Don’t Expect The Market To Resolve The Petroleum Crisis
August 13, 2008
By Charles Cresson Wood
In one of America’s most famous business newspapers, a recent article explored the causes of the run-up in food prices (1). One economist was alarmed because some countries — such as Vietnam and India — are now restricting exports of food, and/or increasing tariffs on exported food, in an effort to ensure that their populations are adequately fed. This economist is quoted as saying “Countries should, in general, rely on trade for food security.” In the eyes of this and many other economists, the free market should instead be used to most efficiently allocate food among the world’s population.
This suggestion is not practical, realistic, or in the best interests of the countries now worried about food security, or for that matter, worried about the security of any other essential commodity such as petroleum. This economist’s suggestion is a classical economist’s dream, where perfect markets instantly allocate resources, where consumers have perfect information, and where countries with special advantages end up being the low-cost providers of certain products. In today’s world situation, countries that follow this mantra of the free markets cult are acting in a way that is bound to damage not only their international competitive advantage, but also the welfare of their businesses and citizens.
As much as those who push “free trade” and globalization would like it to be otherwise, the world market for commodities has many “imperfections” as the economists would call them. These involve problems such as import restrictions, export restrictions, duties, taxes, subsidies, and other serious impediments to the rapid and efficient flow of commodities. The absence of free and open information about the state of these markets is another major impediment to today’s markets operating as this economist suggests.
The focus of this conversation needs to be shifted, from striving to live up to an economist’s dream, to contingency plans that will be able to support a country in the midst of sky-high prices for commodities. These contingency plans must also take into consideration current an future resource wars (such as the war in Iraq), the soon-to-arrive commodity shortages, the anticipated commodity embargos, and the other reflections of the fact that many natural resources are now quite limited in supply. The “leave it to the market” approach has gotten countries like Haiti into serious trouble, where they no longer grow enough of their own food, where they have become dangerously dependent on other countries. The “leave it to the market” approach is what has gotten the United States into a position where it is dangerously dependent on foreign countries for petroleum.
The contingency plans I am talking about should involve a clear articulation of the ways that an absolute minimum amount of food, fuel, and other essential commodities will be produced domestically. In those situations where it is not currently possible to produce these essentials domestically, the contingency plans must articulate a rapid transition plan to a new technological system where a country can in fact provide for a minimum of its needs domestically. Only with such an approach is there any hope of insulating a country and its people so that they will not seriously suffer wherever there is trouble in the broader worldwide marketplace.
For example, the United States must now move to alternative transportation technologies that are no longer dependent on petroleum. There are now eleven alternative fuels that are commercially available, notably electricity, ethanol, butanol, bio-methane, bio-diesel, straight vegetable oil, natural gas, propane, hydrogen, di-methyl either (DME), and synthetic liquid fuel. According to studies done by the Energy Management Institute, many of these fuels are now cost-competitive with petroleum-based fuels. The widely discussed plans of both Boone T. Pickens and Al Gore point in the direction of this conversion away from petroleum that must now take place.
So strategic planners, futurists, and management decision-makers should not put their faith in the teachings of classical economics, which claims that an additional supply of a good or service will always automatically come forth in response to an increase in price. Petroleum provides a good example. The price of crude oil has gone up over 100% over the last year. Yet, the total world production of oil has not substantially increased. This is because it doesn’t matter what the price is, when geological constraints on the total amount of oil in the world hold back production, as is the case right now, only so much oil can be produced. All this means that decision-makers should not stand-by and wait for the price of oil to come back down signifcantly, expecting the market to take care of the problem. To the contrary, they should get underway with their own organization’s transition to alternative fuels.
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Charles Cresson Wood is an alternative fuels management consultant and the author of “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.” Information about the book, and the way to reach him, can be found at www.kickingthegasoline.com.
(1) See Scott Kidman’s article entitled “Food Crisis Forces New Look At Farming,” The Wall Street Journal, 10 June 2008.
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