocation) threaten the United States. A lot are citizens of your own country, you know.

Saudi Arabia would do best to specialize in what it does best. Let your private sector invest in other industries, yes, but take advantage of oil while you can. There's nothing wrong with it.

CaptiousNut: There are many reasons, from China and India to Iraq's pipeline woes, that the price of oil will stay on a plateau, but I'm looking at the recent spikes. Nigeria and Venezuela are other causes of oil remaining high, but the latest spike was because Iran's president opened his mouth. Another factor is the weaker U.S. dollar (which to some extent affects other commodities' prices).

Friday, May 05, 2006 1:03:00 AM  

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