This commentary is by Tom Evslin of Stowe, an entrepreneur, author and former Douglas administration official. It is republished from the Fractals of Change blog.
OPEC Plus, the extended oil cartel co-chaired by Saudi Arabia and Russia, is planning to announce a substantial cut in production when it meets today (Oct. 5), according to a story in The New York Times.
Oil prices have fallen to approximately $85/barrel, about 25% lower than the peak they reached just after Russia’s invasion of Ukraine and close to where they were when the invasion happened. The decline is partially a result of a worsening outlook for the world’s economy as well as the release of a substantial part of the US Strategic Petroleum Reserve (which has helped keep prices down at the pump in the runup to the 2022 US elections).
Even $85 barrel is a substantial increase from the $38/barrel price in November 2020 when Joe Biden beat Donald Trump. Almost all the rise in oil prices is because of a post-pandemic increase in demand and a decrease in supply. US oil production was 12,289,000 barrels/day in pre-pandemic year 2019. In 2021 our production was down to 11,188,000 barrels/day. It is no secret that Biden’s policy has been to discourage US production. That policy worked, in part because the major oil companies are happy to play green and keep their oil in the ground (worked great for them) while the wildcatters who typically drill fast and force prices down have been stymied by pressure against investment in fossil fuels and a hostile regulatory environment.
Europe also declined to drill and instead pretended to be green by increasingly outsourcing energy supply to Russia. Russia might not have dared to invade Ukraine if world oil were still selling at $38 because Russia’s price of production, factoring in corruption, is probably close to $40. Once world prices more than doubled to $89 just before the invasion, Russian profit went from close to nothing per barrel to $49. That why the ruble rose instead of falling in response to western sanctions and that extra revenue has so far financed Russia’s invasion (as well as emboldening Iran).
US oil production is now slowly increasing but still hasn’t reached pre-pandemic levels. Why should oil companies invest in increased production when the administration is both protecting them from competition and slow rolling both leasing and permitting? Biden went begging to Saudi Arabia for more production. Before the invasion, he even asked Russia to produce more. Now the strategic reserve is at record low levels; even Manchin’s mild permitting reforms have been sunk by politics; and OPEC Pus has given Biden a middle-finger answer: “We’re going to cut production further to drive prices higher!” Higher prices will give them more net profit even though the volume of sales will be down.
Let’s push prices down to $40. Here are the short term actions to take:
- Accelerate leasing on public lands but only to those who promise to drill immediately on new and old leaseholds, otherwise majors will just add to their reserves in the ground.
- Expedite electric grid, renewable, pipeline and drilling permitting by agencies and set a time limit on legal appeals against granted permits without lowering environmental standards (essentially what Manchin proposed). To the extent that renewables can substitute for fossil fuels, the price of fossil fuels goes down. Expedited permitting should favor those who will build immediately.
- Institute a windfall profits tax on oil and natural gas which can be avoided by putting “excess” profits into immediate new production or by lowering prices. We are protecting the major oil from Russian competition with sanctions; and so a windfall profits tax is not only appropriate but necessary.
- Stop discouraging lending to wildcatter who historically drill fast and drive prices down but are always short of capital.
- Don’t close any nuclear plant which can safely continue running. The only short-term replacement for nuclear power is burning more fossil fuel which keeps both emissions and energy prices up.
- Stop pretending that it is good environmental policy to move drilling to Russia where environmental standards are notoriously weak rather than have it happen here where we can regulate it.
Europe is belatedly reversing its ill-advised outsourcing to Russia and increasing its own oil and natural gas production as well as building more renewable capacity.
Renewables (and nuclear) must go further to compete with $40 oil and reasonably priced natural gas; so providers of these alternatives also prefer higher oil prices and claim oil prices are an environmental necessity. However the environmental cost of high oil and natural gas prices is more burning of dirty coal (see Germany and even the US)as well as the terrible pollution of war.
With oil at $40, the Russian genie goes back in the lamp. Iran must avoid expensive foreign ventures and has less ability to bribe its populace to do the bidding of the mullahs. China does not get an advantage by buying Russian oil at a discount. Dirty Russian production of new oil — as well as other environmentally expensive extraction schemes — are too expensive to be profitable. The world cannot afford and doesn’t have to accept the consequences of $100 oil.