How Opec and the US differ on oil market intervention

Behind closed doors at the International Energy Forum in Cancun, Mexico, delegates of the world’s biggest energy consuming and producing nations are discussing how to avoid the massive price volatility of 2008.

The Opec oil cartel already has a very clear view on this issue. The US is not so sure about market intervention – on oil, at least.

The idea Opec has been selling for some time now is that the optimum oil price is a steady one that is high enough to spur investment in oil production but not high enough to derail economic growth.

Opec’s members most recently acted on that conviction in late 2008 when they agreed to slash their production to boost prices from $30 a barrel to the current level of about $70-80 a barrel.

But the idea of interfering with the market is one the US cannot abide by, at least not when it comes to oil.

Here is how Daniel Poneman, US deputy secretary of energy, put it at a press conference during the IEF’s two day meeting, which is due to end later on Wednesday:

The goal of the US is a clear and long-standing one and that is to let the laws of supply and demand set prices.

Here is Poneman again, this time with a rather different take on the need for market fundamentals determining price when it comes to renewable energy:

I would say that the sooner we are able to get a price on carbon through comprehensive climate legislation, the sooner those kinds of subsidies [wind etc] will be able to be phased out and the market will actually then operate in the manner in which it should.

But until we have all, what are now considered externalities, such as carbon which actually involves a genuine long-standing cost on the economy…until they are fully incorporated in our market mechanisms, I’m afraid we are not going to get that kind of subsidy-free, clear and perfectly operational market.

In other words, a country’s view on market fundamentals depends on its externalities.

For the US, and other nations those externalities are the cost of pollution.

For Opec the externality – or hidden cost – is the huge social burden of keeping an economy running that is cursed by the skewing influence of oil wealth.

Related links:

More IEF coverage – including video interviews on Opec, the IEA, and Pemex - FT

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