Wednesday, August 04, 2004
Hayek and the Oil Price

It's early days, but has anyone noticed the sky cave in with the oil price going up?

There are three useful (and brief) lessons from the current spike in oil prices:

1. Invading Arabia won't keep the oil price down

This oil shock started with Putin's attempt to nationalise Yukos (and China's surging demand). So, despite the fact that our forces control Iraq has not stopped oil going higher than it was since the, well, last Gulf War.

2. Oil comes from many sources

The Yukos oil comes from Siberia. Well there's not much more that you can say about that.

3. The market in the end sorts this out

A higher oil price means marginal production being bought on tap, increased exploration, substitution with other sources and less consumption. And as Hayek pointed out (with tin) the government is the worst entity to react to these movements. Responding to price changes is what the market is best at:

Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

Now I'll be a good boy and not mention that Britain is an oil exporter (with high production costs per barrel) and so does well out of an oil price rise, as that tends to annoy people.


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