Government, to Save Heart, Severs Head
By Robert Romano
Now that the federal government has decided to preoccupy itself with destroying the financial system, the mortgage industry, and free markets, the price of oil has finally found its own level. At least for the time being.
The oil bubble occurred in 2007-08 because of a combination of bad government policies: 1) restrictive energy production regulations that Congress now threatens to reinstate, and 2) a loose monetary policy—which continues—that has produced one asset bubble after another.
That oil bubble popped in large part due to removing those regulations against oil drilling, because that allowed market forces to reassert themselves.
It was no coincidence. Along its tumble from as much as $140-plus a barrel to now near $40 a barrel, critical cap-and-trade legislation—which would put a big price on carbon emissions—failed in the U.S. Senate, President George W. Bush repealed the executive moratorium on off-shore oil production, and Congress allowed to expire the legislative moratorium on off-shore oil drilling.
When left to its own devices—i.e., when government finally got out of the way, even slightly—a barrel of oil found through the process of price discovery a cost that could be accommodated by the marketplace. No price controls were necessary. No show trials against oil company executives over “price gouging” were required. No nationalization of the oil industry was needed.
Like all other asset bubbles, the oil bubble popped in accords with market forces. It was unsustainable.
Moreover, it was the inflation of those bubbles—including the Dot-Com and housing bubbles—that was unnatural and unnecessary, fueled in large part by loose dollar and excessive credit policies of the Fed and Treasury.
And the fact that such inflation continues to date should be of great concern to all Americans.
The real reason oil has sought its own level is that government, preoccupied with gutting the U.S. financial system, took its eye off destroying the energy industry. Much to relief of everyday drivers, the nanny-state politicians cast their authoritarian eyes on propping up home values. On unfreezing credit markets. On injecting liquidity into an ailing financial system. On lowering interest rates to untenable levels. On committing over $8 trillion in bailouts, loan guarantees, capital injections, loans, and FDIC insurance to the American economy.
In short, on creating the next asset bubble.
Several analysts are projecting that government's excessive borrowing, spending, and printing new money will unfortunately once again help inflationary forces to reassert themselves. Not tomorrow. But eventually. At a moment that is unexpected, when investor confidence has risen from its current doldrums.
While it is good that government has, albeit briefly, removed some of its restrictions against oil drilling, it now needs to make the removal of those restrictions permanent. It needs to allow oil-rich regions to be tapped in accord with market needs of replenishing supply and satisfying demand. But that is not enough.
It must at the same time get out-of-control monetary and fiscal policies restrained as well so that the next asset bubble is not created.
Sadly, it may be too late. The government is not likely to divert from its current course when its stated justification is preventing a “depression greater than the Great Depression,” as President Bush has said.
And it gets worse. Under an Obama Administration, it appears more than likely that the government in 2009 will once again work to restrict domestic oil production, foolishly returning to the Hard Left's paranoia against carbon-based energy.
And if that is indeed the course government takes to—severing its head to save its heart—the American people will once again feel the pain at the pump. All because of its neurotic obsession with muttering the 10 most frightening words in the English language: “I'm from the government, and I'm here to help you.”
Robert Romano is the Editor of ALG News Bureau.