“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