As the price of oil and gas rose to 1970s oil crisis levels over the past year, pundits flew out of the woodwork that this represented a permanent change in the way of the world. Now that the price of gas is tumbling it seems appropriate to revisit those assertions.
Perhaps the most influential commentator to address the issue was Thomas Friedman. In an essay in Foreign Policy magazine he drew attention to a strong correlation between the price of oil and the level of freedom worldwide, as measured by various indices of freedom. He suggested that the dynamic worked so that tyrannical regimes were fed by high oil prices and that the only way to increase freedom worldwide would be to shift away from an oil-based economy.
If Friedman was right, then the current fall in the oil price should be seriously damaging to those tyrants, such that they might be forced to adopt reforms and increase freedom. The dynamic presumably works both ways, given the general increases in measures of liberty worldwide as oil prices fell during the 1990s. If we are not in a world of permanently high oil prices, one of the best things governments could do to increase global freedom would be to adopt policies that reduce oil prices. As a freedom-loving Englishman, this analysis appeals to me.
Yet that does not seem to be the way the dynamic works. Most energy analysts agree that the high prices we have seen recently were a reaction to instability. Increased fighting in Nigeria, the Israel-Lebanon crisis, the Iran question: all led speculators to bid up the price of oil futures. The perception of freedom being under threat raised the price of a barrel of oil. As those threats recede, the price comes down. What we saw was not some permanent new world order that requires a policy response, but an outbreak of what might best be termed "petronoia," a worry that oil prices will increase which becomes a self-fulfilling prophecy because of the nature of the futures market. When those worries turn out to have been exaggerated we see a reduction in the price of oil.
Global freedom and the price of oil therefore both appear to be variables dependent on a third factor: global instability. Solving that problem would increase global freedom and reduce the price of oil. We pay high prices at the pump not because there are dictators in Iran, but because there are unpredictable dictators in Iran. After all, there is little difference between the government of Iran now and in the 1990s when oil prices were at $20 a barrel beyond the factor that they are close to achieving their nuclear ambitions.
We can see how freedom is a dependent variable here by positing a thought experiment. If the Iranian government were to be made more stable somehow, would freedom increase? Almost certainly. Not so long ago, there was much talk of Iranian people power. The youth, we are told, are increasingly Westernized and unhappy with the theocracy. Iranian blogs talked about increasing hostility to the rule of the Mullahs. There was hope of a peaceful revolution. The current regime, however, retains power by use of alarmist rhetoric and appeal to Persian national greatness. It is this rhetoric, combined with the very real possibility of deploying nuclear weapons in its support that supplies the instability that fuels the petronoia. If this government were to be supplanted in an overnight "silken revolution," then any replacement government would be much more likely to negotiate with the United Nations over restrictions on its nuclear program while at the same time introducing religious and economic reforms that would increase measures of freedom. There would be a reduction in the threat to Israel from the Iranian-funded Hezbollah and less effort directed at incurring instability in southern Iraq. The price of oil would plummet.
This analysis should not, however, be taken as an endorsement of 1970s-style "realism" that says that dictators should be supported as long as they are "our" dictators. Dictatorships and tyrannies are by their very nature unstable. Relying as they do on force for their authority, they encourage resentment, sedition and, eventually, violent revolution. If the United States supports such a regime, its successor is likely to be hostile to its interests and therefore an agent of instability. Again, Iran is a case in point: the Shah's regime masked an instability that eventually led directly to the current situation.
On the contrary, democracies supported by the necessary institutions of liberty - the rule of law, property rights, freedom of contract and freedom of speech, to name but a few - have proven remarkably stable over the centuries. A "Freedom Agenda" that supports the development of these institutions, not just elections, will necessarily promote stability in a virtuous circle.
High oil and gas prices can therefore be viewed as a symptom, not a cause of, global instability. Promoting freedom in individual nations can help reduce that instability, which will in turn reinforce global freedom. One of the by-products of that stability will be lower oil and gas prices. This reduced cost of energy will lead to greater global wealth and faster development of the developing world, which will in turn lead to greater stability. Misguided policies that aim at curbing energy use will, on the other hand, lead simply to higher instability, reduced wealth and a more dangerous world. Stability through freedom should be the preferred answer to petronoia.
Iain Murray is a Senior Fellow in International Policy at the Competitive Enterprise Institute.