Oil Industry Disses the Free Market

The free market, who needs it. Not the oil industry obviously. Not the industry nor the governments that depend on its largesse for royalties and taxes. We just had a taste of it and it horrified all parties concerned.

OPEC and its erstwhile collaborators recently fell out and instead of limiting production to maintain price, as they had been doing, they engaged in all-out competition. That, of course, is the point of the free market. Unrestrained competition drives prices down toward the level of the most efficient producer's costs. And the lowest lowest price is what the consumer wants. But the lowest price is not what the producer wants, nor what royalty and tax-collecting governments want.

So while the recent price-busting skirmish was a bonanza for consumers of oil products, it was not happy-making for oil companies and their governments. So they have made an unprecedented pact to constrain production in order to drive oil prices back up. They have decided to rig the market. They find a price-fixed market much more appealing than a free market.

The OPEC cartel and other oil producers, including Russia, the U.S., Mexico and Norway, agreed Sunday to cut crude production by a tenth of global supply to "stabilize" the market. This is the largest cut to oil output ever. Canada is not part of the pact as our production is under provincial jurisdiction. Nonetheless, Alberta Energy Minister Sonya Savage was "cautiously pleased" by the deal. 

Now don't get me wrong. I'm not criticizing the move. I'm not opposed to government interference in the market place. Quite the contrary. During this COVID shock, a lot of unprecedented policies have become necessary. What does annoy me is the support among certain politicians and business people for free markets as a veritable answer to all problems. And the oil industry is replete with such believers. I am one Albertan, and there aren't a lot of us, who recognizes that the wealth of this province derives primarily not from a free market but rather from government interference in the market, specifically by the OPEC cartel, i.e. from a monopoly, the very antithesis of a free market. OPEC's antics over the years have made an Alberta oil industry profitable, and a tar sands industry possible.

No one philosophy has all the wisdom. Free markets are a wonderful economic instrument. Indeed they must be the foundation of a healthy economy, but in some areas and at some times, they are less than the best, sometimes much less, and therefore should be considered on their merits for a particular activity, time and place and not as an economic panacea. It appears that virtually the entire oil industry and its political acolytes currently agree. If perhaps unwittingly.