Cherish the lesson and opportunity of falling oil prices

By Medecci Lineil

The price of oil has fallen.

Some economists and oil analysts now say prices have not hit bottom and could fall as low as US$30 a barrel – a level not seen in more than a decade.

How long the price decline will last and at what price level it will bottom out is not clear because forecasting things is not the job of economics.

The relation between price and supply as one way for one period of time does not mean that it cannot change.
Ludwig von Mises pointed out: “external phenomena affects different people in different ways” and “the reactions of the same people to the same external events vary”.

The price of oil is set by the actions of billions of people in their production and consumption decisions.

At this point of time, one thing is certain: cheap oil prices is good news for both consumers and the economy.

But bad news for the government. Financially weakening. That’s great.

The government will become less dependent on Petronas for tax, royalties and dividends.

No more overdependence on petroleum money.

At a press conference on its third quarter results last month, Petronas warned that falling oil prices might reduce its payments to the government next year by as much as 37% or RM25 billion assuming the Brent crude settles at US$75 per barrel.

Let’s not talk about the opportunity to tax every consumer to compensate for revenue losses.

But talk about the opportunity to build up a vigorous defence of free market to combat economic issues now and in the future.

Falling government revenues as a result of falling oil prices is a blessing for the people because of lesser power of government to spend people’s money.

Lesser power of government spending means less ability for politicians to manipulate our money and resources.

For the man in the streets, lower oil prices mean more disposable income for households despite scarier inflation nowadays.

The process of more disposable income may take some time to work its way into our household’s pockets, particularly low-income families.

So later whenever oil prices shoot up sharply, causing RON95 and RON97 at the pump to rise as well, I really hope the government and ministers will not get involved like pumping billions of subsidies into oil related sectors (eg. state-owned energy companies) since nothing ensures efficiency and consumer protection other than free market.

Abolished oil subsidies and other forms of government interventions change the way people treat prices and utilise resources efficiently – if we want to enjoy genuine economic prosperity.

Many people think oil subsidies will alleviate the cost of transportation, poverty and so on but are an inefficient means of doing so.

Market distortions will encourage more oil consumption and be more expensive.

That will allow less effort to develop and use cleaner alternatives technologies like batteries and biofuels.

Which is supposed to save us from long-term dependence on oil and make us less vulnerable in oil price crises.

The abolishment will free the labor and capital for entrepreneurs to use in productive investments such as new energy efficient technologies which can be applied in transportation, housing, energy, agriculture and many more sectors.

In the free market economy, low oil prices don’t always translate to higher consumption. Of course, people can afford to drive more and buy more cars. But then vehicles produced are fuel efficient, probably much better than Toyota Prius.

More quality roads can be built in rural Sarawak.

More production and cost of living would be minimised.

But again, oil prices have fallen.

Should people complain about the rising of oil prices next time, stop asking for government intervention. Because the government is part of the problem.

Cherish this moment although the fallen is not a big drop as crude oil.

First published at the Malaysian Insider on December 11, 2014.

 

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