Despite all of the dire predictions about the price of oil, the truth is that it will go down, all markets do. What we are witnessing is the last stages of a buying frenzy as part of a commodities bubble. If for no other reason the price of oil will go down, because the higher it rises, the greater the possibility of recession. A high price of oil means that one of the largest inputs for any economic activity is priced out of reach. Margins go down as the price of oil goes up. Either inflation goes up or the economic activity stops or both. If the economic activity stops or slows, a recession occurs. If inflation goes up, eventually the central bank or government will have to slow the economy to get rid of inflation or face social and economic disaster. In either event, the country goes into recession. Since the price of oil is high around the world, the process repeats itself in country after country as the world goes into recession. With economic growth stifled around the world, the demands for oil declines as will its price.

The analysis of why there is an oil shortage is also wrong. The real reason for high prices is socialism. From a supply side, the problem is state owned oil companies. While everyone focuses their criticism on large multinational oil companies, the real culprits, huge state owned companies, never get mentioned. The truth is that the multinational oil companies are midgets compared to the state owned companies like Saudi Aramco, Qatar Petroleum, Venezuela’s PDVSA, National Iranian Oil Company, and Russia’s Rosneft and Gazprom. These are the real companies who control the price of oil and they all have a problem. They are run by politicians who steal and who can’t develop the reserves they have. As a result the amount of oil that these companies produce is often declining resulting in less oil for the world market.

The other part of the socialist problem is demand. Countries from China, Russia, India, Indonesia and many others subsidize the price of fuel. This is supposed to help the poor, but it also encourages people to be wasteful and economies to be inefficient. It wastes scarce resources, but many of these countries are not democracies, so the social unrest from the loss of these subsidies cannot be contemplated. Eventually the costs from these subsidies will be simply too great. China is running its national oil companies into the ground by forcing them to subsidize the price of energy. Its power plants are closing because the price of electricity is fixed but the price of coal is not. Eventually this system collapses and will result in less demand and lower prices, to say nothing of the misery that these countries will inflict on their own citizens.

William Gamble
 Author: Freedom: America’s Competitive Advantage in the Global Market
 EMERGING MARKET STRATEGIES
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