Petroleum Distractions


As the time for critical decisions in the Doha round of trade negotiations has arrived, politicians, business people and trade policy analysts have become increasingly distracted by the price of petroleum and government interventions in energy markets for political reasons. Petroleum is an important economic resource and the current high prices have economic impacts, but the current market turmoil has not changed the underlying economic case for more open trade.

The petroleum market disruptions of the past year are not a new feature for the world economy. These events are the latest version of a recurring condition for over 30 years beginning with the boom in petroleum prices in 1973. Individual country political turmoil, weather problems affecting supply and use and economic policies have all played a role in bouts of both high and low petroleum prices. A convergence of political actions in several countries and weather supply disruptions in the U.S. at a time of strong demand in developing countries like India and China has caused the current episode to be particularly severe.

Crude petroleum prices near $70 per barrel have not changed the factors that led to the start of the Doha talks in November of 2001. The world’s population will continue to expand from 6.4 billion people today to about 9 billion by 2050. Nearly half the world’s current population lives on $2 per day or less ($2 per day is about $3,000 per year for a family of four). Most of the increase in population expected between now and 2050 will occur in countries where most of the population already lives on $2 per day or less. The greatest increase in volume demand for food occurs as people move from $2 per day to $10 per day (about $15,000 per year for a family of four). If these people are to have higher standards of living in the years ahead they must become productive members of market economies.

The 60 years since the end of World War II have been a fascinating experiment on theories of economic organization. The experiment began with relatively free market economies in the U.S. and parts of Western Europe. At the other extreme were the Communist countries that relied on centralized economic commands with only limited international trade. Between the two were economies with varying degrees of government control based on numerous theories of why governments should control natural resources, restrict import as a way to create economic growth or export as much as possible while importing as little as possible.

That 60-year experiment has resulted in the reality that markets work and everything else is a poor alternative. That was brought to light again by U.S. Trade Representative Rob Portman at a roundtable meeting on January 20 when be contrasted North Korea with South Korea, “After the Korean War the North Korean economy was stronger than South Korea. In fact I think the per capita income was over ten times higher. In the interim period North Korea has closed down to trade, taken a self-sufficiency point of view approach, and South Korea has done just the opposite. They`ve opened up to trade. The beneficiaries have been the citizens of the Republic of Korea. It`s an amazing story to go from truly a poor developing country to a country which is now one of the stronger economies in the world.” South Korean trade policies are not totally open by WTO standards, but they have been open enough to cause an economic transformation.

Market economies based on participation in international trade have shown their effectiveness in improving the standard of living of citizens in countries that pursue those policies. Improvements do not happen overnight and adjustments are difficult. The fact that a few countries use government control of petroleum resources to skew markets and political relationships does not change the path to economic growth through increased trade.

Too many citizens, business people and policy makers have learned too much about the benefits of international trade to stop the movement toward freer trade. If participants in the WTO trade negotiations become distracted by petroleum politics and do not stay focused on a more open world trading system, other efforts will keep moving forward. Bilateral trade agreements and other arrangements for knowledge and resource transfers will fill part of the gap. The U.S. continues to move ahead with bilateral and regional trade agreements. The President of South Korea is interested in pursuing a free trade agreement with the U.S. India, Brazil and South Africa are working on an agreement to share germplasm and agricultural research as a way to increase agricultural output in all three countries.

International investors are also quick to note which countries have policies that are positive for economic growth and which have slipped back into failed policies of government central planning. Long-term investments in assets need assurances that markets will remain open to encourage the economic growth necessary to provide a return on investment.

The current high price for petroleum will also be part of its own cure. Exploration for petroleum and natural gas has increased. Clean coal technology, nuclear energy, gas to liquid technology and renewable energy are all getting new scrutiny as petroleum prices remain high. The key to being able to afford these other energy sources is strong economic growth.

Most people in the world will only achieve an improved standard of living when they have the opportunity to turn products of lesser economic value into ones of greater economic value and sell them to cash paying customers. The Doha round talks should focus on facilitating increased international trade and let the petroleum follies be handled by someone else.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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