BizRadio Debate No. 1: Mike Norman vs. Dan Frishberg on High Oil Prices

BizRadio's top two economic experts go head to head on the best solution to high-priced oil: Should the government legally stop speculators who drive up the prices or should the government take the brakes off and let the free market fix the problem by itself? Read the riveting text below or listen to the raw audio.

Mike Norman: "I just don't think it is good public policy to allow speculators to hoard a scarce resource right now. Look, if you want to make a bet on rising oil prices, what's wrong with buying shares of ExxonMobil (NYSE:XOM) (Irving, Texas) or Chevron (NYSE:CVX) (San Ramon, California) or ConocoPhillips (NYSE:COP) (Houston, Texas)? The idea of hoarding a physical commodity, right now when we know it is a scarce commodity -- and there are places in the world where it is produced that they are not very friendly to us -- I just don't think it's good public policy to do that."

Mr. Norman: "You feel it is your right as an American to own oil. What about speed limits, Dan? I feel it is my right as an American to drive 160 miles an hour. You know I lived in Europe for 10 years. I had a Porsche turbo. I used to do that in Germany. How come I can't do that here? Why do we have laws against polygamy? If I want to marry 10 women, what gives the government the right to tell me I can't do it?"

Mr. Norman: "Dan, there is a lot of data to show that the demand from investment is what is driving this run-up in prices. It is no longer attributable to any sort of economic fundamental or anything like that. And people are getting hurt. I'm talking about index speculation where these giant pension funds and institutions buy and hoard the commodity. They're long, they stay long, they own the commodity. Look, demand destruction or alternative energy can also occur at $80, $90 or even $100. I'll give you $100 a barrel, but not $150, and the price keeps going up, regardless. You know demand is falling here, gasoline consumption is falling. Demand growth is not very strong in the world anymore."

Mr. Norman: "Let's talk just about the futures market that people are bidding on pieces of paper. If the value of those pieces of paper continue to go up because one group within that marketplace is constantly long and continuing to put money in there to bid the price of that paper up. The underlying price of the commodity goes up. It's tied together."

Mr. Norman: "We are a society; we come up with rules. A lot of people don't want this anymore, and that's the bottom line."

Dan Frishberg: "Hold on, hold on! I think the run-up in prices is good. And I think that if we just trust the free market the run-up in prices will actually curtail some of that speculation."

Mr. Frishberg: "First of all, who constitutes a speculator, who constitutes an owner? See, I don't believe only people who own oil companies should be allowed to buy oil. I think I should be allowed to buy oil because I am a free American. I should be allowed to stockpile some extra oil, and if I want to buy it by buying futures contracts on it, I don't see why you should think that I'm not allowed to do that? Only somebody else is, and that's my first problem."

Mr. Frishberg: "The next argument I have is a practical one, and the last is a little more philosophical. The first practical one is this: I believe there's not an American economy and an American market anymore. It is only a global one. The rest of it is an illusion. So in America, we don't allow building refineries anymore. We've got regulations for various reasons. Some are smart, some are dumb, but we didn't want to do it. We made it very hard."

Mr. Frishberg: "So right now, Saudi Arabia is building over the next couple of years, not $3 billion or $4 billion like what we would like to do in refineries; Saudi Arabia is going to build $150 billion of new refineries! They're going to make a fortune refining the world's oil! They did it, we didn't. Now we fall behind again because of unintended consequences."

Mr. Frishberg: "So, you can stop speculation here. ... All that's going to happen is smart people are just going to go do the trade on another market and move the profits overseas for conducting the trade. But you're not going to stop it because you don't control the world's economy anymore. That's the first practical thing, is that you're just going to shoot ourselves in the foot because the stuff is going to happen anyway."

Mr. Frishberg: "But the last issue is a general free market idea: Some people think, and I happen to be one of those people, that the free market almost by itself, is the best tool ever invented for rationing an allocating resources. Some other people think the free market is going to come out with 'unfair and bad' solutions, so they want to plan centrally and regulate. They do it by a commissar, a king, a central committee. ... I think most of these attempts have been and were done in good faith by people who wanted good results. I'm positive Lenin wanted good results."

Mr. Frishberg: "The system works with people acting in enlightened self interest, risking their capital and freely making their own decisions. This scares some people but it turned out this unregulated system has been responsible for this country's overwhelming success. We've been imitated all over the globe by people who are now doing it and passing us by. If you look around the world to me, it is clear that the places that encourage free market speculation and reduce taxes and reduce the regulations, they are the ones who have gotten richer and richer. Their stock markets have outperformed ours; their economies have grown faster than ours. The more we tax and regulate, the more we create unintended consequences, and the more we're going to fall behind."

Mr. Frishberg: "For ending the 'oil crisis,' the free market will work like this: We want people to conserve oil and we would like to reduce the demand for oil a little bit. At the same time we want to produce more oil. When the price gets bid up, it becomes prohibitively expensive. People find alternate solutions. They do something else. They move closer to the city; they buy small cars. They reorganize their society as they're going to have to do so that it is not based on oil. And we get more conservation of oil, which is what we want. Then if we don't regulate the people, we want them to find it and let them profit by going out and finding them, we'll be getting more using less and you'll get exactly what you want."

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