How Much Worse Can Our Energy Policies Get?
In the wake of OPEC’s two million barrel per day announced production cut, the Biden Administration has responded with a cynical set of policy responses that will further damage the US and world economies.
First, there is the well-publicized announcement to withdraw another 10 million barrels from the Strategic Petroleum Reserve. The Administration touts this as a win for consumers but it is a last-ditch effort to rescue Democrats in the midterm elections. The release represents about five days of average US crude oil consumption. That’s how long it will offset the OPEC production cuts.
Next, there is the newly announced plan to place a price ceiling on Russian oil by December 5 to punish Russia for the Ukraine invasion and ban transporting market-priced Russian oil by sea. Treasury Secretary Janet Yellen claims that this will benefit low- and middle-income countries. In fact, if the price ceiling works – a big if – it will deliver more economic punishment by reducing Russian production and increasing market prices.
As for Russia, it’s doubtful the announced price controls have Putin quaking in his boyevyye sapogi.
The goal of the price controls is to reduce Russian crude production and revenues. Except price controls never work, damaging everyone except the target.
Suppose Russia reduces its production. World crude oil supplies will decrease and market prices will increase. Because the demand for crude oil is what economists call “inelastic,” reduced production will result in proportionally larger price increases. OPEC will be delighted.
The gap between the controlled price and the market price will widen. Because crude oil is fungible, it will be easy for Russia to transport it by ship to a friendly country, which can then transship the now non-Russian oil at the higher market price. The two countries agree to share the extra revenues.
While Russia may not reap the full, higher market price, it can easily evade the price controls. It may even be able reap the same revenues as before.
Ms. Yellen surely knows all of this.
Back at home, the Department of the Interior is considering a ban on all offshore oil and gas leases for the next five years that is being pushed by green energy advocates. Coupled with DOI’s slow-walking of new leases on federally-owned lands, the ban will push natural gas and crude oil prices even higher. If Democrats convince the Biden Administration to ban natural gas exports, the harm will be compounded. Natural gas prices in Europe will rise even further and countries will burn more crude to generate electricity, raising crude prices still higher. OPEC and Russia will be delighted.
A cynical short-term effort to reduce the price of gasoline. Price controls on Russian crude that will increase prices. Restrictions on US natural gas and oil supplies supposedly to speed the transition to green energy. If these policies were not so economically destructive, they would be laughable.
Except consumers and businesses around the world won’t be laughing.
Jonathan Lesser is an adjunct fellow at the Manhattan Institute.
