The Wall Street Journal Hits a Gusher of Oil Market Nonsense
In March, the editorial board of the Wall Street Journal, whose credo until recently was “free people and free markets,” transformed itself in the blink of an eye into an advocate for price-fixing in the oil market to protect American oil producers.
In “Now Comes the Oil Shock,” and "Pain in the Oil Patch,” it called for the United States government to pressure Saudi Arabia to resume indirectly fixing the price of crude at an artificially high level through a new production quota agreement with Russia and the other Organization of Petroleum Exporting Countries.
In its April 2 editorial “Trump’s Oil Summit,” the Journal further elucidated its position. It argued that alternatives to help American oil producers proposed by others, a tariff on imported oil and production quotas for American oil producers, “would do more harm than good.” Quotas, it explained “aren’t likely to be followed.”
Yet production quotas for the Saudis, the Russians, and other foreign producers are exactly what the Journal is pushing.
Does the Journal think that the economic forces that undermine cartels somehow don’t operate outside the United States? Aren’t the forces that undermine cartels what led to the breakdown of the agreement among Russia, Saudi Arabia, and the rest of OPEC that gave us the low oil prices about which the Journal is so exercised?
The Journal also offered the surprising assertion that “Oil at $20 does not represent free-market supply-demand price discovery.”
Yet the current price of oil, adjusted for inflation, is not much different than it was in 1950-1973, 1986-1999, and 2001-2002. (If you’re skeptical, see the U.S. Energy Information Administration oil price data for those years.)
The Journal’s editorial board, moreover, is familiar with the work of the late economist Julian Simon, whose research showed that over the long term, oil (like other non-store of value commodities) has become and will continue to be less expensive in the absence of powerful foreign or domestic government market interference.
The best response to the Journal’s explanation for supporting oil market price-fixing was stated in a famous 1947 dissenting opinion by Supreme Court Justice Robert Jackson, in which he quoted Mark Twain: “The more you explain it, the more I don't understand it.”
Price-fixing in the oil market is and always has been bad economics.