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).
Tom Evslin
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.
TOM,
PLEASE STOP DREAMING.
SAUDI ARABIA, AND RUSSIA, AND IRAN, etc., are under siege of the US.
Their path to preserve their sovereignty is to be united, and get as much value for their natural resources as possible.
Any increase in oil and gas prices, and coal prices, will hurt Europe (which lacks oil, gas and coal) much more than the US.
The US can have $40/barrel oil and $4/million Btu gas, but that would require the war-mongering US state and US defense departments would no longer export our abundant gas and oil for THEIR geo-political ends, i.e., “weaken Russia”, which are of NO BENEFIT, IN FACT DETRIMENTAL, to the US people.
Remember, this massive PHYSICAL build-up of US LNG export facilities was started at least 10 years ago, at the behest of the US government, so the LNG could be used for geo-political reasons, as the US government is doing right now.
Welcome to reality.
Bite me biden own’s this increase… the oil producers hate him as does
90% of the world. Between his spewing green energy ONLY and his illegal
war in Ukraine along with his war on US production his puppet string pullers
have ruined the stable price of energy we had 2 years ago… The EU peoples are on the verge of revolt as they have no energy for heating this winter are we
going to wait until it happens here???? or are we going to elect sensible people who understand we still need fossil fuels????
Great quotes from a WSJ Op-Ed today as SAUDI And Russia spit on Joe Biden and cut 2 million bbls a day production. They control oil, Not exxon….and windfall profits? Add up the NET PROFITS of the 15-20 largest TECH companies, their annual “windfall profits” push towards $750 billion a year. Just three… Google, Microsoft and Apple will get you about $250 billion WINDFALL profits?! But TECH companies will never pay a windfall tax, because they are tied at the hip with Libs, Dems, Enviros…you name it. Facebook and Google are basically de-facto censorship arms for the Dem Nat Committee!
“Do these people know how preposterous they sound (liberals, Biden and Dems)? No American President has done more to make the U.S. more dependent on foreign energy than Mr. Biden has in less than two years. He came into office promising to slash U.S. oil and gas production, and his regulators and the Democratic Congress are doing everything they can to make drilling difficult and investment non-economic…..Mr. Biden called Saudi Arabia a “pariah” during the 2020 campaign, delayed a planned arms shipment, and continues to pursue a nuclear deal with Iran that would give the Saudis’ main enemy hundreds of billions of dollars to promote terrorism and other trouble. The President had to go hat in hand to the Saudi Crown Prince in July to ask for more oil production, and all he got was a lousy fist bump.
Oil prices have been rising since Monday amid news of the OPEC productions cuts, and those cuts will flow into pump prices for U.S. consumers. Brent crude is back above $93 a barrel, and OPEC seems to want the price to go above $100. That will finance Russia’s war in Ukraine and help the domestic finances of the Arab governments.
The Biden White House has tried every gimmick to lower gas prices other than the one that would really matter: Call off its political and regulatory campaign against American oil and gas production.”
the core issue is that we are addicted. Our addiction is not helped by our definition of economic health. For example, selling guns is good for the economy, and so is medical treatment for gunshot wounds. We would not be so dependent on oil if we re-defined just how we need it. This of course is too big a bite for any American to handle.
This is just another blunder by the feckless Biden administration, and just think Vermont
had 242K, that voted for this senile old fool, they’ll really like him come winter………….
Disagree. Oil and natural gas are critical for USA to work. And look at prices of oil? It was NEGATIVE $35 a bbl a coupele years ago. Look at Exxon profits…many years MASSIVE losses with low oil. $40 will do that again to them. That is BREAKEVEN to exxon. So they will NOT drill anymore at $40 oil. And then you want this? WHY:
“Institute a windfall profits tax on oil and natural gas.”
Baloney! Why don’t you do some logical math….look at the windfall profits by Apple, Microsoft, Google, Facebook (and EVERY big tech company with 50% profit margins) over ten years and TELL ME with a straight face that they are not the ones with real WINDFALL profits? Just Apple alone last year had a $100 BILLION net profit !!!!…and Apple and all other techs use offshore tax schemes.. USA needs OI & natural gas ….USA can get by without the latest hyped and overly expensive I-Phone. And natural gas is a key component to ALL Fertilizers…and fertilizers create more low cost food.. Less fertilizer = higher food costs.. And last?…Exxon cannot control the PRICE of oil – to supposedly GOUGE people. The price of oil is CONTROLLED by foreign governments in the middle east/Russia. So why punish USA firms who have no control of prices? Wake up! Any windfall profits tax on oil or natural gas will only make USA firms HALT drilling because they cannot do it profitably at $40……WHY BOTHER! …with inflation, steel pipes, labor costs etc….most oil companies are a breakeven at $38 to $40 a bbl.. The MORE you tax them, the LESS they will invest and drill , which will INCREASE significantly the cost of energy!