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Wrong Way Hearing

Last week the Senate Judiciary Committee called upon many oil industry executives to defend themselves on the matter of high oil prices:

"You have to sense what you're doing to us — we're on the precipice here, about to fall into recession," said Sen. Richard Durbin, D-Ill. "Does it trouble any one of you — the costs you're imposing on families, on small businesses, on truckers?"

It's good to know that I can always depend on my elected representatives to get things completely wrong.

It's not a simple matter of choice to reduce oil prices. And even if it were, the companies represented at the hearing are a small minority of producers in the world oil market. Extractive commodity prices are set by demand and by expectations of future demand. If the price fell artificially, there would be shortages, and shortages would be dangerously worse than high prices.

I do not hold the oil companies completely blameless. They have been asking the government for permission to expand their production (whether that be more refineries, drilling in ANWR, the outer continental shelf, etc.) for years. It was an error merely to ask. They should have insisted on setting a crude oil price at which development would have been allowed.

Think about drilling in ANWR. If we had a free market (we don't), that land would be bid for both by oil companies who want to drill, and by environmentalists who want to preserve it. There would exist some price of crude oil above which the oil companies' expectations of profit from that development would be enough to overcome the potentially high cost of the land (as bid up by environmentalists). Then it would be developed.

The environmentalist lobby is very influential. They have prevented the development of this land without regard to its economic value. But this is wrong, morally and methodologically. Whatever value the undisturbed wilderness has — whether you think that's a little or a lot — ought to be rationally weighed against the value of the alternative uses of that land. If we accept arguendo that it wasn't worthwhile to drill in ANWR with crude oil at $25/bbl, that conclusion may no longer hold with crude oil at $125/bbl. The case for development is, in fact, five times stronger than before.

By blocking the oil companies from increasing production, Congress is responsible for the trouble of ordinary Americans struggling to afford gasoline. The oil companies are trying to increase production, but Congress isn't letting them! When people damn oil companies for high prices, they are literally blaming the victim. When they encourage Congress to enact a windfall profits tax, they are praising the villain.

It's clear that no single development (such as ANWR) will make a large difference in the price of oil. The market is too big and the new production would be a tiny fraction of the total. But that's not a reason to block it! Everything happens at the margin.

To Senator Durbin:

You are wrong to blame oil companies for high prices. This is your responsibility — yes, you personally. This is your fault, Senator Durbin. You have the power to improve the situation and instead you're making it worse. Shame on you.

To Congress generally:

You should sell ANWR to the highest bidder. You have refused to attempt to set a price for that land, but a price is the rational way to value it. The market doesn't need your help; markets discover prices on their own if only you'll let them. They will discover its environmental value and weigh it rationally against development.

To environmentalists:

You do not have the privilege of complaining about high oil prices as long as you're opposed to developing ANWR "at any price". You made your bed, now lie in it.

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