Is Cheap Oil Bad?

Scrolling through Facebook this morning, I came across someone upset over the recent fall in oil prices. The source of their frustration was the layoffs and economic slowdown associated with falling oil prices in the oil and natural gas industry. The price of oil has indeed fallen, and the oil industry is undergoing a temporary bust as a result, but is that a bad thing?

This article from the New York Times offers a good explanation for economic reasons for falling oil prices. In short, the supply of oil has dramatically increased in recent years, especially from the United States. Additionally, OPEC is continuing to pump out oil, rather than artificially restrict output to raise the price, as they have done in the past.

The sentiment that low prices are a problem is not a new one. Frédéric Bastiat, a Classical French Economist, tackled the issue in his essay "Abundance - Scarcity". He noted that when prices are high in a particular industry, such as oil, those working in that industry benefit. This leads many to conclude that high prices are desirable in all industries, leading to tariffs, barriers to trade, and other means of artificially raising price.

Bastiat saw an inherent conflict  between producers and consumers. Producers want to sell goods for as high a price as they are able, and consumers want to obtain goods as cheaply as possible. However, he also noted that "Man is at once producer and consumer". Anyone in the oil industry, though they produce oil, also have to consume food, water, shelter, and so on. While it would benefit farmers or contractors to have the price of food and shelter high, it would not benefit those who consume what they produce. For any individual working in any given industry, it is almost certain that they consume far more, both in quantity and in diversity, than what they produce.

This was Bastiat's key insight. When prices are high for one industry, say oil, that leaves consumers less wealth to spend on other goods. Expensive oil may lead to growth and stability in the oil industry, but it comes at the expense of growth in any other number of industries. Every consumer of oil benefits from a lower price, just as every consumer of bread benefits from a falling price of wheat.

Bastiat saw wealth in the abundance of commodities, not in the money a select few might earn due to high prices.

"Men are not fed on money. They do not clothe themselves with gold, or warm themselves with silver. What does it matter whether there is more or less money in the country if there is more bread on our sideboards, more meat in our larder, more linen in our wardrobes, more firewood in our cellars."

Cheaper and more abundant goods means a wealthier society. Those who fear falling oil prices would do well to heed the lesson of Bastiat.

Gaddafi, Gold, and Libyan Intervention

Over the course of the twentieth century, the United States (and its allies, most prominently the NATO coalition) has increasingly engaged in military intervention overseas. The justifications for intervention were many: maintaining stability, blocking the influence of other foreign powers, and humanitarian.

In 2011, NATO intervened during the Libyan Civil War between longtime Libyan leader Muammar Gaddafi and various rebel groups, acting to enforce a no-fly zone and move towards a ceasefire. The intervention was justified partially on humanitarian grounds. Certain attacks on civilians, according to a UN resolution, could constitute "crimes against humanity".

Buried in one of the 3,000 recently released emails from Hillary Clinton's private server is an intelligence briefing detailing Gaddafi's supply of 143 tons of gold. Additionally, it notes French President Nicolas Sarkozy's reasons for seeking military intervention in Libya, none of which involve protecting from "crimes against humanity". His five reasons, according to the email, were:

1) A desire to gain a greater share of Libya oil production
2) Increase French influence in North Africa
3) Improve his internal political situation in France
4) Provide the French military with an opportunity to reassert its position in the world
5) Address the concern of his advisors over "Qaddafi's" long term plans to supplant France as the dominant power in Francophone Africa

 The email goes on to note that the supply of gold "was one of the factors that influenced" the decision to "commit France to the attack on Libya".

Gaddafi had been stockpiling gold with the hopes of creating a new gold-backed currency, the gold Dinar, to rival the Euro and the Dollar. He had hoped to force acceptance of this new currency by only selling Libyan oil in exchange for the new Dinar. Further, Gaddafi planned to use the gold reserves to make the Dinar a pan-African currency, and eliminate Western influence in the process.

Francophone Africa, the nations of Africa where French is widely spoken, widely uses a currency called the CFA Franc. The CFA Franc is backed by the French treasury, and trades at a fixed rate to the Euro. The ostensible purpose of the CFA Franc is stability in trade between France and nations using it, but it has the added benefit of maintaining French influence in the region.

Gaddafi's gold dinar would have served as a substitute to the CFA Franc throughout Africa. Whether or not the dinar would have replaced the CFA Franc entirely is uncertain, but Sarkozy feared the possibility enough to support military intervention in Libya. Gaddafi was without a doubt an evil man, a dictator, and responsible for the deaths of many innocents. Yet it seems that supporters of military intervention were actually concerned with maintaining Western influence in Libya and the rest of Africa, and not as motivated by humanitarian reasons as they claimed.