The math is simple. Greater oil supplies, lower prices. Tight oil supplies, prices rise. It is an international “virtual bathtub” where all the Earth’s oil is priced as a total, global commodity. The clearest example of supply and demand imaginable. If anything on the planet contracts oil production, treating all the oil on Earth as if in that virtual bathtub, unless or until people use less of it, prices just go up. And it does not matter who is the US president; oil and gas are global commodities that are priced by the worldwide market.
Oh sure, countries (and states) can assess lower taxes at the pump (generally not a percentage of the price but a fixed sum per gallon), but that option is far more complicated than it seems. Not only does it deprive government entities of revenues (do they have to raise taxes elsewhere to make up for the loss?), but it is a bureaucratic nightmare to implement.
When Russia invaded Ukraine – which had a negative impact on global grain production as well as on the extraction and export of oil and gas – the cost of all things grain-related (from the cost of bread to livestock feed) and petroleum-driven (from shipping costs, prices at the pump to fertilizer) exploded. Russia produces about 10 million barrels of oil a day (a tad more than Saudi Arabia).
In a free market economy, monarchs, presidents and prime ministers have little control over such prices… unless they are from nations that fiercely export in volume. Like those price-fixing O-Peckers. That’s not something that UK PM Boris Johnson, French President Emmanuel Macron or US President Joe Biden (or even Donald Trump if he were still president) can fix. The resulting inflation is not something that any US political party can readily fix. Someone has to figure out either how radically to reduce demand or radically increase supply. The post-pandemic-peak rise in global demand has exceeded even the most optimistic economists’ expectations.
Even though the US is now a major oil producer, US oil prices are only set in the global marketplace. Texas oil billionaires do not sell their output at a much lower price to Americans. They are commodities traders and follow the global pricing. We also do not overproduce oil and gas in such quantities that our upping our own production would have much of an impact on that worldwide pricing structure. Look at the first chart above from the BBC, reflecting the relative output (in millions of barrels) of global petroleum extraction generated by the O-Peckers, and you can see where the solution lies.
You can also see some subtle pressures on international diplomats from nations boycotting Iran, a major oil producer, over its nuclear enrichment program. That boycott and accompanying sanctions pushed prices upward when, in 2018, the Trump administration pulled the United States out of the UN-sponsored six-nation accord contained that enrichment program. Oil prices fell again during the pandemic. And yes, if Iranian oil were readily available to nations otherwise boycotting that nation, it would indeed help lower prices. A good reason to try and reestablish that accord.
A major boost from the other O-Peckers could also help… a lot. So why won’t they help? OPEC, formed in 1960, was a price-fixing cartel of 13 nations, adding Russia (and other nations) in 2016 to form what we refer to as OPEC+ (now 23 countries). Today, they control roughly a 40% of global petroleum production. During the height of the pandemic, as the second BBC chart above illustrates, people drove and traveled less, shipping was also impacted by COVID as ports locked down and ship crews were infected… and the price for oil plunged. Oil producing nations lost billions of dollars from that decreased demand. Obviously, today, cash-starved Russia is not remotely interested in anything that could lower the price of oil and gas. And O-Peckers were also ready to make up for the revenues they lost during the peak of the pandemic.
So here’s how the BBC (May 4th) describes what has happened: “In spring 2020, as Covid spread around the world and countries went into lockdown, the price of crude oil crashed because of a lack of buyers… ‘Producers were paying people to take the oil off their hands, because they didn't have enough space to store it all,’ says [Kate Dourian, of the Energy Institute]… After this, Opec+ members agreed to slash production by 10m barrels a day, to drive the price back up.
“In June 2021, with demand for crude beginning to recover, Opec+ started gradually increasing supply, putting an extra 400,000 barrels a day onto world markets. It is now supplying some two and a half million barrels of oil a day less than in spring 2020.
“However, when Russia invaded Ukraine, the price of crude soared to well over $100 a barrel. This has caused significant rises in the price of petrol at the pumps… ‘When Opec+ cut supplies by 10 million barrels a day in May 2020, they cut too deep,’ says David Fyfe, chief economist at Argus Media… ‘Now they're increasing supply at a slow rate that does not take into account the effects of the Russia-Ukraine crisis.’”
These major oil producers, having suffered through the pandemic slump, have so far refused to “subsidize” non-OPEC+ consumers during these “halcyon days” of profitability. Despite our relations with Saudi Arabia, the UAE and Iraq (which is today more closely aligned with Iran), they are not willing to up their exports to a level that would make a serious difference to oil prices. The combination of taking Russian oil (10M barrels/day) out of the global marketplace (by sanctions and boycotts) and the reluctance of the remaining O-Peckers to “take a bullet” to benefit global consumers… well welcome to incredible global inflation that we are simply powerless to contain.
I’m Peter Dekom, and voting for a new set of US politicians, despite the rhetoric to the contrary, won’t amount to a hill of beans when it comes to containing oil/gas/grain-loss inflation.
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