If the Saudis and Russians make an oil deal and no one takes it seriously, does the crude oil price still fall? And if you’re in the forest, would you hear it?
I’m joking, of course. But the point is simple: it will take more than Russia and Saudi Arabia freezing their oil production at record highs to put a floor under the oil price. Both countries pump more than 10 million barrels of oil a day. That’s 21% of global production. It’s a lot. But if Iran and Iraq don’t go along with the deal, there is no deal.
Controlling the oil price from the supply side isn’t as easy as it used to be. There are more large producers than there used to be. And their interests aren’t always aligned. Even within the cartel (Organization of the Petroleum Exporting Countries, or Opec) you have competing agendas. Hence the Doha dud overnight.
Venezuela made a strong pitch for a production cut. But nobody else went along. And in not unrelated news, credit default swaps on Venezuelan government debt are sky-high. The prospect of the year’s first sovereign debt default is now on the table.
By the way, if Jeremy Corbyn and Bernie Sanders are fair dinkum about democratic socialism, they ought to go have a good look at Venezuela and see if they can turn it around. The country has $70 billion in debt. $9.5 billion of that matures this year. It has $15.4 billion foreign exchange reserves, two-thirds of which is in gold. It’s promised everyone something for nothing… and delivered a whole lot of nothing.
How much wealth can socialism destroy? A lot, apparently. The government has arranged a gold swap with Deutsche Bank to stave off a day of reckoning. And in the meantime it hopes a rebound in the oil price will generate more cash from the nationalised oil industry to pay for all the other things that are free. The clock is ticking.
Wealth isn’t just something lying around on the ground you can pick up. Even when you steal it from individuals or the private sector via nationalisation, it takes skill and effort to make productive assets productive. Socialists take that for granted, and then scratch their head in frustration when things grind to a halt.
Oil reserves don’t find themselves. Gold mines don’t dig themselves. You need good geologists and business people to run the extractive industries at a profit, so you can afford new capital equipment. Wealth is created in a specific institutional framework: private property, rule of law, free markets, small government, low taxation.
It may not be fashionable to say that in this day and age. But it’s true. And it’s a point Charlie Morris has made exceedingly well in the February issue of The Fleet Street Letter. He makes the point with regard to China and the next phase of its growth.
But Western welfare states will rue the day they forgot that the road to freedom and prosperity begins with certain rules. Change those rules and you make yourself poorer.
Category: Economics