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The Harmful Effects of an Oil Tariff
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13679 |
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Section : |
CURRENT ISSUES
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| Issue
Date : |
8 / 1988 |
3,610 Words |
| Author
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John Baden and Mary Ann Parker
John Baden is chairman of the Foundation for Research on
Economics and the Environment. Mary Ann Parker is a project
associate for FREE. |
In 1980, liberal Democratic Sen. Edward Kennedy said that "a Democratic energy policy must oppose the decontrol of gas and oil prices." Eight years later, the conservative Republican governor of Texas, Bill Clements, advocated a federally mandated $20 floor and $25 ceiling on oil. Shortly thereafter, Texas Railroad Commissioner Kent Hance made a trip to OPEC's April meeting. The potential Republican gubernatorial candidate urged OPEC members to cut production and shore up low oil prices.
Kennedy's efforts on behalf on federal regulation of oil and gas, Clements' advocacy of federal price control through energy floors and ceilings, and Hance's posturing with the sheiks share a common objective: to fix the price of oil and gas. Like a stopped clock, however, an artificial rate is almost always misleading, for it sends inaccurate signals to producers and consumers alike.
These price-fixing efforts also share a common cause: They are all politically motivated. Kennedy wanted federal regulations to subsidize lower energy costs for supporters in the Northeast, where local economies were feeling the ravages of recession. Clements and Hance wanted the government to subsidize higher profits for producers in Texas to spur domestic production and relieve a sagging Texas economy.
These policies may have short-term advantages for the politicians' constituencies, but the long-range economic effect of government intervention in the oil patch is profoundly negative. When the government goes beyond the defense of property rights and control of externalities (costs that affect third parties, such as pollution), inefficiencies in the form of misallocations of resources are predictable consequences.
In 1981, President Reagan lifted price controls on domestic oil and gasoline. He argued that allowing oil companies to charge more for their products would supply more funds and incentives for the exploration of new reserves. In the Carter years, political mischief turned a modestly increased scarcity into a full-blown shortage. Many investors had been led to believe that the shortage represented an exponential decrease of domestic reserves signaling natural scarcity. Thus, an exponential increase in profits would follow. Many investors followed the advice of Eddie Childs, the chief executive officer of Western Energy (which eventually went bankrupt): "If you don't own an awl well--buy one." In Funny Money, Mark Singer tells the story of one get-rich-quick artist, a former preacher and car salesman who started "Fraley Oil & Gas." "The
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