Time to relearn market economics

Emmett Tryrell:

Do my eyes deceive me? Am I reading that President George W. Bush has joined with the Republican leadership to call for investigation of the oil companies in light of soaring oil and gas prices? Oil hit $75 a barrel recently and apparently transformed the Republicans into Democrats, Democrats of the Charles Schumer and Jean-Francois Kerry variety.

Actually if they are going to haul in the oil executives for investigation I suggest they get to the root of the matter and haul in famed economist Milton Friedman. Let him bring his Nobel Prize along for display. Prof. Friedman is the fellow who, roughly 50 years ago, revived the world's awareness of markets, and he has been explicating the consequences of markets ever since, first from the Department of Economics at the University of Chicago, and more recently from an office in the Hoover Institution, the conservative think tank named after -- who else? -- Herbert Hoover. His old adversary John Kenneth Galbraith once erupted in oratorical excess on the TV show "Firing Line," that there is any such thing as a "market."

Well, we now know that there is. One of the reasons for the robust economy in so many places around the world today is the existence of markets, which establish the value of resources, effectively allocate those resources and establish sustainable profits for product. With the booming economies in places such as China, India and our own country, oil is now relatively scarce, and the price buyers are willing to pay for it is high. Yet, despite the sudden increase in oil prices, the profitability of oil long-term is not exorbitant. Though it may astonish the Democrats who are now playing the demagogue's game with the oil companies and the Republicans who apparently wish to join them, investors know that oil's return on capital is not terribly high. In fact despite the surge in oil prices in recent months, BP, the world's second-largest oil corporation, reported a 15-percent decrease in profits for the past quarter, as a consequence of lower output, a refinery shutdown and increased taxes.

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The politicians may think the answer is to drag businessmen into investigations, but that is not going to produce oil. It may produce votes for the politicians from the electorate's economically illiterate but not much else. What is needed is more oil or at least a steady contribution to Boone Pickens' 85 million barrels. That means opening up areas where we know oil exists, for instance, the Arctic National Wildlife Refuge. It means encouraging the creation of more refineries. We have not built a new refinery in the United States in 30 years. It means encouraging alternative energy sources, the best being nuclear.

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