Thursday, April 27, 2006

Brown's Advice to the World on Oil

Over at the ASI Tim Worstall is explaining why a lack of oil supply is due to intervention in the oil markets in the new oil demanding countries as much as it is to any failure of the free market. What he doesn't mention is that we can find such unfortunate intervention far closer to home than Mexico.

The free market response to rising oil demand is that it will increase prices which, in turn, will incentivise new investment and make new fields profitable. It's no co-incidence that North Sea oil came online not long after the last oil price shock. This mechanism is ruined, however, if you take the opportunity, as the Chancellor has done, to place a windfall tax on oil profits as this endangers the market signal that increased investment in oil will be rewarded.

This harms investment in the North Sea and is likely to hasten the UK's move away from supplying most of its own energy needs. This will make the UK more vulnerable to oil price shifts and make the oil prices a more credible excuse for incompetent Chancellors in the future. At the moment a rise in the oil price is no direct concern for the United Kingdom, particularly if countries like the US which genuinely depend on oil grow more robustly.

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