The Price of Oil: If it’s Broken, Why Not Fix It?

The price of oil is too important to be left to market forces. Since the early 1970s, the world oil market has repeatedly failed to send price signals that allocate economic resources efficiently. Governments of oil-importing nations should correct this market failure by fixing oil prices in internal markets at target levels high enough to set in motion technological and structural changes in the way their economies use oil and gas, while incentivizing increased domestic production. The result will be steadily declining imports, and greatly increased certainty for decision-makers in the internal oil and gas markets. The policy tool for achieving this is simple: an excise tax on oil imports equal to the difference between the target price and the prevailing world market price. For political reasons, it would be expedient to combine this with a windfall revenue tax to confiscate domestic producer revenue above the target price.


What Is Broken

Unlike democracy, the free market is not an end in itself, but a means to achieving economic efficiency. When a market fails to do this, as many often do, it must be fixed by government. The whipsaw prices generated by oil market forces between July 2007 and December 2008 have drowned out with noise any meaningful signals that prices may be trying to send to guide decisions by individuals and businesses about what to consume and how to invest. And it is not only short-term prices that are being whipped.

The Oil Drum