Gas station prices in Los Angeles last week. Photo: David Crane/MediaNews Group/Los Angeles Daily News via Getty Images
Economic war is expensive. For weeks now, the West has been trying to thwart Russia’s war of conquest in Ukraine by devaluing its currency and banning its exports. This has an expected impact on the Russian economy. But American consumers of wheat, industrial metals, matryoshka dolls, and, above all, energy proved to be a collateral damage.
In recent years, Russia has produced about 10 percent of world oil and 3 percent of American oil. Now Russian oil is banned off the coast of our country, and its purchase has become more difficult in terms of logistics and risky for the reputation of traders around the world. Even before the war began, the rapid recovery of the global economy from the COVID-induced recession, combined with years of underproduction in the fossil fuel sector, led to higher energy prices. The last thing energy markets want is a sudden drop in global oil supplies. Now we have one. As a result, the price of oil has jumped more than 40 percent since the beginning of this year.
This poses a threat to both the US economy and the presidency of Joe Biden. If energy prices continue to rise, America’s recovery in high inflation could turn into a stagflationary recession. Meanwhile, few economic indicators are a better predictor of the president’s political fate than gasoline prices. And for a Democratic president, high fossil fuel prices are a particularly vexing problem.
The current rise in oil prices has nothing to do with the climate policy of the Biden administration. But Republicans are doing everything they can to convince voters otherwise. As the White House contemplates lifting sanctions on Venezuela and Iran to alleviate oil shortages, the Republican Party attacked administration for pleading “every bad actor in the world to increase their own fossil fuel production” while waging “a holy war against our own American energy production here at home.”
If Biden is leading an anti-fossil fuel crusade, he is losing it. As Matt Iglesias points out, under Biden, the United States produced more barrels of oil per day than under Trump.
Graphics: Slow boring
However, it is undeniably true that even before the war in Ukraine, US energy production was not keeping pace with rising demand. In the recent past, when oil prices rose, the number of operating oil rigs grew at almost the same rate. However, during the current recovery, the growth in the number of drilling rigs has lagged far behind the growth in energy prices:
Graphics: Hire America
But this is a consequence of the caution of fossil fuel investors, not Biden’s policies. The main problem is that US shale drillers lost a lot of money during the 2014 oil price crash. During the recovery from the 2008 financial crisis, strong economic growth in China fueled high oil prices. At the same time, advances in horizontal drilling technology have radically expanded the possibilities for oil and gas production in the United States. The shale boom followed.
But for frackers, price signals are a cruel master. Starting a new drilling operation is a time-consuming process. And the need for energy can quickly disappear. Investment decisions that made sense when oil was trading at $100 a barrel become disastrous if it falls below $30. This is exactly what happened between mid-2014 and early 2016. As a result, US energy investors suffered heavy losses.
Now that boom times are returning to the US energy sector, these investors want to bounce back. Thus, they force firms to prioritize shareholder dividends over expansion. After all, the war in Russia may end tomorrow, and they may again lose money on expanding drilling.
This caution by investors stems primarily from the inherent volatility of oil prices rather than fear of looming green policies. And it is Big Oil’s risk aversion, not Big Government rules, that is holding back US production. While Republicans yell at Biden’s inability to open up more federal land for drilling, U.S. companies already own drilling rights to “so much federal acreage that they have enough to drill for years without having to apply for additional permits,” according to Barron’s.
All the same, it is true that the Democratic Party wants to cut carbon emissions and that in recent years it has blocked the construction of new infrastructure powered by fossil fuels. In addition, some prominent Democratic factions denounce oil production as inherently bad, and high gas prices as a positive good (because they discourage fossil fuel consumption and therefore carbon emissions). These realities allow Republicans to blame the current energy price hike on Biden. And they also make it harder for the president to address the private sector’s underinvestment in energy generation through new federal policies.
For example, the government could theoretically overcome investor caution by providing loan guarantees or other federal subsidies to fossil fuel companies. While such a policy could mitigate the short-term problem of acute energy shortages, it could also undermine the Democrats’ long-term decarbonization goals.
What Biden needs is some kind of energy policy that balances between these two issues, lowering gas prices today while not encouraging higher fossil fuel consumption tomorrow. Ideally, this policy could also be enforced through creative interpretation of existing law, since Biden can hardly trust our capricious Congress to act quickly.
Fortunately, this ideal policy can actually exist.
In a new report, progressive think tank Employ America offers Biden a plan to increase energy production in the short term while reducing fossil fuel demand in the long term.
The main purpose of their proposal is to reduce the volatility of oil prices. Sharp fluctuations in oil prices not only constrain production, but also contribute to the caution of investors. They also cause damage to both consumers and climate hawks. When oil prices rise, Americans’ standard of living suddenly falls; when such prices fall, they make renewables (temporarily) less competitive, thereby undermining the growth of the green energy sector, as well as undermining political will for public investment in public transport and other forms of low-carbon infrastructure.
Fortunately, the US government has tools it can use to narrow the range of oil price fluctuations. The first (and most important) is the Strategic Petroleum Reserve (SPR), which currently holds about 714 million barrels of oil. The administration has already tried to lower prices by removing oil from the SPR. But the effect of such an action is inevitably temporary. In order to use the SPR to drive prices down longer, Uncle Sam must not only liquidate reserves, but also commit to replenish them in the future.
It often takes about two years for shale drillers to extract all of the available fossil fuels from a new well. Right now, the frackers are sitting on their hands in fear that before 2024 the price of oil will fall below their break-even point. If the federal government commits itself to replenishing the SPR in two years – and does so by purchasing oil at a price above the cost of production (about $60 a barrel) – then investors’ fears will be allayed. A market for their goods would be guaranteed. And as production increases, prices will fall for a long time.
To further appease anxious shale shareholders, the Employ America proposal recommends that the government use the Treasury Department’s Monetary Stabilization Fund (ESF) to reduce the cost of borrowing for shale drillers. Under current law, the ESF has the right to purchase “credit instruments and securities that the secretary deems necessary.” In this case, he could purchase credit and securities related to the drilling of new oil wells. To ensure this fossil fuel subsidy does not slow down the transition to a green economy, the program will run for two years.
One of the good things about shale drilling is its rapid decline: unlike many other forms of fossil fuel infrastructure, new shale wells rarely produce oil and gas for much longer than two years. Thus, encouraging the drilling of such wells should mitigate current energy inflation without promoting carbon-intensive energy use in the distant future. In addition, the ESF program may also subsidize borrowing for projects that reduce the demand for fossil fuels, such as expanding public transportation.
Meanwhile, to prevent oil prices from ever crashing far below the cost of production—and undermining the transition to a greener economy in the process—the government could use SPR buying and Department of Energy rulemaking to put a floor on the price of oil. . For example, when oil falls below $40 a barrel due to weak demand, Uncle Sam can start filling reserves.
Finally, the Employ America proposal recommends that the Defense Production Act (DPA) be applied to the energy crisis. The DPA gives the government the power to prohibit hoarding or price gouging on certain materials critical to national security and to force businesses to prioritize contracts critical to national defense. In this case, the government could use DPA to debottleneck the shale sector supply chain (to lower energy prices today) and help automakers get the semiconductors they need to make electric vehicles (to reduce fossil fuel consumption tomorrow).
Using America’s plan may confuse some climate hawks. And not without reason. The Biden administration may remove subsidies for shale drillers. But once a precedent is set for such programs, the next Republican administration will almost certainly resume subsidizing on its first day in office, even if there is no energy crisis to justify it.
However, America’s current dependence on fossil fuels cannot be ruled out. Economically, more than $100 a barrel of oil threatens to drain the finances of many vulnerable Americans and trigger a recession that leaves others out of work. From a political standpoint, sky-high gas prices increase the likelihood that climate denialists will take back the reins of the EPA in 2024. By using the executive branch to spur an increase in oil production in the near term, Biden can solve the main problem of his constituents, as well as set a precedent. for broader government management of the energy sector. The risk that such measures prolong our economy’s reliance on carbon energy could be greatly reduced by the passage of the Recovery Better Act’s clean energy tax credits, which all 50 Democratic senators ostensibly support.
With sound policies, the time will soon come when lowering energy prices and reducing carbon emissions will no longer be conflicting imperatives. But now is the time to practice.
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