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Lesson from the oil crisis: The same lousy policies in different Halloween ‘Green’ masks
This month is the fortieth anniversary of the first “OPEC crisis,” when Egypt and Syria launched an attack on Israel, Arab oil-producing states introduced an embargo against the U.S., and the price of oil quadrupled.
Looking back — and without going into the complex geopolitics of the Middle East — a number of lessons stand out: markets rule, the oil industry is remarkably innovative, the “oil curse” is real, and the same lousy policies tend to return time and again, only dressed in a different Halloween masks.
The OPEC crisis seemed to herald the decline both of the major oil companies and of the West more generally, but it hasn’t turned out that way. If OECD countries are declining, it has a lot more to do with economic and social policies than the price of oil. The developing countries that have done best in recent decades are not oil producers but oil consumers, primarily China and India. Meanwhile those who have done worst include many inhabitants of OPEC countries.
In the latest Index of Economic Freedom, Algeria and Angola are in the bottom ten, while Venezuela is the lowest ranked of 152 nations. Others, such as Iran and Ecuador are well down the rankings while Libya and Iraq can’t even be ranked.
As for those lousy policies in developed countries, Western governments’ reflexive response to the first crisis was almost universally to introduce price controls, “off oil” policies, fuel economy limits, alternative energy subsidies, and, in Canada, create a state-controlled “national champion,” PetroCanada.
The second OPEC crisis, in 1979, which was associated with the fall of the Shah of Iran, led to a further doubling — at current prices — to US$100, the same as they are today. But that surge, which was exacerbated by policy confusion, did not last long, although it certainly had a dramatic impact in Canada. As the first crisis led to the creation of PetroCanada, so the second crisis led to the fall of the Progressive Conservative government of Joe Clark, who wanted to dismantle the people’s oil company. The return of the Trudeau Liberals led to the National Energy Program.
One of the many things the NEP got disastrously wrong was its price projections. Instead of continuing to rise, oil prices went down for most of the 1980s and 1990s, with further geopolitical ramifications, including the role collapsing oil revenues played in the implosion of the Soviet Union.
For the rest of this column, click here: http://opinion.financialpost.com/2013/10/29/peter-foster-tales-from-the-opec-crypt/