Wednesday, May 24, 2006

Food for oil? How about markets for oil?

Everyone's read plenty about the oil issues affecting the world. Evidently, everyone is producing as much as current capacity will allow, and prices at the pumps keep marching higher and higher. No one's explanation seems to fit the entire world story.

The Federal Reserve Bank of Dallas provides as interesting an explanation as I've seen. Only three of the thirty countries that supply the world with oil rely on private, market-based means of distributing oil. And, using the Heritage Foundation's Freedom Index, over 44% of the world's oil production occurs in countries that are either "mostly unfree" or "repressed."

It begs the question-- how can oil prices be expected to follow market adjustment mechanisms when markets play such a small role in oil production?

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