Is OPEC Killing Itself?

…If one thing can be learned from history, it is that crisis spurs innovation: WWI brought us the United Nations, out of the Great Depression came the FDIC, SEC, Social Security and many other forms of government regulation, and the splitting of the atom was a result of the daunting threat of the German military in the Second World War. Those are just examples of government action and don’t even touch on the countless other innovations created through our market-based economic system.

Markets facilitate creativity as competition grows and entire industries are affected by the delicate balance between supply and demand. In no part of our lives could this be truer today than with oil and gas. Consumers in the United States and all over the world are feeling the increasing pressure of rising fuel prices. It is this pressure that threatens the livelihood of the world’s biggest oil exporters in the long run. Higher oil prices have created a modern crisis for the American economy. If history is a guide, our market system may facilitate a solution that leads us away from oil, rendering the OPEC cartel obsolete.


Why is this time different?

The United States has seen lofty oil prices in the past, but those higher prices have not translated to a decrease in America’s dependence on oil. What makes this time different? To answer this question, we must first determine the cause of price increases today compared to the past.

High demand is blamed for the majority of the recent run-up in oil prices, while the previous oil spikes in the 1970s were politically motivated. These politically generated embargoes were not sustainable as the lure of higher profits broke the will of the cartel.

Today, future demand for oil is expected to increase as nations all over the world continue to develop. This increasing demand creates a long-term persistence in the price levels not seen in the past. Also, this persistence forces firms and other economic agents to further incorporate higher prices into their long-run expectations.

These expectations make this oil “crisis” different than anything we’ve seen in the past: Firms are anticipating long high oil prices.

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