The oil market may be a consumer’s nightmare, but it is a green’s dream come true – prices so high that consumers are forced to reduce their use of gasoline and heating oil, while the government seeks to prevent those high prices from providing oil companies with an incentive to increase supply and bring prices down. It might be unfortunate that the precipitating event is a gruesome war in Ukraine, but in the long run $100 crude oil (prices moved as high as almost $140 and fell as low as $107 last week) will help prevent the even greater calamity of a warming globe. So argue the greenest greens.
Who have their priorities in order. Last week the administration shelved an interagency review aimed at accelerating shipments of LNG to Europe to wean it off Russian gas because, reports Reuters, “some in the White House argued it would counter the administration’s efforts to wean the U.S. off fossil fuels consumption and production and tackle climate change.”
At least greens have respectable reasons for their positions. Republicans, who polls show want Donald Trump to be their candidate in 2024, carry a heavier burden. Their man remains a big fan of Vladimir Putin, with whom he “got along” and whose invasion he regards as “genius and savvy”.
Inflation Staggers Consumers
The green agenda might provide comfort for Putin, but not for consumers. Stunned by the 7.9 percent increase in prices this year that has driven up food costs by about $1,000 compared with 2021, customers unload their supermarket carts into the trunks of their cars or beds of their trucks, and proceed to the gas pump where another shock awaits their weekly visit. The average price of a gallon of regular has risen by over 50 percent this year, to $4.33, closer to $6 in California, which mandates cleaner fuel, and which last week’s Biden executive order puts it in a position to make the national standard. If Janet Yellen is right that inflation will remain “uncomfortably high” next year, $7 gas is not an impossibility, at least in California.
Best estimates are that consumers will pay about $2,000 more for gas in 2022 than they did last year. With $1,000 extra for food, that comes to a $3,000 inflation tax that hits hardest lower-income families that must drive kids to school and themselves to work.
The World Floats On A Sea Of Oil
Don’t curse a stingy Mother Nature or an uncaring God for being stingy with supplies and pushing prices up. The world floats on a sea of crude oil. At current rates of production formal estimates are that we have 53.5 years’ supply available. And that understates our bounty. Forty years ago geologists estimated that we had 30 years’ supply in the ground. After two decades of draining that supply, we had 40 years’ remaining. Another 20 years of draining reserves, and we have more than 50 years supply available. Improved technology discovers more oil reserves, and makes them economically accessible.
Biden Wants More Oil From Anywhere But America
Almost 80 percent of Americans believe President Biden was right to say we will not finance Putin’s war by buying his oil even if a ban drives up energy prices. Some facts: We have been importing about 672,000 barrels per day (bpd) from Russia, about 3 percent of domestic consumption. U.S. crude production is expected to increase by 630,000 bpd next year after rising by 760,000 bpd this year, unless the administration’s aversion to such a development results in effective policy steps to prevent it. Ending the ban on completion of the Keystone XL pipeline would eventually bring down 830,000 bpd of Canadian oil, but that last is a step too far for this President, as is removing the various impediments he has created to the fuller development of domestic reserves.
And He Wants It Now
Besides, neither “next year” nor “eventually” is soon enough for Biden and his Democrats. They want price relief now, before the November congressional elections: next year is eons away when reckoned by the political calendar. So the President is turning for help to Iran’s Ayatollahs by reviving the nuclear deal, Maduro’s Venezuela by easing sanctions, and most importantly, Saudi Arabia, which is believed to have sufficient excess capacity to bring down crude prices. Biden once promised to turn Saudi Crown Prince Mohammed bin Salman’s government into a “pariah”, the sort of thing a man not accustomed to tolerating criticism is unlikely to forget, and Russia is a de facto member of the cartel, now known as OPEC Plus. No surprise, then, the cartel’s answer is “Nyet” and, assuming The Wall Street Journal’s report is correct, the Crown Prince would not even take the President’s call.
Calling on that trio to help us punish Putin for human rights violations might strike anyone unfamiliar with the antics of both of our political parties as odd, but there must be few such observers of our politics remaining in the land.
Here Comes A Recession
The Democrats’ electoral prospects would be damaged further if the economy slips into recession in response to mounting headwinds. Soaring oil prices are one such. Continued supply bottlenecks, shortages of key minerals traditionally supplied by Russia, and the economic difficulties being experienced by European economies that have chosen to rely on Russian natural gas are others. Add to those headwinds the Federal Reserve’s monetary policymakers, set to begin raising interest rates this week by one-quarter of a percentage point, the first of five to seven increases expected by investors. Some analysts predict that these headwinds will combine to bring on a recession.
Unless It Isn’t
On the inevitable other hand, jobs are plentiful; some 11 million job openings remain unfilled; unemployment is low and falling; nominal wages (not adjusted for inflation) are rising in pace with inflation, especially at the lower end of the wage scale; Omicron infections are proving more benign than originally thought and falling; and consumers are sitting on $2.5 trillion in excess savings to use on stuff other than face masks.
Balancing all of this, Goldman Sachs puts the chance of a recession next year at 35 percent and has cut its fourth quarter-to-fourth quarter growth forecast for 2023 to 1.75 percent from 2.0 percent. There are times when economists revise a forecast by 0.25 percent to prove they have a sense of humor.
More Oil Now And Lower Emissions Later Is The Goal
It is against this difficult-to-predict macroeconomic background that America is groping for an energy policy that reflects the geopolitical realities of the rise of a revanchist Russia, and a communist China challenging America for world leadership. Biden is right that the search for new oil supplies now need not interfere with the development of alternatives to fossil fuels. But he will need to allow development of new supplies that will be available for many years, not only for a few months, if the transition to a greener economy is not to be so painful as to become politically unacceptable. Which means persuading oil producers that they are not deemed enemies of the people, to be denied access to capital by a Biden nominee to the Fed board who has proposed just that, and that the value of their investments will not be regulated away to placate Green New Dealers who would leave all those years of oil supply in the ground forever, a stranded asset over which they would shed no tears. If that results in windfall profits for oil producers as war-induced prices stay elevated, a windfall profits tax might be considered, with the revenues used to reduce the impact of $100 oil and $5-$6-dollar gasoline on lower-income families. I write “considered” rather than “enacted” because we would not want to tax funds reinvested in expanding supply, prospective beneficiaries cannot be identified with precision, and redistribution often has major unintended consequences. Let consideration begin.