Two weeks ago, we gained some proof of a theory offered by the 19th-century British economist David Ricardo.
Namely, that if goods can be traded, then they should be the same price everywhere, accounting for the costs of transportation. This seems pretty obvious: If you can buy cheap in one place and then sell in another place for a gain on your original purchase price, then you take your profit and close the price gap. We call the process “trade.”
Now, consider some oil prices.
The price of West Texas Intermediate is a good guide to the price of crude oil from U.S. fields. Brent prices offer the same guide for North Sea oil in Europe. These two prices should be roughly the same, adjusting for the costs of moving European oil to the United States, or vice versa. But they haven’t been the same for about 15 years — why?
First, the U.S. worked out how to frack for oil, vastly increasing U.S. production. There was a ban on the export of crude oil still in place. Not all oils are exactly the same — Brent and WTI are slightly different, too — and it’s usual to ship out some, ship in some, to get the right mix. Some oils produce more jet fuel, gasoline, bitumen, heating oil, so you try to process the right starting mix of crudes. Previously, this wasn’t allowed — crude couldn’t be exported. WTI was therefore below the global price.
We might think this is great: cheap gas for all. Except processed oil could be exported at those global prices. So while the American crude was below the global price, American oil products were at the global price. That meant someone eating a very good profit: the oil refiners in the U.S. The people losing were the crude oil producers.
Finally, in 2015, the export ban on crude oil was lifted. Six years later, WTI and Brent are about the same price again. By removing the former barrier to efficient markets, the markets are once again efficient.
As Friedrich Hayek pointed out, prices are information. This means that if prices aren’t where they logically should be, then it’s worth our working out why they’re not. The answer is that some law, some regulation, possibly some campaign contribution has obstructed market efficiency. Once we note this, we track back to what’s causing the inefficiency. Then, we can ask the important question of whether the action behind the inefficiency is worth it.
The lesson from oil extends.
California gas prices are higher than the rest of the lower 48. Sugar inside the U.S. is usually twice the world price (Lifesavers are made in Canada for this reason). The U.S. price of steel is twice that of the outside world. Perhaps we might want to revisit the underlying decisions by politicians?
