“Did you know that OPEC has been colluding to destroy America’s frackers, prop up the price of their own oil and continue to get rich as they just laugh at our expense? How dare they!? How do we stop them? The government needs to do something – isn’t that what its for? Those poor Dakotans will be driven out of business! They have families too – we must help them!”
When my thoughts become stormy – apprehension masquerading as insight – I often reach out to a friend, who has a calming manner about him which distills the pond made muddy by those insinuating that it must be deep indeed, too deep for the likes of me. So I sought him out on chat and we began discussing – OPEC was the topic of the day. “It’s a matter of lowering the cost of marginal production. The marginal producers (those incapable of reducing costs) will ultimately be driven out by competitive markets. Capitalism is the ultimate ecologist, doing more with less (or the same) is the key to generating wealth.” He went on, “Competition is the natural order of things. The capital markets help regulate prices (not profits) leaving producers to lower costs and increase efficiency relative to others. That increases productivity (and output), lowers prices and raising living standards.” Basically, the most efficient role for government is to not look through the lens of one particular business or industry – because in trying to help, it inadvertently distorts the market, with the consumers paying the cost in the end.
“Right”, I thought to myself after we hung up. “I understand the theory – makes rational sense. Hell, I even believe it. But what about those poor frackers? Those darn Saudis, somebody’s gotta teach them a lesson. We gotta protect our industries from the bad guys.”
A few days later I was reading more on OPEC – as I tend to do – when I came across something from the Motley Fool which made me chuckle. It seems that quietly, without pretense and with little fanfare the frackers – with their good old-fashioned American ingenuity – have been hard at work, improving their technology and streamlining their operations. Faced with a “new normal” of oil under $50 a barrel (fracking’s original break-even price) – they had gone back to the drawing board, the result of which was a reduction of the cost of their own production to arrive at a new floor of $30 a barrel. As everybody knows, at $30 a barrel, every barrel of oil OPEC pumps becomes a nail in its own coffin. In their attempts to destroy the frackers, replacing protection of oil prices (their original mandate) with the protection of market share (in the hopes of outlasting the frackers) – they had lost both. As the Venezuelan saying goes, “They were left without the goat and without the rope.”
Consequently, OPEC has died. The frackers killed it, and good riddance. As I finished the article, I thought back to my own apprehensions – so often repeated in policy discussions that it has become second nature. Economic illiteracy is in vogue. Yet the truth remains inviolate – clear as a mountain pond: interfering in the oil market would have served the interests of OPEC, would not have helped the frackers (in fact would have done them harm in the long run) and would have cost the American people millions at the pump. And wouldn’t that be foolish?
“To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.” Friedrich August von Hayek
My late father, God rest his soul, was a Petroleum Engineer who specialized in a number of high-tech approaches to oil recovery, including directional drilling coupled with formation fracturing. The technology had actually been around for about fifteen years by the time he retired in the late 1990’s, but at that time it was rarely used in low permeability formations such as oil shale owing to its high overhead costs. One just could not justify the exorbitant expense with crude oil selling anywhere from $17 to $25 a barrel. But I remember my Dad saying “there will come a day when every drilling technique in the book will be used and almost every accessible formation on earth will be opened for exploration.” All we had to do was wait for the price of oil to justify it. The Bakken Oil Shale was only just ramping up into high gear right before my Dad passed but he at least had the pleasure of smiling at me and saying “I told you Jake.” It was one of his victories. The market worked, just as he said it would.
Now; with respect to your judgment that “Economic illiteracy is in vogue,” you are, in my opinion, more correct than you may realize when your comment is applied to petroleum production. Are you aware that Hillary Clinton has signed on to the “no fossil fuels” plan to end all oil and natural gas production? Take a look:
Is our economic future to be “governed” by a group of people who are so insensible to the realities of economic life that we must wonder whether anyone is going to produce anything?
By the way Joel, I love the ending quote. I’m a huge Friedrich Hayek fan.
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Thanks Jacob – great story. I didn’t know about the Clinton pledge but i did know that the dems in general are rough on oil. The only way to get away from fossil fuels is let the market find a solution. otherwise its not gonna work.
The only way to move the U.S. away from fossil fuels is to build the superconducting electrical power transmission grid à la South Korea–or the now-forgotten Pickens Plan–so that alternative energy from wind and solar power which can be produced in the South, Southwest, and Great Plains states can be transferred to the Far West, Upper Midwest, and Northeast where it is needed. With that kind of infrastructure in place, large-scale solar and wind power development would become feasible. Just take a look at what Texas has done right within its own borders and you can see the prospects unfold.
Unfortunately, grid modernization requires spending in Red States which nixes the whole idea for the “progressives” from the git-go, even before consideration of the necessary budget cuts the project would require comes into discussion. They much prefer using the baseball bat of executive orders and regulatory rulings to achieve their ends, especially when it helps their contributors and hurts their political opponents.
And all of this goes right back to your “fatal conceit” quote Joel. The intended effect will be nothing like the actual result, no matter how much they try to use the power of government to their own advantage.