President Biden’s oil-price two-step won’t lower your gas prices
Long-term, there are only two ways to minimize the punishing effects of oil price volatility: increasing domestic oil production and decreasing domestic oil consumption. Increasing U.S. oil production would bypass OPEC and limit the geopolitical clout of predatory nations such as Russia.
President Joe Biden has now completed the twostep ritual that presidents perform to deflect voter anger over rising gasoline prices. The first step is ordering an investigation into gas price gouging, which Biden did last week. The second is releasing oil from the U.S. Strategic Petroleum Reserve, which Biden did Tuesday. These moves accomplish one thing: making it appear that the president is doing something about gas prices.
Gas prices reflect the underlying price of oil. The oil price, in turn, reflects global supply and demand patterns. The Organization of Petroleum Exporting Countries (OPEC) and its allies regulate international oil supply to maximize benefits to oil producers such as Saudi Arabia and Russia. OPEC nations have been wary about increasing production, because they fear more pandemic-related economic headwinds may drag down oil demand, and therefore on the price they get for their oil. But demand has surged 5% from a year ago, reflecting the economic reopening. The result is higher oil prices.
Biden pressured OPEC to boost its production faster than planned, but the cartel has not complied. So the president coordinated a release from the Strategic Petroleum Reserve with releases from other oil-consuming nations’ oil stocks, bringing to market some stored-up supply. Past coordinated releases came during times of stress in the oil supply chain, such as when war disrupted Libya’s production or Hurricane Katrina ravaged Gulf of Mexico oil refineries. This is because, insomuch as they make any substantial difference, releases from oil reserves have only short-term effects.
Indeed, the 50 million barrels the United States will release equates to about 2½ days of national consumption. India pledged to release a little more than what it consumes in a day. Biden’s hints that he would take action may have encouraged oil prices to level off in recent weeks. But the market yawned at his announcement; oil prices actually rose. His move may also elicit retaliation from OPEC, which could cancel planned production increases. That could put upward pressure on prices down the road.
Long-term, there are only two ways to minimize the punishing effects of oil price volatility: increasing domestic oil production and decreasing domestic oil consumption. Increasing U.S. oil production would bypass OPEC and limit the geopolitical clout of predatory nations such as Russia. Yet this makes sense only as a transitional policy. Over time, the country must cut its dependence by encouraging more fuel-efficient and electric cars, investing in public transit and better planning communities. Hand-in-hand with boosted domestic oil production should come a higher gas tax, the proceeds of which could be rebated back to consumers to make all but the biggest gas-guzzlers whole. A steadily increasing levy would raise prices slowly and predictably, giving the economy more time to adjust, and it would keep more fuel dollars in the United States, all while shifting consumption patterns away from a toxic addiction to the fossil fuels that are warming the climate.
Republicans stress domestic oil production. Democrats emphasize weaning off carbon-intensive fuels. Both have a point. If, years down the line, presidents are still performing the oil-price two-step, it will represent a massive national failure.