Oil Prices

Eakinomics: Oil Prices Oil prices grabbed the headlines yesterday, with The Wall Street Journal leading with “U.S. Oil Prices Retreat After Hitting Six-Year High on OPEC Standoff” and “Prices for West Texas Intermediate surged before falling back, while Americans faced the steepest gasoline prices in nearly seven years.” It was a strange moment of déjà vu, flashing back to the world before the North American energy revolution – led by hydraulic fracturing and horizontal drilling – radically diminished the pricing power of the Organization of the Petroleum Exporting Countries (OPEC). Instead, the paper reported “Crude prices have advanced almost 60% this year, a surge powered by a revival in consumption of fossil fuels as vaccines roll out and major economies unlock. The Organization of the Petroleum Exporting Countries and its allies, led by Russia, have continued to hold millions of barrels a day in the ground each day, limiting supplies.” The price movement is shown in the chart (below). In the main, this is a story about COVID-19. The onset of the pandemic stopped mobility – cars, trucks, airplanes, and shipping – in its tracks, slowed the global economy, and sent oil prices plummeting. Prices even went negative briefly in April of 2020. With the progress against the coronavirus has come a reversal of those trends and rising oil prices.   The final part of the story, however, is the attempt by OPEC to continue to restrict supply. And there is a lesson here for U.S. policy. Per the Journal, “The U.S. has pushed the cartel to reach a deal that would allow output to rise, cooling the surge in prices. ‘Administration officials have been engaged with relevant capitals to urge a compromise solution that will allow proposed production increases to move forward,’ Reuters reported a White House spokesperson as saying Monday.” Why is the United States trying to get OPEC to supply more? Why not simply rely on the U.S. producers that have been so successful over the past 15 years? Presumably, it is perceived as bad climate change politics to encourage U.S. oil production. But if there is going to be more production somewhere, why not in the United States? And from a climate perspective, what matters is emissions of greenhouse gases from all sources, not just petroleum, and the focus should be on policies that limit such emissions without demonizing any particular energy source. Any realistic forecast of U.S. energy usage includes fossil fuels for the foreseeable future. U.S. policy should acknowledge this reality and not hand OPEC leverage over the energy and economic outlook.