In an attempt to control the rapid rise in global oil prices, Mr. Srinivasan, India’s petroleum secretary (We call that the Secretary of Defense here), recommended that we “halt trading of crude oil on commodity exchanges”, brazenly denying the fundamental laws of economics. Mr. Srinivasan predicted that if crude was eliminated from the commodities traded on Nymex, the world would “see a drastic reduction in the price” of crude oil, which reached as high as $98.62/barrel before settling for the day at $96.
What has been pushing the price of crude up so much and so quickly? Political instability in the oil-producing regions has created a supply-glut; unmitigated damage to our refining capacity has made the supply issue even worse. But probably even more obvious and impactful is the entrance of China and India onto the world energy marketplace–only a decade ago, China was an oil exporter; now it imports a large portion of its oil. With diminished supply and drastically increased demand from not just the United States but also China and India, a price increase is normal and inevitable. That’s just how things work with inelastic supplies like fossil fuels.
The Nymex executives quickly dismissed Mr. Srinivasan’s suggestion, claiming that “Nymex is just a central point where buyers and sellers can come to exchange their wares”, and hence “without Nymex, users could only imagine a group of countries getting together and saying ‘What do we charge today?’” That is economic reality of supply and demand.
Instead of hiding from economic reality, why not promote alternative sources of energy–namely solar, hydroelectric, wind, or even clean coal? That, not the step away from market policy, would be a step in the right direction. The recent jump in oil prices just makes that a more attractive option.