Supply vs. Demand Should Be Common Sense by Now

It might seem odd to defend the free market anywhere in America. How is it that the free market could be doubted, especially since the collapse of Marxist socialism in the early 1990s? Are not the attributes of free-market capitalism obvious to all? Yet in the midst of the recent financial roller coaster ride and price spikes consumers have faced in visits to gas stations the past few months, some politicians have suggested ideas like production quotas or price controls. They have questioned whether the free market is best system for our citizens.

Is the free-market perfect? No. Is it the best system of trade and commerce for citizens who want to live in a free society? Absolutely, yes. Let’s look a little closer.

Issues that surround the energy industry actually provide an excellent means of examining free market principles, such as production quotas or price controls. No matter how frustrated we grow over prices, government controls don't work. In the energy sector, the Nixon administration's ill-advised rationing in 1973 led to long lines at gas stations, dreadful market distortions, and greater dependence on foreign suppliers. China experienced the same problem when it set refining quotas and consumer price controls in 2005.

The problem in the oil market right now is quite straight-forward: oil price increases come in the context of constant demand acceleration along with limited supply. In the world today, the methodical upward march in oil prices is driven by energy demand, not only in growing American and European economies, but the increased energy demand of India and China – places that, even 20 years ago, were comparatively minor players in the global economy. If we impose quotas or controls, the oil and gas will simply seek the more favorable offers of our global competitors, creating a shortage of supply here at home.

Things might be different if Oklahoma had more oil wells still operating. Through the decades, the state lost much of its marginal production, i.e. wells that did not produce enough to be profitable at the time when oil was less than $25 per barrel. Due to environmental regulations, these wells could not simply be turned off and sealed. They had to be filled with concrete. Today, if not filled in, these wells would be profitably adding to our nation’s domestic oil supply. This is simply a factual observation, not insensitivity to environmental concerns or historical reality.

The way forward, the best energy solution for America, and indeed for the entire world, is “all of the above”; meaning policymakers should remove obstacles and permit the market to work. They should encourage energy producers, transporters, businesses, universities and others to study and investigate every realistic means to boost energy production in a growing world economy. Oklahoma is uniquely positioned to contribute in many ways toward energy expansion.

“All of the above” includes an even stronger domestic oil and gas industry to maximize Oklahoma’s existing assets, infrastructure and resources; technological improvements in vehicle efficiency; accelerating clean coal systems for power generation; more wind, hydro and nuclear generation. It also includes energy diversity capabilities such as compressed natural gas (CNG), synthesized fuels from natural gas or coal (GTL/CTL), and biofuels in the form of ethanol, octane or whatever hydrocarbon configuration the market demands. It also may include upgrading the power grid so that Oklahoma can enjoy its central position as a power transporter. The important thing is that these initiatives are market-driven, not government mandated.

In the end, whether the concern is energy, health care, housing, or even monetary policy, there are no better alternatives to the price signals and rationality of the free market. In Oklahoma, the U.S. and the world, over time consumer choice should drive winners and losers, rather than government making such choices for us.