Why US oil prices are not determined by the world market price
Robert Hockett is the Edward Cornell Professor of Law and a Professor of Public Policy at Cornell University
Cross-posted from Forbes
Chances are you are hearing two claims with great frequency these days. The first is that the US is energy independent where oil is concerned. The second is that oil prices are ‘set globally,’ so that there’s nothing that we can do about presently war-wrought price-spikes at gas stations.
These claims are mutually incompatible – ‘independence’ and ‘nothing we can do’ do not hang together. They can’t both be true unless there is some catch, some sleight-of-hand hidden in one or both claims.
Happily, there is a catch. It’s in the second claim. The ‘so that’ you find there is fallacious. It suggests a ‘natural’ causal nexus that is actually an institutional causal nexus. It is a function of arrangements we presently leave in place by choice, not by necessity. The significance of this fact cannot be gainsaid right now.
To see what I mean here, start with the first claim we hear – that the US is energy-independent where oil petroleum products are concerned. There is a nontrivial sense in which this claim is correct, and its rightness is very important right now: The US exports more petroleum than it imports. In other words, we are in oil trade surplus.
How then can oil prices be rising in ways that harm virtually all Americans? If ‘we’ have all that oil, why are ‘we’ paying prohibitively more at the pump?
This is where the ‘global prices’ canard enters into the discourse. ‘Global supply and global demand,’ we are told, ‘set the oil price. We have no choice.’
That is of course nonsense. It is indeed true that the oil market is global and that prices are – presently – ‘set’ there. But who ‘sets’ them? How does that happen? Is it that complacent fatalist favorite, the ‘invisible hand,’ again?
The hand is quite visible. To see why and how, begin with a question. Are oil prices in Saudi Arabia simply ‘set by the market?’ Of course not. And that is because Saudi Arabia, as one of the world’s largest producers, is not a price-taker, but a price-maker. (This is why people keep urging President Biden to make nice with the head-of-state killer and dismemberer of a Washington Post journalist.)
But if Saudi Arabia, as a principal oil exporter, more ‘makes’ price than ‘takes’ price, why can’t the US?
The answer that’s typically given – in the rare cases that discussions of this matter get this far – is that domestic US uses of petroleum are variegated, requiring more grades of petroleum than the US produces. We must therefore import petroleum even while exporting it. Hence our net oil surplus is smaller than any gross surplus would be were we capable of it.
As if this were an answer.
The reply is of course a non sequitur. For the US can certainly sell on global markets at the global price, use the proceeds to purchase on those same markets what oil grades it requires but doesn’t produce, and then make the full oil portfolio available to Americans at prices we’d enjoy were we to produce more petroleum in total than we use – which we do.
That isn’t happening. Yet there’s no reason it can’t. This isn’t complicated at bottom, after all. It is all rudimentary accounting.
Of course, someone might now say that global uncertainties wrought by Putin’s war are to blame for current global oil price spikes. Volatility in the petroleum futures market is the real root of current prices, just as it was fourteen years ago when Putin invaded Georgia – constant blather about ‘peak oil’ back then (as now) to the contrary notwithstanding.
But when we turn to those present arrangements themselves, as I am doing here, the volatility point is beside the point. For Putin-caused volatility has nothing to do with our own oil supplies. (Ukraine is not Mexico or Canada – it is not even in this hemisphere, any more than is Putin.) And whatever oil we are selling on global markets ‘benefits’ by the Putin-caused price-spikes as does other oil on those markets.
We are returned to the question, then, why Americans are not benefitting by ‘America’s’ petroleum export surpluses as Saudi Arabians do.
If something that makes sense for nearly every American is not happening in America, a helpful strategy for locating the source of the holdup is to ask cui bono. Who is benefitting right now at the net expense of near every American?
I have my suspicions, but rather than point any fingers let me suggest a fine way to lure those responsible into showing their (hardly ‘invisible’) hands: President Biden and the Department of Energy should make two announcements…
First, petroleum sold in the US shall be priced, at a maximum, as it was before late last summer, when speculation that Putin had ‘plans’ for Ukraine began spiking. It will remain so for as long as the US remains capable of exporting as much as or more than it uses.
And second, should the US suddenly find itself not producing enough to export more than it imports, President Biden will invoke the Defense Production Act to put others in charge of whatever wells mysteriously cease producing enough during the present crisis.
We did both of these things during the Second World War, and it served us quite well. Let us make no mistake this time that we didn’t make last time. We are effectively in the midst of a low-intensity war right now, and there’s no reason to skimp on well-proven wartime measures.
The same, of course, goes for the medium- and longer-term, over which we must move as rapidly as possible to assure independence, even top global exporter status, in the industries of tomorrow – solar, wind, EVs, batteries, semiconductors, supercomputers, high-end pharmaceuticals, and more.
But I’ve written plenty on those in these pages and others before, and will write more – these are the future, after all. But for the present, it is time we stopped treating as fate what is choice where petroleum is concerned.
It is time that we benefitted by our energy independence as much as or more than the subjects of unelected ‘princes’ and petro-state oligarchs do elsewhere.
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